9 Types of Investment Properties

1
The Single Family Investment Property

Condo for sale
Jake Wyman/Photographer's Choice RF/Getty Images

For the purposes of this article, "investment properties" refers to income-producing properties or properties that can readily be flipped for a profit. Primary residences which see returns in the form of capital appreciation are not included here.

The single family investment property is a house or condominium bought with the intention of renting or selling it to a single tenant or buyer. Common ways to invest in single family properties include buying foreclosures, fixer uppers or other properties believed to be undervalued for the area. The main goal is to buy something you feel is undervalued, fix it up and sell it for a quick profit, or rent it out to a single tenant or family. You should believe that the ARV is much greater than the purchase price.

Pros:

  • They are smaller properties, so they require a smaller investment.

Cons:

  • When the economy is bad, it will be harder to flip a property because fewer people are able to buy.
  • A vacancy in a single family home or condo means you will have zero returns until you are able to find a tenant.

2
The Second Home/Vacation Home Investment Property

Picture of Vacation Home Investment Property
© David McNew/Staff/Getty Images

The second home or vacation home becomes a rental property when the homeowner decides to rent it out when they are not there.

An example would be a family who owns a beachfront condo in Miami that they only use from December to February. The other nine months out of the year, they look for tenants to rent the condo from them. It doesn’t matter if they rent it to one person for the whole nine months or 25 different people within the nine month period. As long as they are receiving rental income, it is considered an investment property.

Pros:
  • You may not have considered renting out your vacation home, so any rental income is just passive income in your pocket.
Cons:
  • A vacancy in a single family home or condo means you will have zero returns until you are able to find a tenant.
  • It will be harder to rent a beach front home in the northeast in the dead of winter or a ski-lodge in the heart of summer.

3
The Small Multifamily Investment Property

Picture of Small Multifamily Investment Property
© hybridproperties.com

This is a two- to four-unit house or building. The small multifamily is the most common type of investment property for beginners. It can be an owner occupied property or all units can be occupied by tenants.

Pros:

  • Offers stable returns. There is always demand for apartments regardless of the economy.

Cons:

  • You are responsible for the property maintenance and operating costs of the building.
  • Tenant leases are short, typically one year, so there may be a lot of turnover.
  • With so few units, vacancies, especially prolonged vacancies, will have a large impact on your return.

4
The Large Multifamily Investment Property

Picture of Large Multifamily Investment Property
© hybridproperties.com

This investment property is made up of five or more residential units. Apartment complexes fall under this category. This type of property can also be owner occupied (although not as common) or all units can be occupied by tenants.

Pros:

  • Offers stable returns. There is always demand for apartments regardless of the economy.
  • Having a vacancy in this type of property will not impact your profit as much as the loss of a tenant in a single family home or retail property for example.

Cons:

  • You are responsible for the maintenance and operating costs of the building.
  • Tenant leases are often short, about a year, so there may be a lot of turnover.

5
The Mixed Use Investment Property

Picture of Mixed Use Investment Property
© MLS

A mixed use property is a property that is used for a combination of residential and commercial purposes. This type of property is often seen in urban areas.

For example, it can include a combination of apartments and stores, such as a three family with a Laundromat on the first floor and two apartments above it. It could also be a combination of offices and apartments, for example, a 25 unit building with a real estate office on the ground floor and apartments above it.

Pros:

  • The commercial property has a supply of customers from the tenants above and the tenants have convenient access to the retail below, such as a deli.
  • You will receive two streams of income, one from the residential part and one from the commercial part.

Cons:

  • It is harder to get financing for mixed-use properties because they are seen as riskier investments because it is, in essence, two separate businesses that are trying to succeed.
  • Construction costs are higher than for single-use properties.

6
The Office Investment Property

Picture of Office Investment Property
© MLS

This can include one tenant (a company) or multiple units (offices) for multiple tenants (companies).

Pros:

  • You can get considerable rent from office tenants.

Cons:

  • Often require a large investment, as offices are often located in downtown areas.
  • If you have a vacancy, it will be much harder on your pocketbook.
  • Office buildings offer variable returns as employment is directly tied to the strength of the economy.

7
The Retail Investment Property

Picture of Retail Investment Property
© MLS

Again, this could be one tenant, such as a small ice cream parlor or a large store like a Wal-Mart, or it can include multiple units for multiple tenants, such as a strip mall with a nail salon, pizza parlor and drug store, or a power center with over 250,000 square feet of space.

Pros:

  • Retailers tend to sign long leases which can give you stability.

Cons:

  • Their success is generally tied to how healthy the economy is.

8
The Industrial Investment Property

Picture of Industrial Investment Property
© MLS

This type of property is more often limited to one tenant. For example, it can be a warehouse for manufacturing, a storage garage or a distribution center.

Pros:

  • Industrial buildings typically require a smaller investment than an office or retail building.

Cons:

  • Buildings are very industry specific, so you will have a smaller prospective tenant pool. A building designed to print paper will not be able to meet the needs of a company looking to store large trucks.

9
Land as an Investment Property

Picture of Land as an Investment Property
© MLS

Four approaches to investing in land are:

  1. Buy and hold
    • You hold onto it in the hopes that the land will become valuable and you can sell it to a developer.
  2. Buy and flip
    • You buy a piece of land, go through the entitlement process yourself, and then flip it to a developer. The entitlement process will involve legally changing the zoning for a plot of land. For example: a piece of land is located in a commercial zone, but zoned for residential use. If you can legally change the zoning of the property to allow for a commercial property to be built, it will be worth more to a developer than it was when it was zoned for residential use.
  3. Buy and rent
    • You buy a vacant piece of land and rent it to neighboring businesses or households. For example: a piece of land is located in a densely populated area that lacks parking. You can buy a vacant piece of land and turn it into a parking lot to receive monthly income. Note: depending on the size of the parking lot you create, you may need to have the property rezoned.
  4. Build it up yourself
    • You buy with the intention of developing it yourself.

Pros:

  • Land can be a passive investment compared to other types of real estate investments.
  • There are four different ways to invest in land.

Cons:

  • You will need to make sure the land is properly zoned for what you plan to build on it. For example, you will not be granted permission to build a seven-story gym in the middle of a quiet residential block.
  • It can be a risky investment because it almost always involves speculating that the land will increase in value over time.
  • You will have to pay the property taxes, and possibly maintenance (lawn care) while the property is sitting vacant, so you will need to continue to make an annual investment in the property.