What Type of Rental Property Is Most Profitable?

If you’re looking to make some money in the real estate building, you’re probably wondering what type of rental property is most profitable. As the experts in residential property management in Montreal, Ramfield ensures your investment properties have maximum occupancy and profit. They can help you understand the most profitable types of residential rental properties.

The Most Profitable Rental Property Types

If you’re thinking about investing in real estate, the following types of residential properties can produce the most profitable outcomes.

Multi-Family Homes

Many experts consider multi-family homes the most profitable type of rental property. Multi-family homes include everything ranging from duplexes to apartment buildings with hundreds of units.

You’ll rarely find them for sale because they’re the most popular type of investment. If you do find one, you’ll enjoy the following benefits from the property:

  • Capitalizes on demand: People always need a home, and the more units you have, the more you can benefit from the consistent demand in the real estate business. You likely won’t have any extended vacancies with a multi-family home.
  • Minimizes inflation impact: As inflation rises, so do your costs for maintaining and operating your properties. The more units you have, the more you can absorb the effects of inflation without raising rent too quickly and encouraging your tenants to look for more affordable options.
  • Lower per-unit cost: Buying a 100-unit apartment building will always require less investment than buying 100 single-family units. You’ll need a higher upfront investment but you’ll end up spending less money in the long term by scaling rapidly rather than gradually.
  • Efficient operation: Managing and cleaning a single 100-unit building is much more efficient than cleaning 100 single-family units. You’ll have a centralized maintenance location and won’t waste time traveling to multiple locations if various tenants have problems at the same time.
  • Tax advantages: Because multi-family homes have higher operating expenses, you can often write off more on your taxes than if you purchase a single-family home. Some larger apartment buildings may qualify for commercial tax breaks as well.
  • House hacking: If you want to maximize your rental income and minimize your own living expenses, consider house hacking. This means you live in one unit of your multi-family apartment while relying on the other units to pay your mortgage.
  • Better financing: Because multi-family homes generate more profit, you likely don’t require as much money down as when you purchase a single-family home. You’ll have a higher mortgage payment, but if you can fill your units, you won’t have a problem paying it.

Real Estate Investment Trusts (REITs)

What type of rental property is most profitable? Consider investing in a real estate investment trust. Using a REIT, you can invest in a property and share in its profits without buying it outright or paying for the management expenses.

Investing in a REIT can provide you with several benefits:

  • Efficient management: Managing your own rental properties can feel overwhelming, especially if you have multiple buildings. When you invest in a REIT, the trust invests in professional management so you won’t have to worry about assuming the responsibility.
  • Steady income: 90% of the taxable income a REIT produces it pays back as dividends to the investors. REITS pay out at different frequencies, including monthly, quarterly, or annually, but they all provide a steady stream of income for investors.
  • Portfolio diversification: An REIT often invests in multiple types of investment properties, including residential and commercial. Diversifying a real estate portfolio on your own could take decades, but a REIT offers a sound investment that can endure shifts in the market.
  • Liquidity: You can easily buy and sell shares in your REIT, making for a much faster sale than trying to buy or sell a physical property.
  • Low investment requirement: Whereas a rental property would require thousands or hundreds of thousands of dollars in initial investment, you can usually obtain a share in a REIT for just a few hundred dollars.
  • Tax benefits: The dividends you receive from a REIT frequently qualify for tax deductions, holding periods, and more.

Single-Family Homes

Many first-time real estate investors prioritize buying a single-family home because, even as an entry-level option, it can yield significant results:

  • Low investment requirement: If you don’t have the upfront capital to buy a multi-family home, a single-family home can help you invest in the industry. Once you start making money, you can reinvest your earnings and grow your portfolio.
  • Potential appreciation: While markets fluctuate, single-family homes often gain value that outpaces inflation. This helps you securely build long-term wealth.
  • Capital improvement potential: If you make repairs or renovations to the property, you can often justify raising rent above the inflation rate.
  • Tax benefits: When you use your single-family home as a rental property, you can write off expenses like maintenance, mortgage, and property taxes.
  • Easy financing: If you’re new to investing in real estate, your lack of history could make it hard to secure financing for larger properties. Because they provide the same level of risk as buying your own home, you’ll secure your financing much more easily.
  • Low-risk: If you no longer want your property, you’ll find a single-family home much easier to get rid of than a multifamily home. Whether you sell it or trade up with a 1301 exchange, you’ll always have an easy exit strategy.
  • Reduced vacancy rate: Apartment buildings often see tenants turn over after their year-long lease ends. Single-family home renters often stay longer, reducing the frequency with which you experience vacancies.

Mobile Homes

While you likely don’t think of mobile homes as a luxury rental unit, they’re a great way to start investing in the industry. If you rent out a mobile home, you can take advantage of the following benefits:

  • Mobility: If you’re unsatisfied with the rental market in your city, you can move the mobile home to an area with higher demand. Mobile homes allow you to stay flexible with your investment.
  • Low investment: If you’re looking for a lower investment than a single-family home, consider buying a mobile home as a rental property. They’re a great starting investment for the real estate industry.
  • High demand: What type of rental property is most profitable? Partially because affordable housing remains in extremely high demand, a mobile home can provide considerable profit if you purchase one for renting out.
  • Sustainable income: While you won’t benefit from high appreciation with mobile homes, they provide a consistent monthly income you can use for your living expenses.
  • Lower maintenance: Because of the way contractors build mobile homes and their smaller living space, mobile homes often require less maintenance than single-family homes. This can reduce your operating expenses.
  • Longer leases: Mobile homes often cater to retirees and families that don’t have the budget to move or rent more expensive places. This usually results in longer leases and lower turnover expenses.

Vacation and Short-Term Rentals

If you’re moving, consider the amazing benefits of short-term or vacation rentals rather than selling your home. It’s a great way to start building a strong portfolio and enhance your monthly income for little investment.

  • Higher rates: Because of the high rate of turnover, you can often charge amazing rates on the rentals you list on Airbnb or Vrbo. Whereas you may charge $1,500 a month for a long-term rental, you can charge $200-$300 a night for a vacation rental.
  • Low investment: Many people turn a home or property they already own into a vacation rental, so you’ll likely require little investment. You may have to make a few minor repairs or renovations, but that means you can charge more for a luxury stay.
  • Little vacancy: According to Airbnb, the average rental property listed on their site remains occupied for 21 days each month. Even if you only charge $100 a night, that’s an average monthly income of $2,100.
  • Included maintenance expenses: For short-term rentals, you can usually add the cost of cleaning the property with the overall price of the stay. This means cleaning and maintenance expenses don’t come out of your profit margins.
  • Diverse rental potential: During slower rental periods, you can easily pivot to offering your home as a long-term rental. This helps you weather changes in the market much easier.
  • Scalability: Once you know how to manage one short-term rental property, you can easily apply those skills to another one. It provides a rental model that you can scale without much effort.

Determining the Best Rental Property for You

If you still can’t decide which rental property will offer the best profits for your situation, consider the following factors before you invest.

Available Capital

Consider how much money you have for a down payment on your property. For example, while a 100-unit apartment building requires a smaller percentage down payment, it still might require a larger lump sum than buying a mobile home.

If you’re able to think long-term, a higher down payment can maximize your profit and earnings in the long term. However, sometimes you have to scale more slowly, and a single-family home or starter property can still produce excellent results.

Financing Ease

Consider your credit history, your debt-to-income ratio, and other factors that can affect how easily you obtain financing and favorable interest rates. Certain properties, like single-family homes, can offer better financing potential than higher-risk properties. If you don’t want to deal with financing, consider investing in a REIT.

Industry Knowledge

How much do you know about the real estate and rental business? If you’re new, consider a REIT or mobile home that won’t require much upkeep and has lower vacancy rates.

If you’re confident you know how to manage a rental property, you could opt for a multi-family home. You can also hire a property management company like Ramfeld to help you fill the gap between your knowledge and your needs.

Financial Goals

What financial goals are you trying to achieve by investing in real estate? If you’re looking for assets that appreciate, you may prioritize a single-family home or REIT. However, if your goal is a steady monthly income, you may find a mobile home or short-term rental more easily achieves the results you need.

Ramfeld Offers Integrated Real Estate Solutions

What type of rental property is most profitable? You have several options, but many investors love multi-family homes.

Whether you need help with CAP rate calculation or want the highest cash-on-cash returns, Ramfeld offers integrated and expert real estate solutions. We’ll help you succeed in the real estate market.

To learn more about what we can do for you, call 514 745-6106 today.

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