Which Investment Property Type is the Best Option for You in 2025?

Real estate investing remains one of the most profitable ventures for anyone, but it’s not as simple as choosing a color to paint your wall. It requires thorough research and sufficient knowledge of the real estate industry to make the right decision. Read on to learn which real estate investment fits you best.

Residential Properties vs Commercial Properties

Residential Real Estate Investments

• Residential rental properties are intended for people to live in, such as apartment buildings, single-family homes, or other multi-unit dwellings.
• The lease terms are typically shorter. There are month-to-month leases and fixed-term leases. Most rentals offer monthly renewals for tenants.
• Property management duties are more hands-on and can be challenging when landlords have multiple tenants to manage.
• Tenants are protected by stronger landlord-tenant laws, including habitability standards and eviction protections.
• Maintenance is mostly shouldered by the property owner, and doing so regularly is crucial.
• This reliable income-producing property comes with lower risk, but usually has lower yields. It's also why it's easier to find financing options, such as traditional bank loans or real estate investment trusts.

Commercial Real Estate Investments

• Commercial properties are typically used for business purposes, including office buildings, retail stores, and warehouses.
• The lease term can range from 3 to 10 years, which means occupancy is not a problem for property owners for a while once the property is rented.
• The legal protections are tailored to the specific needs of the business, but aren't as stringent as those for residential rentals.
• While it depends on the lease agreement, landlords are only responsible for structural maintenance, such as foundations, roofing, and exterior walls. The tenant is typically responsible for maintaining electrical, HVAC, and plumbing systems.
• Commercial real estate investments are higher risk but yield high rewards. However, due to the commercial property's purchase price, financing options are more limited.

Residential Rental Property Types

Single-Family Homes

These are among the most common types of rental property investments, typically appealing to families. Tenants prefer single-family homes due to the privacy they offer, and they are typically sought after in suburban areas. The monthly rent is normally higher due to the benefits that come with it, such as a larger and more private space.

Apartments

Apartments are usually comprised of multiple rental units in a larger building. Unlike single-unit homes, apartment units typically do not have a yard, and the outdoor space is shared among residents. However, with rent prices normally cheaper than the former, it attracts younger tenants, such as students and single couples. 

This type of income property does well in urban areas near shopping centers, colleges, and offices, and has better chances of yielding positive cash flow when marketed correctly.

Condominiums

Like apartments, condos are separate units within a larger building, but they have more space to work with. This investment property type is also popular among young professionals and single couples. 

They often come with HOA fees for maintenance and repair costs or property management fees, but usually have access to better amenities within the property, like fitness centers, swimming pools, and lounges.

Townhouses

A townhouse can be the closest thing to a single-family home. While they are multi-level structures attached to other units, they offer nearly the same level of privacy as single-family properties. They are also typically more affordable to rent and can sometimes feature an outdoor area.

Mobile Homes

Despite being portable homes, mobile homes are still subject to property taxes, albeit at a lower rate than other types of investment properties. Also known as manufactured homes, real estate investors won't have to spend much to acquire one. However, it might not be a good purchase since its property value tends to depreciate instead of increase over time.

Commercial Rental Property Types

Office Buildings

The size of the building can vary, ranging from high-rises to mid-rises and suburban office parks. These are leased by businesses, professionals, and corporations. It doesn't necessarily need to be in an urban area, but potential renters would prefer a building close to the city center for its amenities and convenience.

Retail Spaces

Since retail spaces are designed to sell goods and services to customers, the rental property should ideally be located in an urban area or one with high foot traffic. Otherwise, the business could end up with negative cash flow, which can ultimately affect your rental income.

Industrial Properties

This type of rental property is usually located outside city centers but has access to transportation routes. It can be used as warehouses, manufacturing facilities, or distribution centers. This type of real estate doesn't require as much in-person interaction from customers, as it doesn't directly depend on physical transactions to turn a profit.

Hospitality Properties

The rental property can be a motel, hotel, resort, or any other type of vacation rental property. The rental income will heavily rely on its proximity to tourist spots, entertainment, and other locations that renters usually travel to. 

The monthly rental income may not be as consistent, and the maintenance costs may be higher, but this income-producing real estate can be very lucrative in popular destinations.

Key Factors in Deciding Which is The Best Investment Property Type

1. Budget: Any real estate property is already considered a significant investment, and this is even more true for commercial properties. If you have a limited budget, consider starting with residential rentals first.
2. Risk Tolerance: Like most businesses, the rental industry is a high-risk-high-reward sector. Property investors can earn significantly more rental income with commercial properties, but a stable income is more likely with residential rentals.
3. Local Market: Research the rental market demand to determine whether you can attract tenants, as this will significantly impact your cash flow. It's advisable to consult experts like property managers to gain insights.
4. Net Income Generated: Your monthly cash flow is the most crucial aspect of the business since the income generated from the property will cover your monthly mortgage payments, property taxes, maintenance costs, and more. To determine your net operating income, deduct your operating expenses from your gross rental income.
5. Market Conditions: Do the current real estate market conditions favor buyers or sellers? What are the interest rates like? Check the market value of the area based on existing properties. This is a significant factor in devising your investment strategy, so consider consulting a financial advisor if necessary.

Let a Property Manager Handle The Rest

Real estate investing already sounds complex, but your worries aren’t over once you acquire the property. When managing a rental business, you will need to constantly handle day-to-day operations to generate income consistently.

Once you find the right property, hiring property management services can be your next step. You can be a stress-free landlord while earning passive income. Companies like Harland Property Management can help you maximize the potential of your investment.

Contact us now, and let us help you with your investment journey!

More Resources:

• 10 Factors to Consider Before Expanding Your San Diego Rental Portfolio
• How to Find Distressed Properties in San Diego