What to Consider Before Investing in a Small Rental Property
As a real estate investor, it’s important to note that not every type of investment property is a good fit for every investor. Some investors find that commercial properties work best, while others may find that single-family homes are a better fit. One type of investment you may want to consider is a rental property with less than 6 units. In this blog, we’ll discuss the pros and cons of investing in a small rental property.
Categories of Rental Property with Less than Six Units
If you are interested in investing in a rental property with less than six units, you should know that you have a few different options available:
- Single family home: property can only be rented to one tenant. Typically has one kitchen and 1 form of entrance/exit.
- Two family home: property has two separate living spaces. Typically on different floors with their own kitchen, bedrooms, living room, and bathrooms. It can be rented out to two different groups of people. Each space has its own entrance/exit.
- Duplex: two family home where units are next to each other instead of on top of each other.
- Mixed-use: property offers both residential and commercial units. For example, a restaurant or retail space on main floor and several rental units on second floor.
- Apartment building: property is made entirely of residential units. Depending on layout, there may be 1, 2, or 3 units per floor.
Advantages of Rental Properties with Fewer than 6 Units
If you own a property with less than 6 units, there are some advantages you need to be aware of. These are as follows:
- Might be Exempt from Fair Housing Rules. As a landlord, the Fair Housing Rules are one of the most important things you need to be aware of. While it’s typically a good idea to treat all current and prospective tenants equally and avoid discrimination. There are situations when you are not required to follow these rules. Be sure to check local laws to see if there are other applicable rules.
- Might be Exempt from State Rules of Security Deposit: in addition to exemption from Fair Housing Rules, there are certain states that have exceptions from other landlord/tenant rules in a state. For example, in New Hampshire, if a landlord owns 5 or less units and lives on the rental property, they are not subject to the security deposit rules. Therefore, though traditional security deposit maximum is equal to one month’s rent, they can charge whatever the want. The caveat to that is, if the tenant is 60+ years old, the security deposit rules do apply.
- Not required to hire outside help: with a smaller rental property, landlords can typically manage it themselves without having to hire outside assistance. This saves money and you know what is going on, making it easier to catch issues such as late payments or damage to the property before it becomes a more serious issue.
- Tenants can help with maintenance: smaller rental properties with 6 units or less are more “homey” than a larger complex. Many times, tenants are willing to help with things such as taking out garbage in common areas, shoveling the walkways, and mowing the lawn. They may offer these services for free or ask for a reduction in rent or negotiate for another amenity.
- Can diversify your investments: since they are much less expensive than a larger apartment complex, the smaller rental properties allow you the option of purchasing several properties in different areas. Plus, you may wish to purchase a small, mixed-use property to try out another category of rental units.
Disadvantages of Rental Properties with Fewer than 6 Units
There are also several disadvantages of rental properties that have less than 6 units, which we will look at below:
- Self-managed: financially, it would not make sense to hire a property manager to manage your small rental property. This is a large expense to take on if you only have one or two small units, which means that you will be the one managing it and must learn to deal with issues such as collection of rent, disputes between tenants, daily maintenance tasks, requests for repair, evictions, unit turnover, disputes about security deposits, filling vacancies, and more. This can be time consuming and stressful, especially if this is a second income stream.
- Vacancies hurt: if you only have a few units, one empty one creates a gap in your income. Therefore, it’s critical that you fill vacancies quickly and make sure that you have proper screening procedures in place to reduce your risk of property damage and tenant evictions.
- No Superintendent on site: you may have tenants that don’t want to live in a building that doesn’t have a super on site. Most people want to know there is someone they can contact if there is a maintenance emergency.
- May be difficult to rent units on top floors: smaller properties don’t usually have elevators, which means tenants must use stairs to access units on higher floors. This may turn some people away.
Investing in rental property can be a great way to build a lucrative income. If you’re just starting, you might want to consider smaller properties (6 units or less) to begin with. These types of properties have advantages and disadvantages. If you are ready to take the next step, contact Masters Commercial Capital Group to learn more.