The road to success is easier for real estate investors who select a niche and become an expert in that area. Deciding which niche to choose depends on the investor’s interests, resources, and financial goals. Here are the benefits and drawbacks of common real estate niches.
Since single-family homes make up about 60 percent of the housing in the United States, it’s an obvious niche to consider. Single-family homes are easy to finance because they don’t require commercial loans. However, sometimes rents on single-family properties aren’t sufficient to cover the investor’s monthly costs. Investors also need to plan on carrying the mortgage when the home is vacant.
Some investors choose buildings with two to four units because they can live in one unit and rent out the rest. Small multi-family properties are often easy to finance because most banks use the same standards as loans for single-family homes. Vacancies aren’t as problematic as they are with single-family homes. When a tenant moves out, the investor still has rental income from the remaining units.
Apartment buildings with five to 50 units generally fall into the category of small apartments. Investors will find less competition because large companies aren’t interested in these properties and they aren’t affordable for many individual investors. Also, small apartments are financed according to commercial lending standards. Managing a small apartment building is labor intensive. Investors may need to consider the additional cost of hiring a property manager.
Buildings that have over 50 units usually sell for millions of dollars. They may feature amenities like a swimming pool, a gym, or a concierge. Large apartments can be a passive investment since a paid staff takes care of the property. In addition to rent, large apartments often have some amenities offered to tenants at an additional cost, such as a parking space or storage space. Some investors purchase large apartments in a partnership with other investors. Sometimes these properties are owned by REITs (see below).
Investors in real estate investment trusts (REITs) purchase shares of a commercial real estate portfolio. Some REITs own various types of commercial properties. Others specialize in an asset class like shopping centers, hotels, or office buildings. REITs pay dividends to shareholders and are a completely passive investment. The income potential is not as great as that of hands-on investment niches, but it requires relatively little effort.
There are dozens of ways to invest in real estate, but these options are some of the most popular. One size doesn’t fit all, but knowing how hands-on of an investor you’d like to be is the first step in deciding your niche.