The pros and cons of owning different types of rental properties
Buying a home may be all about location, location, location — but investing in real estate is also about decisions, decisions, decisions.
Sep. 12, 2023
5-minute read
According to CIBC's Homeownership Poll, 38% of Canadian homeowners think it's an attractive time to consider an investment property. The poll also revealed that 1 in 5 Canadians are currently homeowners and 22% of them are landlords.
Before diving into the real estate market, you'll want to think about it from all angles. The type of property that makes the most sense for you will depend on how much time you have to manage it and your interests. Are you prepared for the hands-on management of a short-term rental, or is renting to longer-term tenants more appealing? Do you want a free-standing home, or are you up for the challenge of owning a multi-unit dwelling?
Things like your financial objectives, lifestyle preferences and risk tolerance play crucial roles in finding the right opportunity. Consider the following overview of different types of real estate investments and their unique traits before you buy.
Charge a premium with short-term vacation rentals
Imagine a relaxing villa by the beach or a modern loft in a bustling city. These properties are usually rented for a few days or weeks, catering to travellers seeking a home away from home. They can produce higher rents compared to homes with longer-term leases. They also offer investors the added benefit of having a personal vacation spot.
Income from this type of real estate investment can be unpredictable due to seasonal changes and demand. Short-term rentals can also require more hands-on management. For example, you may need to deal with more frequent arrival and departure logistics. You'll also need to clean and restock supplies between guests and be on call to answer any questions. If you outsource these responsibilities, you may be using a good chunk of your monthly revenue to pay for a property manager.
Some locations may have strict regulations for short-term rentals. Be sure to know what the local policies are before you commit to this type of investment.
Earn steady income with long-term rentals
These properties are typically leased for 6 months or more. While they might generate less monthly revenue than short-term vacation rentals, the income tends to be more stable. You will also have less frequent tenant turnover, which can reduce the amount of maintenance and management involved.
That said, a long-term rental also means an extended commitment to your tenants, so you'll want to vet them thoroughly. If you find yourself with a less-than-ideal tenant, solving the situation could take weeks or months.
Unlike short-term rentals, where you can enjoy personal use of the property in off-peak seasons, long-term rentals typically don't offer this flexibility. The property is the tenant's home until the lease ends.
The pros and cons of freehold homes and condos
A freehold home gives you ownership of the building and land, providing more control over the property. But you'll have to take care of any maintenance and repairs. This kind of property might have more potential to go up in value over time, particularly if it's in a desirable location. The drawback is that it could require a higher investment from the start.
Condos, on the other hand, can be a more affordable option. Maintenance is usually a shared responsibility, and you may have access to amenities like a gym, pool or residents' lounge. Condos are often located in urban centres, close to employment hubs, grocery stores, parks and community services such as hospitals and libraries. They can be a big draw for prospective renters.
Remember, condos come with monthly association fees and rules that could limit what you can and cannot do with your property. For example, an association's bylaws might not allow short-term rentals or restrict what kind of renovations you can do. Before diving into a purchase, be sure to read the rules thoroughly and talk to other condo owners.
Should you invest in a single-unit or multi-unit property?
Single-unit properties, like a standalone house or an apartment, can be easier to manage and finance. They often require less effort when it comes to management so it might be a better fit for those looking for a more hands-off, less-hassle investment. This may also be a good option for newbies investing in real estate for the first time, since it may be easier to get financing.
If you're open to a more complex scenario, consider multi-unit properties since they offer multiple streams of rental income. You may be able to benefit from economies of scale when it comes to property management. In other words, as you increase the number of units you manage, certain costs, like repairs or maintenance, may decrease per unit. A multi-unit property could also provide more income stability since the risk of a property sitting empty is spread over a number of rental spaces.
You'll need to weigh these advantages alongside potential challenges, such as having to coordinate multiple leases and deal with a variety of tenant issues all at once. You may need to hire on-site staff or a professional property management company to handle the needs of multiple tenants, which could take a bite out of your profits.
Look at the big picture
The success of your real estate investment will depend heavily on location and local market conditions. Is the property close to restaurants and shopping centres? Is the job market strong? How much demand is there for rentals? And what's going on with the larger real estate market? Are prices trending up or down? Understanding these factors can help you make an informed decision, along with speaking to a trusted financial advisor.
There's a diverse landscape of properties available. Making the right investment depends on what you're hoping to achieve, and your personal circumstances. Careful consideration of the type of rental that's right for you is a critical part of getting the most from your real estate investment.
Your CIBC advisor can help you look at different scenarios and how they may fit with your financial goals.
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