Not every type of investment property is right for every property investor. Commercial properties may work for one investor, while single family homes are the right fit for another. Rental properties with less than six units are one type of investment to consider. Here are the pros and cons.
Types of Rental Properties With Fewer Than 6 Units
There are several options available if you are interested in investing in a rental property with fewer than six units.
- Single Family Home- A single family home is a type of property that can be rented to one tenant. It traditionally only has one kitchen and one main form of entrance and egress, so the layout of the home only allows for it to be rented to one tenant.
- Two Family Home- This is a property that allows for two separate groups of people to rent it out. The two living spaces are separated, usually on different floors of the home, and each have their own kitchen, bathroom, bedrooms and living space. Each apartment also has its own form of entrance or egress.
- One apartment can be on the main living level, while the other can be in the basement or the top floor of the home. It is common for the owner to live in one unit and rent out the other.
- Duplex- A duplex is a type of two family home where the rental units are side by side instead of on top of each other.
- Mixed-Use Building- This type of rental property involves a mix of residential rental units and commercial rental units. For example, there could be a restaurant on the bottom floor and several rental units above it.
- Traditional Apartment Building- This type of rental property is made up of all residential rental units. Depending on the size and layout of the property, there could be one, two or three rental units per floor.
Pros of Rental Properties With Less Than 6 Units
There are several benefits that you need to be aware of if you have a property that has five or fewer rental units.
- May Be Exempt From Fair Housing Rules- Fair Housing rules are one of the most important things landlords must be aware of when renting and managing their property. While it is in your best interest to treat all prospective and current tenants equally and not discriminate against anyone, there are certain times when a landlord is exempt from following fair housing laws. In general, any property that is owner-occupied with four units or less does not have to follow fair housing laws. You should always check your local laws to see if different rules apply.
- May Be Exempt From State Security Deposit Rules- In addition to being exempt from Fair Housing laws, certain state also grant exemptions from other state landlord tenant rules. In New Hampshire, landlords with five or fewer units who live in the rental property do not have to follow the statewide security deposit rules. So, while the traditional security deposit maximum in the state is one month’s rent, these landlords are free to charge their tenants whatever security deposit amount they choose. If any tenant in the property is 60 years of age or older, however, the statewide security deposit rules will still apply to that tenant.
- Do Not Have to Hire Outside Help- When you have a smaller rental property, you are often able to manage it yourself without outside help. You will save money by not having to hire a property manager or a building superintendent. You will know exactly what is going on at your rental property on a daily basis. Since you are so involved, you will likely be able to catch problems, such as late rent or property damage, quickly before they become bigger issues.
- Tenants May Contribute to Maintenance- Rental properties with fewer than six units have a more homey feel than larger apartment complexes. Often a tenant will be willing to take out the garbage, shovel the walkway or mow the lawn. The tenant may do this for free, may ask for a small reduction in rent or may do it in exchange for another amenity, such as a free parking spot.
- Ability to Diversify on a Small Scale- Smaller rental properties give you the option of purchasing several properties in different neighborhoods because they are less expensive than larger apartment complexes. You can buy properties on different blocks in the same neighborhood or purchase rentals in completely different cities.
- A smaller mixed-use rental property also allows you to dip your toe into another category of property investment, such as retail, while still having a more stable income from the residential rentals. It can help you determine if it is something you might want to do on a larger scale.
Cons of Rental Properties With Less Than 6 Units
There are several downsides of rental properties with fewer than six units that you should also be aware of.
- Usually Self-Managed- It typically does not make financial sense to hire an outside person, such as a property manager, to manage a small rental property. Paying a property management fee is a large expense if you only have two rental units. Therefore, you must be prepared to deal with all issues at the rental property including:
- Vacancies Have Big Impact- When you only have a few rental units, one vacancy puts a huge dent in your income. If you have two rental units, one vacancy will cut the rent you collect in half. In these properties, it is very important to fill vacancies quickly and to have proper tenant screening procedures in place to hopefully minimize tenant evictions and property damage.
- No Live In Superintendent- Certain tenants may not want to live in a building with no building super. They want someone who they can contact immediately if there is an emergency or other issue.
- Harder to Rent Top Floors- Smaller rental properties typically do not have elevators like larger apartment buildings. Therefore, tenants will have to use the stairs in order to get to an apartment on a higher floor. This could be a deterrent for many people, such as those with health problems, those with smaller children or elderly tenants.