Real Estate Concepts Everyone Should Understand: Understanding Property Types

Venturing into real estate investment introduces a world of possibilities for those aiming to cultivate wealth. Yet, for those new to the field, the array of property types can be overwhelming. Each category possesses distinct advantages and disadvantages. In this essay, we will delve into five prevalent property types: single-family homes, planned unit developments (PUDs), condominiums (condos), cooperatives (co-ops), and multi-unit homes such as duplexes and apartments. This exploration aims to equip budding investors with the comprehensive insights they will need to make informed decisions.

1. Single-Family Homes: The Best Place to Begin

These properties encompass a solo dwelling unit designed for a single-family; they are the quintessential American home. Their allure lies in the privacy, autonomy, and potential rental income they offer. Investors relish the control they possess over the property, from its upkeep and renovations to rental agreements.

However, single-family homes might demand substantial initial renovation costs, both in property acquisition and ongoing maintenance as there is much more variability in upkeep within the single-family space than there is in the multi-family; regulations force a higher minimum maintenance standard on multi-unit properties. Moreover, their appreciation rates might not align with those of other property types in certain markets. While they often display higher rates, they can also be lower. Nonetheless, due to their familiarity and adaptability, single-family homes stand as the best choice for most newcomers. While not cheap, they are less expensive and easier to acquire than other property types.

2. Condominiums (Condos): Shared Ownership and Convenience

Condos stand as a favored option for urban investors desiring a blend of ownership and convenience. A condo comprises individual units within a larger complex or building. While owners hold ownership of their units, communal areas such as hallways and recreational facilities are collectively owned and maintained through condo-association fees.

Condos offer the advantage of minimal exterior upkeep and shared amenities. This resonates with investors who seek real estate investment without the burden of external maintenance.

Condos are not without risk, however. Some condo associations will choose not to assess sufficiently high fees to account for emergencies. A condo association can insist its members pay an emergency assessment to deal with unforeseen repairs as a result. This is especially common in Florida where regulations do not require condo associations to build up an emergency reserve. In fact, the GSEs charge additional fees on Florida condos for precisely this reason.

3. Planned Unit Developments (PUDs): Fusion of Community and Independence

Planned Unit Developments (PUDs) blend elements of single-family homes and condos, creating a situation that combines the advantages of single-family homes with the shared amenities of condos. PUDs often contain parks, pools, and common spaces. Each unit in a PUD possesses its parcel of land, resembling single-family homes.

These features can attract a higher price. Nevertheless, potential investors should assess homeowners’ association (HOA) fees that cover shared area maintenance. A thorough understanding of these fees and associated regulations is paramount before making a commitment. It is essential that the investor knows the HOA in-depth and can ensure that they will not take action to interfere with their efforts to make money from the property. Much of the time, the additional rent you receive because of these amenities will not be large enough to cover the HOA fee; in that case, the PUD is costing you money.

4. Cooperative Apartments (Co-ops): Shared Living, Shared Choices

When you purchase a co-op, you acquire shares in a corporation that owns the entire building. Shareholders have the right to inhabit a specific unit. While there are plenty of exceptions, most co-ops are a poor investment, especially for newcomers.

Co-ops often implement rigorous buyer screening processes due to their strong community focus. This screening process can make it difficult to receive the maximum market value from your unit. Shareholders collaboratively decide on building management and regulations. Co-ops frequently have lower purchase costs compared to condos or single-family homes, yet they involve heightened scrutiny and potentially variable monthly fees. You can even inherit the maintenance expenses of others if they are not able to produce the cash. The board can also change its policy on subletting at any time, which might require you to drop your investment at a financially inconvenient time.

Depending on how the Co-op’s construction was financed, it is possible to inherit a “balloon mortgage” that can destroy the financial viability of the co-op at some point in the future, a balloon payment that will require you to lose your unit at some point. This can make the investment impossible to bail out of.

Be incredibly careful before investing in a co-op.  

5. Multi-Unit Homes: Duplexes and Apartments

Multi-unit homes encompass properties like duplexes and apartments, offering multiple separate living spaces within one structure. Duplexes consist of two units, typically side by side or one above the other. Apartments involve larger complexes with multiple units.

Investing in multi-unit homes can provide diverse income streams from multiple tenants reducing the risk associated with buying and renting a single-family home of comparable size. However, it also means dealing with more extensive maintenance and management responsibilities. Duplexes offer a balance between shared revenue and manageable complexity, while apartments can yield substantial income but demand more robust management strategies.

Conclusion

Embarking on a real estate investment journey can be simultaneously exhilarating and daunting, especially for newcomers. Grasping the nuances of various property types—ranging from single-family homes, PUDs, condos, and co-ops to multi-unit homes like duplexes and apartments—allows investors to align their preferences and aspirations with the right opportunity. To succeed, you must choose the property type that best suits your needs. 

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published August 18, 2023