There are countless options, and the answer to this question will depend largely on the market you are looking at. As a general rule I recommend and prefer residential units to commercial buildings. Commercial buildings can provide some great advantages such as long-term tenants that are in charge of their own repairs. However they usually have a much larger barrier to entry, and if they become vacant you need to be prepared for a long vacancy.
A residential unit may be vacant for a month or two between tenants, but a commercial property could be vacant for a year or two or more. I have experienced this with the two commercial buildings with four commercial spaces that I have owned, and it’s not fun. For that reason, among some others I have sold them and will only be buying residential units for the foreseeable future. Residential units are much more stable and predictable.
So what type of residential unit should you be looking at? Single-family homes? Duplexes? Townhomes? Small apartment buildings? The answer is yes. You should look at all the options in your area. Every market is going to be different. The returns may be better for a certain type of property in your market as opposed to a different market. In general though my favorite properties have been small multi-family buildings. They have consistently provided the best returns. A great starting point is 2 to 4 unit buildings.
Although it’s not always the case, typically you’ll get higher returns in multifamily properties. With single family homes, you have to compete against buyers that are planning to live there themselves. That can make it harder to get the rent to purchase price ratio needed to make it a good investment. Multi family properties also provide the advantage of multiple units sharing a single structure and single roof. This results in lower capital expenditures over time.
Another advantage of multifamily properties is that you are not 100% or 0% occupied as you are with a single-family home. With a single-family home, when it’s vacant, it’s 100% vacant. You have to make sure you have reserves to cover the entire mortgage and all monthly expenses until the next tenant moves in. With a duplex, you may not break even with just one tenant but, it’s still nice to have a portion of the expenses covered while you have a vacancy. These are all rough concepts though. If the numbers make sense single family homes go for it! Even though I have a preference towards multifamily I own a lot of single-family homes. In fact, 26% of my rental units are single-family homes. There is no hard rule as to which type of property to go after.