Real estate investment offers a myriad of opportunities for individuals looking to diversify their portfolios, generate passive income, or build long-term wealth. Understanding the different types of real estate investments can help investors make informed decisions based on their financial goals, risk tolerance, and market knowledge.
In this article, we will learn about some common types of real estate investments.
Understanding the Different Types of Real Estate Investments
You can buy several types of real estate investments. Learn more about each to see which might fit your portfolio and investment goals.
Residential Properties
One of the most common types of real estate is residential properties. Individuals, couples, and families live in houses every day, and landlords are typically expected to provide appliances, maintenance, and the basic things needed for a property to be a comfortable home. Types of residential properties include single-family homes, apartment complexes, and duplexes.
Income generated by investing in residential properties will typically come in the form of rental income and property appreciation. However, not all residential properties are used as rentals. Even the home you buy and reside in is considered an investment, as is any vacation home or second property that you own. And if your home or property increases in value, you can sell it for a higher price and potentially profit from the sale.
Commercial Properties
Commercial properties describe any property used for business purposes. This could be an office building, retail space, industrial property, sports and recreational property, and much more. These properties are typically rented out to a business that uses them as office space to offer services, sell products, or engage in other business practices.
Typically these types of properties have long-term leases, so there's less tenant turnover than a residential rental property. These businesses earn rental income and depending on the lease agreement, may help cover property taxes and maintenance costs.
Commercial property investments are also susceptible to economic downturns and have risks. For example, if the business renting your property is struggling, it may not be able to pay its rent. If it exits the lease, finding a new tenant in a slow economy can be hard. Additionally, changes in consumer trends can affect property success. Malls used to be places of booming business, but now many are struggling as consumers trend more toward strip malls.
Rental Properties
Many investors who own real estate use them as rental properties. Like there are many types of properties, there are many types of rentals. Residential homes can be used as a rental, where you rent your property to a tenant using a lease agreement. The tenants pay monthly rent, and the landlord will typically deduct maintenance and upkeep costs as well as management fees, and pocket the rest as income.
Residential properties can also be used as vacation rentals listed on sites like Airbnb or Vrbo. There are no lease agreements or long-term tenants. Instead, you may rent your property to individuals, couples, friends, or families who are on vacation in the area of your property.
These types of rentals may not be occupied constantly but can typically be charged at a higher rate. This is ideal if your property is in a popular tourist area. However, in addition to maintenance, upkeep, and management, landlords will likely need to pay for regular cleaning. These fees may be incorporated into the rental rate of the property.
Additionally, many commercial properties are rented to businesses in a long-term lease agreement. In any rental property, management is key. If you don't want the responsibility of managing your property, you'll need to hire a management company to oversee your property for you. Investors should also know the tax considerations for earning rental income.
Before purchasing a property, consider the types of rental you want to own and then select a property in a market that matches your goal. For example, if you want to own a vacation rental, you'll likely want to find a property in a popular vacation area. If you want to own a residential property, look at booming neighborhoods.
Fix-and-Flip Properties
A fix-and-flip property is one that an investor buys for less than the market value. This property typically needs a lot of renovations and may not pass inspection. The investor then fixes the property, makes it desirable, and sells it for more than the purchase price and cost of renovation. The goal is to make a decent profit from flipping the property, which they can use to grow their wealth and continue their investment strategy.
Flipping a property is attractive but takes a lot of time and work. Investors will need to ensure they'll be able to profit from it. They'll also need to vet and hire contractors, oversee the construction, and then go through the selling process. If you're interested in purchasing a property to flip it, ensure you choose a property in a desirable market and understand the cost of renovation.
Raw Land
Raw land refers to undeveloped, vacant land that has not been improved or built upon. By purchasing raw land in an up-and-coming area, investors can capitalize on future developments and infrastructure projects that may drive up property values. Additionally, raw land investments typically require lower upfront costs compared to developed properties, making it a more accessible option for many investors.
Another benefit of investing in raw land is the flexibility and control it provides. Investors have the freedom to develop the land according to their own vision and timeline, whether that involves building residential properties or commercial structures or simply holding onto the land for future use. This level of control allows investors to tailor their investment strategy to their specific goals and preferences.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) allows investors to get exposure to real estate in their portfolio without purchasing or managing a property. A REIT is managed by a real estate company that creates a portfolio of diversified properties. Individuals then invest in the entire portfolio, gaining exposure and innate diversification. They'll receive returns generated by the income made on the properties.
There are three types of REITs: equity, mortgage, and hybrid. Equity REITs own the properties in their portfolio and make money through rental income and property appreciation. Mortgage REITs invest in mortgages and make money from the interest on the mortgages. A hybrid REIT invests in both.
REITs are considered safer than purchasing a property because of their diversification. However, there are risks. If the real estate market dips or crashes, it could affect the value and income generated by the REIT. Plus, there are often fees associated with REITs that can affect returns.
Crowdfunding Platforms
In addition to REITs, crowdfunding allows individuals to invest in properties without purchasing them outright. Crowdfunding involves pooling together a group of investors to purchase a property or fund a project. Investors purchase fractions of ownership in the property and will receive returns that match their percentage of ownership.
Crowdfunding is a great opportunity for investors who want to invest in real estate but can't afford the large minimum investment required to purchase a property outright. Other investors may choose crowdfunding instead of full ownership because they don't want the responsibility of a landlord. Crowdfunding provides accessible real estate exposure without management responsibilities.
Tips for Picking a Real Estate Investing Strategy
Before building your real estate portfolio, you'll need to consider your financial situation, experience level, and goals. If you don't have the capital to purchase an entire property or partners to invest with, opportunities like REITs and crowdfunding may be a good option. Additionally, if your portfolio can't afford the risk associated with owning a rental property, then you may want to consider a REIT.
However, if you have the capital and are an experienced real estate investor, then you may not get the desired return from crowdfunding or REITs. In that case, owning a rental property may be better suited for your portfolio. If you have questions about what type of real estate investment is best for you, talk to a professional financial adviser.
Avenues to Real Estate Investing
In the past, real estate was largely inaccessible to everyday investors. Only the wealthy seemed to own properties and invest in the real estate market. However, new investment vehicles and platforms have made real estate more accessible than ever. So whether you have a couple hundred dollars to invest or several thousand, there are opportunities for everyone. Ensure you understand the types of real estate investments and their risks to make an informed decision for your portfolio.
Frequently Asked Questions
Which type of real estate investment is best?
The best real estate investment for your portfolio depends on the capital you’re willing to invest, as well as your goals, experience and risk tolerance.
What type of rental property is most profitable?
Generally, rental properties such as multi-family units, apartment buildings, or single-family homes tend to be more profitable than other types of properties. Rental properties provide a steady stream of income through rental payments, which can help offset any expenses associated with property maintenance and management. They also have the potential for long-term appreciation in value, further increasing profitability over time.
What type of real estate is best for beginners?
For beginners in the real estate market, the best types of properties to consider investing in are typically residential properties such as single-family homes, condominiums, or small multi-family units. These properties are often more straightforward for beginners to manage and require less upkeep compared to commercial properties. Residential properties also tend to have a more stable demand in the market, making them a safer investment choice for those new to real estate.