Types Of Real Estate Investments: A Complete Guide
If you’re ready to start real estate investing but not sure where to begin, you’re not alone. On the matter of how to invest in real estate, you may quickly find that there are many types of real estate investments to choose from. Knowing you want to expand your investment portfolio is one part of the equation, but how do you know which real estate investment strategy is right for you?
Let’s walk through the different types of real estate investments, including the pros and cons of each.
5 Types Of Real Estate Investing
Before we delve into the real estate investment types, it’s important to be aware that not all real estate investing demands physical property ownership. You can invest in physical real estate through residential property, commercial property, new construction or land. Real estate investment trusts (REITs) and crowdfunding platforms, however, don’t require you to own a property.
Although investing in real estate may require more money upfront than buying stocks, the potential return on investment (ROI) can be worth it. Now it’s time to take a close look at five real estate investment examples so you can determine which type of real estate investing might be suitable for you.
1. Residential Real Estate
A residential real estate property can be a single-family home, a townhouse, a condo or a vacation home. When you invest in residential real estate, you’ll essentially become the landlord or hire a property management company while collecting rent through the tenants who occupy those properties.
There’s also the house flipping option when investing in a residential property. This means buying the home at a reduced price, making the necessary repairs or renovations and then selling the home at a higher price.
Residential Real Estate Pros
Here are some advantages of residential real estate investing:
- The tax benefits and deductions represent savings – you may be able to deduction a portion of what you spent maintaining and operating the rental, helping you save on taxes.
- Many residential real estate properties appreciate in value over time, especially if the property is taken care of, which means a potentially good ROI.
- Rental income can be a goldmine. Depending on the location and neighborhood of the property, you have the opportunity to make passive income each month through renters.
Residential Real Estate Cons
And now for some of the disadvantages of residential real estate investing:
- You have to put money upfront for a property, which can be tricky if you don’t have the financial capacity to get started.
- You could be managing the property yourself, which can be time-consuming when dealing with tenants and any needed repairs.
2. Commercial Real Estate
Commercial real estate usually means a mall, hotel or office building. When you buy a commercial property, you’ll be allowing another business to occupy and lease that space from you. Similar to residential real estate, by collecting rent or selling the property at a later time, you’ll be receiving extra cash flow through your commercial real estate investment.
Commercial Real Estate Pros
- The opportunity to rent out many spaces in just one building can create a high ROI.
- The potential is there for professional networking with your tenants.
- If you lease your property to successful businesses, that could contribute to an increase in the property’s value over time.
Commercial Real Estate Cons
- A bigger property and space mean more potential upkeep for you.
- You may be purchasing public property, and any property damage resulting from public use could be your responsibility to fix.
- Commercial real estate may require a larger down payment than other investment types.
3. Raw Land Real Estate
Raw land real estate refers to a location with no physical property on it. When you invest in land real estate or new construction, you’re investing in undeveloped land with the potential to either sell it back for a higher return or develop a business or property.
Investing in undeveloped land also tends to be a bit cheaper for real estate investors because there’s not yet a structure already there.
Raw Land Pros
- Maintaining raw land requires much less upkeep and maintenance due to the absence of buildings on the property.
- You generate income through the land in various ways, like building multiple buildings and renting the spaces out.
- Investing in land is cheaper than other real estate investment types.
Raw Land Cons
- You may not see a return on your investment as quickly.
- You may have to deal with zoning laws and regulations with raw land real estate.
- Requiring raw land will require more extensive research.
4. Real Estate Investment Trusts (REITs)
When investing in a real estate investment trust (REIT), you don’t own a physical property. REITs are multiple companies that operate and oversee many real estate investments. By investing in a REIT, you’re hoping to generate income by putting money upfront into different types of real estate investments and not owning or maintaining the property yourself.
REITs are a great investment strategy because you’re not doing any labor, just investing. This means you won’t need to hand over as much money upfront. You can also find some publicly traded REITs, such as hotels, malls and office buildings, on the New York Stock Exchange (NYSE).
REIT Pros
- The potential is there to make extra income while not managing or maintaining the property.
- REITs allow you to expand and diversify your real estate portfolio.
- You have the potential to see a good return on your investment in the long run.
REIT Cons
- Although a good ROI is possible, it may take longer than other investment types.
- The dividends taxed on a REIT are often higher than other investments.
- REITs have the potential for high fees.
5. Real Estate Crowdfunding
Real estate crowdfunding refers to multiple individual investors coming together to pool their funds and invest in real estate. You can find real estate crowdfunding platforms online or, if you know of investors, it may be useful to reach out to them about any investment opportunities on the horizon.
This type of investment strategy is similar to a REIT because you still don’t have to put as much money upfront, but you’re still able to generate passive income.
Crowdfunding Pros
- This type of investment strategy allows you to diversify your real estate portfolio without putting much money down.
- Real estate crowdfunding is fairly easy to get started with, compared to other investment types.
Crowdfunding Cons
- You may not see your ROI as quickly as you’d like.
- The potential exists for online platforms to charge you fees for their services.
- Real estate crowdfunding is relatively new, so there’s not as much data on the income you could receive down the road.
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How Do You Pick The Right Investment Strategy In Real Estate?
The right real estate investment strategy for you ultimately depends on your finances and individual needs. Can you afford a down payment on a home, or are you just getting started and finding that a REIT may be a better choice? Either way, we gathered a few tips to help you decide on what type of real estate investment is best for you.
Real Estate Investing Tips
As mentioned above, you’ll first want to figure out how much money you can invest in real estate. After you know where you are financially, consider the following tips:
- Do your research. Investing in real estate means investing in research. You’ll need to find the right neighborhood or location, the right investment type for you and anything else that will set you up for success.
- Know the risks and returns. Investing requires money, so you’ll want to make sure you understand all the risks associated with real estate investing but also the return on investment you could potentially reap.
- Decide your involvement. Real estate investing allows you to decide if you want to be fully involved – such as by being a tenant, or making repairs or renovations – but keep in mind you could hire a management company. If those options are too much work, a REIT or crowdfunding platform may be a better fit.
- Work with a real estate professional. If you’re purchasing a physical property, a real estate agent or other real estate professional is important to have by your side to help and support you through the buying or selling process.
- Keep an eye on the market. The real estate market is prone to fluctuate, so the timing of when to invest in a property is important to keep in the back of your mind.
The Bottom Line
Investing in real estate comes with both risks and rewards. So, no matter what type of real estate investment you choose, make sure you’re doing the necessary research before jumping in.
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