Different Types of Real Estate Investments You Need To Know
The world of real estate investments is growing alongside technological advancements. There are many types of real estate to know about, but not all will be a good fit for your interests and skills. The key is to find the right type of investment that will allow you to grow your portfolio and reach your financial goals. Learn which type of investment aligns with your interests and skill set.
Here are some alternative real estate investments to explore:
Residential Real Estate
Residential real estate is probably the most widely known and understood real estate investment. There are many different types of residential real estate investments that you may or may not know about, from micro-flipping to accessory dwelling units (ADUs).
Residential real estate investments are usually active, meaning they will likely require significant monetary and labor contributions from you – but they have the potential to bring in sizable profits and continuous cash flow.
Types Of Residential Real Estate Investments
Since residential real estate investments can be many different things, let’s explore a few of your options.
Long-term rental Property: A long-term rental property is a piece of real estate that you buy to rent out to tenants. This property can be anything from a multifamily home with four units to a small, single-family house. As an investor, you make money on these properties by collecting rent from tenants and through appreciated property value if you eventually decide to sell the property. When managing a rental property, some investors choose to live on-site at the property, known as an owner-occupied multifamily property. However, this is not required by any means.
Vacation rental: Owning a vacation rental is similar to owning a long-term rental property. You buy a property, typically in an area popular with tourists, and then rent it out (usually short-term) to visitors who will stay in it for a short period. This can be one of the more work-intensive residential real estate investments because either you or someone who works from you will have to manage the property’s upkeep between guests continually.
Flipping a house is one of the most active investments you can take on. When you flip a home, you purchase a fixer-upper in desperate need of repairs, then make those fixes and sell it. This tends to be risky because you must invest a lot of your own money into the house, and there’s a chance you might find additional problems and lose money rather than make a profit. However, if all goes well, you stand to make potentially thousands in profit upon sale.
Microflipping is the less extreme version of this; you buy homes sold for less than their potential market value and then quickly resell them, usually without major repairs. This is less profitable than traditional flipping but less risky and cost-intensive.
Accessory dwelling units, or ADUs, are extra living spaces on your property that you rent out to a tenant, commonly a family member. Basements and sheds converted into tiny homes are common examples of ADUs. Operating an ADU is typically less cost-intensive than managing another entire property, so this can be a good option for those interested in generating some passive income from their current property.
You have the potential to make a lot of money back on your investment if you know what you’re doing. Finding the perfect property in the area could net you some sizable extra income each month. Investing in residential real estate can be very expensive. Especially if you’re doing something like flipping a house, remember that you have to pour your funds into purchasing and renovating the property, which can cost thousands upon thousands of dollars. Managing real estate yourself can be time-consuming. Having to do property upkeep or perform various landlord duties such as collecting rent and overseeing repairs can eat up a lot of your time.
Commercial Real Estate
Commercial real estate refers to real estate investments that are typically non-residential. Hotels, warehouses, offices, and retail stores are all examples of commercial real estate investments. These types of investments are typically considered active and involve the investor owning and renting out a space to a business that will use it. Like residential real estate, you can earn extra cash flow by collecting rent or selling the property as value appreciates. Commercial real estate is known to yield higher returns than residential. If you can afford to manage a commercial space, it can prove lucrative over time, depending on your area. The value of the commercial real estate is determined by how much revenue it generates. If your property is housing successful businesses, it may appreciate much faster than a residential property. Upkeep may not be as risky as it tends to be with residential investments. Since you’ll likely be renting commercial spaces to businesses, there tend to be more professional relationships between tenant and owner.
With commercial investments, you have to worry about the public and your tenants. You might need professional assistance to keep your property up to standards and to help you manage any issues that might crop up. Commercial investments tend to be more time-consuming as well. Rather than dealing with just a few tenants, you’re likely to have to juggle multiple leases and more potential issues.
Since your investment property is public, there’s more risk involved. While residential building owners also have to worry about property damage, commercial building investors may have more to fear about someone being injured on the premises or damaging the property.
Rehabbing properties is another great way to make money in real estate. You can find properties that need some work and then fix them up and sell them for a profit. This is a great way to get started in real estate because you don’t need a lot of money.
Raw land is a great way to make money in real estate. You can purchase land and then sell it for a profit. This is a great way to make money, but it does take some time to find the right land.
When new investors first learn about real estate wholesaling, many think it sounds too good to be true. They don’t realize how much work it is to find great deals on properties. Still, as types of real estate investing go, it makes a great model. Wholesalers find a good deal on a property, put it under contract, then sell the rights to that contract to a real estate investor. The wholesaler never actually takes title to the property themselves.
That means they don’t need to worry about financing or investment property loans, don’t need to hassle with screening tenants or property damage, or fielding 3 AM phone calls about roof leaks. They don’t pay any closing costs, and they don’t take on any headaches of property ownership.
Retail properties consist of shopping malls, strip malls, and other retail storefronts. In some cases, the property owner also receives a percentage of sales generated by the tenant store and a base rent to incentivize them to keep the property in top-notch condition.
Industrial real estate investment
Industrial real estate refers to properties that are used for industrial purposes. You deal with businesses rather than individuals, implying longer terms. It’s not uncommon to see industrial real estate investors lease their property to the same firm for many years.
Now that you know about the different types of real estate investments, you need to choose the best one for you. Each type of investment has its own set of pros and cons. It would help if you decided which one was right for you based on your goals, budget, and experience level.
So, what type of real estate investment should you make? That’s a question only you can answer. But hopefully, armed with the information in this post, you feel more confident in making a decision. If you want to explore any of these types of investments further, or want help from an experienced professional, don’t hesitate to reach out for assistance.
Amy Alwell is a REALTOR® in Florence, Kentucky, who specializes in helping her clients find the right investment property for their needs. Whether you’re looking for a fixer-upper to flip or a rental property to generate income, she’ll work with you to find the perfect fit. There are a lot of different factors to consider when investing in real estate, but with Amy’s help, you can be sure to find a property that meets your goals.