Types of Real Estate Investments

Different Types of Real Estate Investments

There are numerous ways to invest in real estate including buying an investment property and renting out a property. Most real estate investments fall under two categories: active or passive. Active investments are ones that will cost you both your own money as well as your time and potential labor. Examples of active investments include flipping houses and managing residential rental properties. These type of investments tend to be more lucrative than passive ones due to their higher cost and larger risk.

Passive investments are ways of investing that do not typically require you to personally own or manage a property. Examples of passive investments include real estate investment trusts (REITs), real estate funds, and crowdfunding. These types of investments allow you to invest in real estate without having to put forward a lot of money or manage properties.

Here are some ways to get involved in real estate investing:

Residential Real Estate

This type is one of the most widely known and understood real estate investment. These are usually active investments, meaning they will require a larger amount of money and contributions from you, but they do have the potential to bring in a sizeable amount of profits and continuous cash flow.

Whether you have the time and money to spend on an investment property or not, there are a multitude of ways to get involved in real estate investing. Let’s explore a few of the options available to you. Here are some common types of residential real estate investments:

• Long-term rental property - this is a type of real estate that you buy with the intention of renting out to tenants. This property can range from a multi-family home to a small single-family house. As an investor, you make money on these properties by collecting rent from tenants and/or through appreciated property value if you decide to sell the property.
• Vacation rental - this type of investment is similar to owning a long-term rental property. In this case, you will buy a property and then rent it out to visitors to will stay for a short period of time. This type of rental can be more work intensive because you or a site manager will need to manage upkeep of the property between guests.
• Flipping and Microflipping - flipping a home is a very active real estate investment. When you flip a home, you purchase a fixer-upper that needs repairs and take on the task of fixing the home and then selling it. This is considered a risky investment because you need to invest your own money into the house and there is a chance that you will find additional issues and lose money, rather than making a profit. If everything goes smoothly, you could make thousands of dollars in profit. Microflipping is a less extreme version of flipping a home where you buy a home that is sold for less than their potential market value and then you resell them quickly, usually without major repairs. This is less profitable than traditional flipping but is less risky and costly.
• Accessory Dwelling Units (ADUs) - these are extra living spaces on your property that you can rent out to a tenant. Operating an ADU is typically less cost-intensive than managing an entire property, which could be a good option for those interested in making some passive money from their own property.

Pros of Residential Real Estate

• You have the potential to make a lot of money back on your investment if you understand what you are doing. Finding a great property in a perfect area could net you a significant income each month.
• Real estate appreciates over time. If you buy a property and make repairs, you could sell it at a much higher price.
• There are many tax benefits to investing in real estate including tax deductions depending on your income.

Cons of Residential Real Estate

• Investing in residential real estate can be expensive, especially if you are doing a house flipping which can cost thousands of dollars.
• Managing real estate can be time consuming.
• Managing a property does not come with much liquidity, so you are unable to sell a property quickly and use that money right away like you can with other investments.

Commercial Real Estate

This type of real estate refers to investments that are typically nonresidential including hotels, warehouses, offices, and retail stores. Commercial real estate investments are considered active and require the investor to own the property and rent it out to a business that will use it. Investors will collect rent monthly or sell the property as the value appreciates to earn money.

Pros of Commercial Real Estate

• Commercial real estate is known to yield higher returns than residential.
• If your property is housing successful businesses, it may appreciate in value much faster than a residential property.
• Upkeep may not be as risky as it tends to be with residential investments.

Cons of Commercial Real Estate

• You will have to worry about the public as well as your tenants. You may need professional assistance to keep your property up to standards and help you manage any issues that may arise.
• These type of investments tend to be more time consuming as you are dealing with multiple leases and more potential issues.
• There is more risk involved since your investment property is public. Commercial real estate investors have to worry about people being injured on the premises or damaging the property.

Raw Land Investments

This refers to a property with nothing on it including buildings, paths, crops, or anything else. Undeveloped land is a cheaper investment opportunity but does appreciate over time. You can use raw land to lease to farmers or to builders who are looking to develop the land.

Pros of Raw Land

• Raw land is easy to acquire and it costs much less to own than developed land.
• Does not cost much to maintain. No repairs or updates needed.
• You could buy and hold, lease, or even build on the land you own.

Cons of Raw Land

• Raw land grants you few tax advantages.
• You may not make much money right away.
• Zoning rules can be complicated.

Real Estate Trust Investments (REITs)

These are the companies that operate as trusts and oversee other real estate investments. These are considered passive investments and generate income from the properties managed by other companies. Some REITs are listing on the New York Stock Exchange and are publicly traded.

Pros of REITs

• You can make an income without ever having to see, manage or own a property.
• Steady income.
• REITs are technically stocks and can help diversify your portfolio.

Cons of REITs

• REITs are best utilized as long-term investments that will yield growth over time, meaning they will not make you a lot of money quickly.
• REITs are taxed higher than qualified dividends.
• You have little control over your investments since you do not own or manage any properties.

Real Estate Crowdfunding

This is a relatively new method of investing where investors essentially join a group online and pool their funds and invest in opportunities that they would otherwise not be able to finance on their own. This type of investing requires much less money up front and is considered passive.

Pros of Real Estate Crowdfunding

• A great way to diversify your investment portfolio.
• Offers unique opportunities that investors may not have had access to without the help of other investors.
• Not much effort involved and the entire process can be done online, unlike other types of investments.

Cons of Real Estate Crowdfunding

• Investors are taxed on the dividends they receive.
• Some investment platforms may require you to meet a certain level of income in order to invest.
• Crowdfunding platform may charge users fees for using their service.

In Conclusion

Investing in real estate can be an exciting opportunity for those who want to make some extra money and get involved in owning and renting out property. It is important to be an informed investor to ensure you are putting your money into something that will ultimately benefit you in the long run.