5 Types of Real Estate Investments

Real estate investors can select from several types of property investment. Whether it is a active or passive real estate investing, you should be aware of your options, as well as the risks of investment. This post will help you better understand the different types of real estate investments available to you.

Understanding Different Types Of Real Estate Investments

There are different real estate investment types. Residential real estate investment is commonly thought of first. Residential real estate includes single family homes and multi-family buildings.

Another type of real estate is commercial real estate. Commercial real estate includes anything that generates revenue from the real estate not related to people living there and excludes farming. Some real estate investors purchase raw land for future development.

Another important feature to evaluate is active vs passive investing in real estate.  An active real estate investor is involved in the day-to-day decision activities and typically directly owns the real estate.

On the other hand, a passive real estate investor typically commits funds to some person or entity who is taking the active role in the real estate investment. Passive investors have several hands-off options including loaning out money for real estate investments or investing in a real estate investment trust (REIT).

#1 Residential Real Estate Investment

Residential real estate investment is the most common type of real estate investment for several reasons. First, it is easier to get loans for residential rental real estate. Also, the business model is easier to understand. Third, there is an abundance of residential real estate. Lastly, residential real estate is easy to exit because it can be sold to either other investors or homeowners.

Types Of Residential Real Estate Investment

Residential real estate offers investors numerous options regarding both the type of real estate and strategies to make a return on the investment.

• Long-Term Rental – The most common form of residential real estate is the long term rental. Here, the investor is an owner-landlord and the customer is a tenant using the property as a home. The long-term rental strategy is best for real estate investors seeking a lower maintenance real estate investment and working on a long-term investment timetable.
• Short-Term / Vacation Rentals – Short-term rentals in high traffic, tourist areas are another type of real estate investment. Focusing on short-term rentals can be very profitable but requires more time. As a real estate investor you will need to know how to have the property continuously marketed, reserved, check-in and check-out guests, and ready the property for the next guests.
• Flips – House flipping is another way to invest in residential real estate. Here, a real estate investor purchases a property needing improvements. The profit comes when the purchase price plus the cost of the improvements is less than the potential sale price after completing repairs, commonly called the “after repair value” (ARV). House flipping is not as easy as it looks on television, but can be highly profitable.

• ADU Situations – In real estate an ADU means an accessory dwelling unit. Some people may say auxiliary dwelling unit. Either way, think of it as extra. A common example of this is the real estate investor purchasing both halves of a duplex, living in one, and renting out the other. Essentially, the owner/ real estate investor has extra space to rent our at his or her primary residence.
• Wholesaling – Real estate wholesaling is acting as an intermediary between the current real estate owner and some other real estate investor. Essentially, you are finding house flipping opportunities for other real estate investors. You lock in your purchase with a contract with the added stipulation you may assign the contract to anyone of your choosing. You then assign the purchase contract to someone who will pay a premium to you for the assignment. This sounds easy, but these opportunities can be hard to find.

Pros Of Residential Real Estate Investment

There are real benefits to residential real estate investment.

• Income Generation – A carefully sought out and bought rental property or flip can be profitable. Landlords benefit from monthly cash flow whereas home flippers can make a tidy sum when they sell. The Quadwalls Real Estate Team can help you find profitable rental real estate opportunities in Northwest Indiana. Taking the first step only takes three minutes by completing the Quadwalls HomeFinder Assistant.
• Asset Value Growth – Real estate typically increases in value. Therefore, the real estate you invest in today is more likely than not to be worth more in the future.
• Tax Loss Opportunities – By working with a tax professional you may be able to use your real estate investments to provide some tax losses. This can offset other earned income.

Cons Of Residential Real Estate Investment

Active real estate investment is not for the faint of heart. A lot can go wrong and those mistakes can be costly.

• Money – Real estate investment can be cash intensive. Yes, you can get a mortgage for your rental real estate investments. But, the more leverage you take the less room there is for errors. Flipping homes is very cash intensive, too.
• Obligations – If your real estate investments have you acting as a landlord you have a lot of obligations which must be followed. Everything from compliance with federal, state, and local laws, regulations, and ordinances, to maintaining the property, sourcing tenants, collecting rent, and unfortunately evictions, too.
• Losses – Do not expect real estate investment to all be profits. It is not easy to be a successful real estate investor. Be prepared that you may lose money as a real estate investor.

#2 Commercial Real Estate

Commercial real estate is the broadest category of real estate. Types of commercial real estate investments include all real estate that generates revenue not from tenants living there and is not raw land or farmland. A hotel, a strip mall, a gas station, a warehouse, and even a factory can be considered commercial real estate. Commercial real estate is typically more profitable than residential real estate but is much harder to get started in.

Pros Of Commercial Real Estate Investments

Commercial real estate investment has its benefits which set it apart from residential real estate.

• Sophisticated Tenants – Commercial property tenants are typically business owners with the wherewithal to remain professional.
• Less Responsibility – Commercial landlords frequently have less responsibilities pertaining to maintaining the facilities inside the commercial unit.
• Shared Costs – It is not abnormal for a commercial tenant to pay recurring costs of the property. For example, a triple net lease, which is relatively common, requires the commercial tenant to pay or share the cost of maintenance, insurance, and property taxes.
• Higher Returns – The cost sharing terms found in the typical commercial lease and the higher rent rates per square foot commercial real estate usually has a higher return than residential real estate.

Cons Of Commercial Real Estate Investments

Though the benefits sound good there are major drawbacks to commercial real estate investment, too.

• Complexity – Along with sophisticated business owner tenants comes sophisticated leases. Commercial real estate investors will find the paperwork all a bit more extensive. This can add even more need for a budget for professional advisors.
• Vacancy – During an economic downturn commercial properties are more likely to remain vacant for a longer period of time
• Risk – An added risk is the added traffic. Commercial real estate exposes the owner to the risks associated with the masses coming to the location including business employees and customers.
• Lending Requirements – The requirements for getting a loan on a commercial property are significantly more stringent vs. residential real estate.

#3 Raw Land

Raw, undeveloped land is another opportunity for real estate investors to consider. Raw land includes land upon which nothing has been built. The land may be prairie, an overlooked lot, or forested. The land may have utilities available or still yet need to be connected to utilities. The target piece of land is one which you believe will be wanted for development in the near future. Purchasing land is a bit speculative.

Pros Of Raw Land Investments

There are benefits to investing in real estate which is just raw land. These benefits include:

• Low Prices – Some land can be bought at surprisingly low prices. This can help real estate investors with fewer resources start out in real estate investing.
• Low Recurring Costs – Raw land has low annual costs. The costs include any debt repayment, minimal property taxes, and it would be wise to get a basic insurance policy on the land, too.
• Little to No Maintenance – Raw land will not take time from you because it is most likely nothing or nearly nothing will need done on the land.

Cons Of Raw Land Investments

• Speculative – Purchasing raw land is quite speculative. Your decision is a bet on where future development will occur and when. This is difficult and may never happen.
• Zoning Challenges – Raw land will most likely need to be re-zoned to fit the needs of a prospective buyer. Your local government may cooperate, but they might not.
• No Return – There is no return on raw land until you sell the property or sign a lease for usage of the property.

#4 REITs

A REIT is a real estate investment trust. The trust is set up as an operating entity and organized as a company. The REIT invests in and operates either a single or portfolio of real estate properties. Qualifying as a REIT requires conforming to a set of government regulations. Many REITs are publicly traded. A publicly traded REIT allows people to participate in real estate investment with a small amount of money, and the asset ownership in the form of shares is easy to sell.

Pros Of REITs

A REIT offers real estate investors many benefits making it an attractive real estate investment.

• Little to No Decision Making – REITs are a completely passive investment with no day-to-day decision making.
• Liquidity – If the REIT is publicly traded you can easily liquidate your position by selling the shares.
• Small Buy In – Many publicly traded REITs will allow you to purchase as little as a single share meaning you can participate with a small amount of money.

Cons Of REITs

REITs are not all benefits, though. Here are the cons of investing in a REIT:

• Little to No Control – REITs are managed by the officers of the entity. Shareholders have little input on their decision making.
• Higher Taxation – Though a qualified REIT is required to return dividends to investors, these dividends may be taxed at a higher rate than dividends from other equities.
• Not for Short Term Investors – The best success with a REIT is through long-term ownership. So, a REIT may not be the best investment for real estate investors needing their capital returned in a short timeframe.

#5 Real Estate Crowdfunding

Crowdfunding is simply the pooling of money from many investors in order to make some larger investment. The idea is old but has received a new name in our dot-com universe. If the investment is successful investors can be rewarded with a payout. Crowdfunding real estate investment is considered a passive investment.

Pros Of Real Estate Crowdfunding Investments

There are benefits to participating in a crowdfunded real estate investment. These include:

• Passive Investment – You will not have to commit time and know how to day-to-day decision making.
• Smaller Investment – Many crowdfunded real estate investments allow investors to participate with a lower initial investment vs. buying a home to rent out or flip.

Cons Of Real Estate Crowdfunding Investments

My opinion is there are far more negatives associated with crowdfunded real estate investments which make it less attractive despite its low barrier to entry. The cons of crowdfunded real estate investments include:

• Unregulated – Many crowdfunded real estate investments are not securities. Therefore, you are buying into an investment that is an equity position with little voice in the decision making but does not necessarily have the protections of the U.S. securities laws and regulations.
• Illiquid – It can be very difficult to exit a crowdfunded real estate investment because it is not openly sold on a daily basis via an exchange.
• Speculative – Most crowdfunded real estate investments are highly speculative in nature. You have an entity trying to build a business but is using John & Jane Q. Public to get the cash needed. If it is that great of an idea why not go to a bank?

Active vs Passive Investing

One of the most daunting tasks of real estate investing is the added responsibility that comes with being an active real estate investor. Active real estate investors take on a lot of responsibilities. This includes day-to-day decision making and addressing problems as they arise.

On the other hand, passive real estate investing allows the investor the opportunity to invest but frees him or her from all of the obligatory day-to-day activities. Passive real estate investment really might be the better option to consider.

I encourage every real estate investor I work with to be honest about how much time they have to address what will occur as an active real estate investor. It all sounds like fun to play Monopoly in real life but it actually takes a lot of time. Think about this, if you are renting out a one bathroom home and the tenant says the toilet has broken, you can’t say, “Well, give me a few days, and I will come and look at it.”

Which Real Estate Investment Is Best for You?

Before starting to invest in real estate you should find your comfort level. The best type of real estate investment is the one inside your comfort zone. Factors you should consider is your capitalization, your debt, your time and availability, and how willing you are to do the things that can be really tough as a real estate investor.

The Quadwalls Real Estate Team in Northwest Indiana has helped new real estate investors start a profitable enterprise or portfolio and experienced investors grow their operation. You can contact us for answers to questions about real estate investment. We can help you look for a profitable rental real estate property in Northwest Indiana, too. The first step is to let us know what you are looking for. You can do that in three minutes by clicking here to complete the Quadwalls HomeFinder Assistant.