Real estate investing lists among the oldest and most rewarding asset classes. It’s a great way of building wealth and can be one of the more reliable types of investment. New investors are usually aware of these benefits, but some are not aware of the several different categories of real estate investments available.
For a savvy investor, focusing your efforts on a specific niche can be the first step in succeeding in your pursuit of financial independence and the benefit of a passive income. What do you need to know about the best types of real estate investment opportunities for your needs? Let’s find out.
Types of Real Estate Investing
In 2020, the revenue from the property management field reached an unprecedented $88.4 billion in the U.S. If you’re a prospective investor determined to develop, acquire, own, or flip real estate, you should first understand the industry by dividing property investment into its various categories.
Based on US Census Bureau records, renter-occupied housing units accounted for about 30.4% of the overall inventory during the fourth quarter of 2020. Renting just makes sense for a large portion of the population, even if they have a choice to rent or own a property. These properties include houses, apartment buildings, vacation houses, and townhouses where individuals or families pay you to reside in the property. Details about their length of stay are stated in the rental or lease agreement.
Pros: short leases (due for renewal every 6-12 months) allowing you to capitalize on any positive adjustments in the market conditions.
Office buildings and skyscrapers basically constitute commercial buildings. Property owners lease out these spaces to companies or small business owners, who then pay rent to use the property. Commercial real estate prices have been on an upward trend. This statistics indicates this category has a considerable ROI in the long term.
Pros: Benefit of longer leases, usually multi-year. Typically, this approach helps generate greater stability in cash flow and often cushions you as the property owner from rental rates decline.
Cons: Markets fluctuate, and its possible rental rates may increase rapidly within a short period. Due to the dated agreements, a property owner may not have the flexibility to increase the rent to match the competitive market rates
These properties generate income from customers who frequent properties such as industrial warehouses, storage units, distribution centers, manufacturing facilities, and other purpose-built properties. As a real estate investor, you charge significant fees and earn service revenue as a means to increase your return on investment.
Retail properties include shopping malls, strip malls, retail storefronts, among others. Depending on the agreement type, property owners can also receive a portion of sales generated by the stores alongside a base rent. This strategy helps create an incentive for them to maintain the property in remarkable condition and attract shoppers.
Typically, mixed-use properties blend any of the above classifications into one project. This catch-all category of real estate investments is attractive for those with considerable assets since they offer a level of built-in diversification that helps control risk.
Real Estate Investment Trusts (REITs)
REITs have risen in popularity in the real estate investment community as an alternative way to invest in real estate. They are popular with investors who don’t want the responsibility of overseeing the management of an investment property.
But what’s a REIT? This real estate investing strategy involves investment in shares of a corporation dealing or owning real estate properties and allocating a considerable amount of its earnings as dividends.
Cons: tax complexities. Dividends don’t enjoy the same favorably low tax rates common stocks attract. But REITs can be an excellent addition to your investment portfolio, preferably when you buy them at the right value—with an adequate margin of safety. Besides, you can also opt for more esoteric areas like tax lien certificates.
As a rule of thumb, lending money for real estate is regarded as real estate investing and can also be accounted for as a fixed-income investment. Akin to investing in bonds, you generate your returns by lending money in favor of interest income.
Investing in a real estate/building and later leasing it back to a tenant, for instance, as a restaurant, is at par with fixed income investing instead of an actual real estate investment. In this case, you’re simply financing a property—but somewhat, this hedges between investing and financing. Overall, you technically own the building and have a claim to its appreciation and profits.
Getting Started In Real Estate Investing
Every kind of investment has its share of potential benefits and shortcomings, and real estate investing is no different. Smart investors minimize their risks by anticipating the twists in cash flow cycles, economic cycles, potential for natural disasters, and changes in lending traditions. So, it’s best to analyze and weigh the opportunities very thoroughly before deciding if real estate investing is the right choice for you.
Real estate investing can carry many rewards with benefits potentially lasting a lifetime. If you apply due diligence, you can capitalize on the available opportunities in what can be a fun and lucrative path.