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Oct 05, 2021 PropStream

Different Types of Real Estate Investments

Real estate investment involves buying properties and reselling, renting, or managing them with the goal of earning a profit. 

There are two main tracks to investing that can be i) active — where you directly own or finance real estate — or ii) passive, such as crowdfunding or otherwise raising capital, where others are actively managing real estate on your behalf. Those who have real estate in their portfolio may be active, passive, or a combination of these approaches.

The goals of an active real estate investment can differ. Some people may wholesale a property,  fix and flip existing properties, or develop vacant properties to earn quick returns. Others may seek cash flow with rental properties or long-term growth with a buy-and-hold strategy. Some even do a combination of the above. 

Irrespective of their approach, all real estate investors should obtain the necessary information to make informed decisions about the best investment for their needs, goals, and risk tolerance. 

Whether you are looking to take a more active role in managing your investment or you’d like to be passive and do as little as possible, here are the most common forms of both active and passive real estate investment that you can choose. 

REITs

Real estate investment trusts (REITs) are companies that own or finance income-producing real estate. You can invest in property through a REIT by buying shares, just like you would with a company's stock. These shares effectively grant you part ownership of properties. 

  • What type of property? All different types of property.
  • Who occupies the property? Commercial or residential tenants; REITs for resale or initial development remain unoccupied.
  • Is this investment right for me? If you lack the funds or experience to purchase an entire investment property, REITs can be worthwhile. 
  • Who should invest? REITs are a good active investment for those who don’t want to purchase a physical property. They’re also an option for experienced investors who want to diversify their holdings. 

There are other options, including stocks and ETFs that are somewhat similar to REITs or which can even be composed of REITs. 

Real Estate Stocks

Real estate stocks are essentially just conventional stocks, but which represent a share of ownership of any business involved in real estate. Major brokerages, retailers, and developers could all sell shares that would be considered real estate stock. Tech companies and mobile platforms like Airbnb or Zillow, which are involved in vacation rentals and property listings, can also be packaged and sold as real estate stocks.

  • What type of property? All types of property may be associated with real estate stocks. The investment is in ownership of a company or a business, rather than in a physical property directly.
  • Who occupies the property? N/A. Because the stocks may be shares of a company, there may be no underlying physical property involved in the stock.
  • Is this investment right for me? Real estate stocks allow investors to dip a toe into the waters of real estate investing without having to get deeply familiar with the marketplace for real estate or contending with any local laws and regulations. Real estate stocks can be included as part of a broader index or mutual fund, as well as purchased individually like common stock, making it accessible for any budget. 
  • Who should invest? Like the broader stock market, real estate stocks can be a great beginner option as well as something expert investors monitor closely and trade more actively. They can be acquired as part of a larger investment package, or carefully selected individually. Their flexibility makes them a viable option for any budget and any level of financial knowledge.

Real Estate ETFs

Exchange-traded funds, or ETFs, are similar to mutual funds: they are securities designed to allow investors to attach their money to an index, rather than a specific stock. ETFs are available in stocks, bonds, certain commodities, and real estate investment trusts. Real estate ETFs are traded on the open market much like common stock and offer investors shares of a larger set of real estate in a portfolio, which can allow holders to profit from dividends generated by the underlying properties, or by selling the shares as they appreciate.

  • What type of property? Any type of property may be included as part of an ETF, including residential developments, undeveloped land, and commercial property.
  • Who occupies the property? Varies; real estate ETFs may comprise rental property, commercial tenants, or even unoccupied land to be developed. 
  • Is this investment right for me? Real estate ETFs can be bought and sold like common stock, so this may be affordable to investors on any budget. ETFs can also be held as part of a tax-favored investment account like an IRA or Roth account, which can offer further benefits to investors. If you are interested in REITs but don’t have sophisticated knowledge or experience investing, ETFs can offer broad exposure to diversified properties without having to build your own portfolio. 
  • Who should invest? Novice investors and those wanting to learn more about real estate investing, as well as casual investors just looking to diversify their portfolios or make a lower-cost foray into real estate investing.

Crowdfunding Platforms

Real estate crowdfunding platforms raise capital to fund real estate investments. Some funds purchase existing buildings while others focus on new constructions. Interested investors can see the details of the project online and buy shares for as little as a few dollars. 

  • What type of property? Commercial or residential. Search different platforms to find the type of investment that fits your needs.
  • Who occupies the property? Commercial or residential tenants. 
  • Is this investment right for me? Crowdfunding sites are typically best for passive investors and novices who want to put smaller dollar amounts in specific real estate investments. This is not a good option for those who want a say in the resale or development process. 
  • Who should invest? Crowdfunding sites are ideal for people who want to put smaller amounts in real estate or find specific projects to invest in without the money and risk requirements of physical ownership. 

Those with more money to risk can focus on physically purchasing property. 

Residential Real Estate

Residential real estate includes single-family homes, apartments, condos, and vacation properties. An investor can purchase the properties for rent or to resell after holding them for a period. 

Residential real estate investors need to consider location, market conditions, and property values before making a purchase. 

  • What type of property? Single-family homes, multi-family properties (apartments or condos), or any other related type of property. 
  • Who occupies the property? Residents. An investor could also live there until resale. 
  • Is this investment right for me? Residential real estate can be a good option for people with the funds to purchase property physically. Also, skills or connections to repair or renovate properties are beneficial. 
  • Who should invest? Residential real estate can be a good entry point for investors because you could potentially live at the property until resale. Also, residential real estate investment is often less complex than commercial or industrial property because there are fewer economic factors to consider.  

Commercial real estate is often the next step for investors who want to diversify their real estate portfolio and have a larger capital base to work with. 

Commercial Real Estate

Commercial real estate refers to buildings that are rented or bought and sold for business purposes. Malls and office buildings are examples of this type of property. Commercial real estate also includes retail property, which is a building where one or more tenants operate stores that sell products directly to consumers. Shopping centers, strip malls, and standalone shops are all examples of retail properties. These are typically cash-flow businesses where the owner collects rent from tenants each month. 

Commercial real estate investment may include renovating or developing property to attract potential tenants. 

  • What type of property? Buildings are used for business purposes. Examples include retail malls, restaurants, or office space. 
  • Who occupies the property? Business owners. 
  • Is this investment right for me? Commercial real estate is for investors seeking regular cash flow from rent payments. If you are looking for cash flow, retail property is an alternative to residential rental properties. However, commercial real estate can involve significantly higher investment amounts than other forms of property, so you need to be well-funded. Economic cycles and other factors can affect tenant retention and how much you can charge in terms of rent. 
  • Who should invest? Serious investors who understand economic factors as well as the property market. Because of the significant investment, this option is not for novices. 

There are other options for those who would like to take a step beyond commercial property. 

Historic Property

Historic properties must meet one or more criteria. Though some are officially listed on the National Register of Historic Places, others are judged more subjectively. Historical properties are either of a certain age or were the site of a historically significant event. 

For investors, historic properties can command a higher sale price because of their notoriety or character. Furthermore, some cities and states provide tax benefits to owners who seek to preserve older buildings. 

  • What type of property? Residential or commercial buildings. Investors seeking revenue from ticketed admissions may operate historic buildings as museums or historic sites. 
  • Who occupies the property? Tenants, residents, or businesses. 
  • Is this investment right for me? Historic significance may increase the value of the property. However, this type of real estate might have expensive repair and maintenance requirements. 
  • Who should invest? If you are seeking a unique type of real estate investment and are willing to deal with the requirements and risks of maintaining an older building, this could be a profitable investment option. 

If you understand the pros and cons of historic building ownership, this could be a rewarding investment option. 

Raw Land, Land Investing, Vacant Property, & New Construction

This type of investment involves purchasing raw land and improving it for either resale or rental. You will need to consider zoning regulations, utility connection, and location. In some cases, you can hold the raw land without improvement in the hope of reselling it. Raw land typically does not come with any improvements, such as water and sewage, installed. So this needs to be taken into consideration.

  • What type of property? Undeveloped land or vacant land. 
  • Who occupies the property? No one occupies. 
  • Is this investment right for me? Raw-land investment usually requires access to significant funds. You may need to attract other investors who will help pay for construction projects. 
  • Who should invest? If you understand the risks and expenses associated with developing a property from scratch, this could be a good investment option. However, adding value to raw land is typically not a good choice for novice investors. 

Investors need to know how to find desirable land if they want to engage in this type of development. 

Rental Property 

Rental real estate provides a steady cash flow, but you are responsible for maintenance, upkeep, and tenant acquisition costs. Therefore, this type of investment can become complex without proper planning. 

  • What type of property? Residential or commercial buildings. 
  • Who occupies the property? Rent-paying residential or commercial tenants. 
  • Is this investment right for me? People looking for regular cash flow may benefit from rental property investment. However, they need financial reserves to handle any maintenance and upkeep costs that may occur.  
  • Who should invest? Investors who want regular income from their property. However, factors such as tenant turnover, maintenance costs, zoning, and liability make this a poor choice for novices without financial reserves to deal with potential issues. 

If investing in rental property sounds too intensive, some alternatives can help you avoid the costs associated with maintaining a property for the long term by quickly turning properties around for resale. 

Short-Term Rentals 

Long-term rentals like apartments involve leases that span months or even years, and may be used as a primary residence by the renter. Short-term rentals, also often called vacation rentals in the residential market, are properties that serve a function similar to hotels or resorts. Platforms like Airbnb can allow owners to list property — from a single room to entire units — as short-term rentals for travelers. Some organizations like We Work also target start-ups and entrepreneurs who work from home and need short-term leases and or meeting rooms.

  • What type of property? Generally residential homes, apartments or meeting rooms, and office space.
  • Who occupies the property? The renter, although in some cases an individual room may be rented while the owner continues to occupy the property. In the case of some short-term business rentals, renters will buy a subscription for shared or common space.
  • Is this investment right for me? Short-term rentals can generate a very high income compared to long-term rentals, since multiple occupants can potentially rent it out, and pricing can be more rapidly adjusted to reflect demand, seasonality, and other changing factors. Mobile platforms have proven that short-term rentals are viable for novices as well as experienced property owners and managers who don’t want to deal with the full resale process involved with buying and selling real estate. 
  • Who should invest? Short-term rentals are a great option for novices, owners looking for supplementary income, and especially those who live or own property in highly trafficked tourist destinations, like major cities or near popular parks. Short-term rentals do carry some unique laws and regulations, but anyone who learns these rules (especially related to sanitation and health codes) can invest in or manage their own rental property.  For commercial short-term rentals, landlords with unused commercial space may create an opportunity for themselves in this market.

Wholesaling

Wholesaling is the name for securing and referring leads to other investors, typically for properties that are not yet officially listed. For example, if the owner of a home has acquired debt and has liens on their home, a wholesaler may be able to identify their home and connect the homeowner with investors who would purchase the home. Wholesaling usually involves purchasing properties at less than market value (or at a wholesale price), bypassing the normal listing and bidding process. Wholesalers will usually deal with other investors who may want to fix and flip or have other plans for the property to turn a profit. Successful wholesaling can involve time and resources to identify potential leads and build a steady pipeline of properties and is a stepping stone into starting an active real estate investment portfolio.

  • What type of property? Both commercial properties and residential homes. 
  • Who occupies the property? Varies; could be unoccupied, owner-occupied, or even undeveloped property. 
  • Is this investment right for me? Wholesaling is for people who can identify and secure leads. If you want to operate outside the standard market, and are interested in occupying more of a “middle man” type of position, wholesaling may be right for you. It is a consideration for people who would like to get into real estate but don’t have enough funds to buy the property themselves.  
  • Who should invest? Wholesalers are savvy salespeople and talented researchers. They need less capital to get started than many other investors who purchase and own or resell property outright. You must be willing to get familiar with local rules and regulations regarding commissions for securing leads and may need to work with an attorney to navigate your contracts.

Flipping Houses

Flipping houses involves renovating properties and then quickly reselling them for a profit. This is one type of investment that requires the skills to find properties, as well as the finances and know-how to make renovations before resale. 

Investors may rely on skip-tracing services to find contact information for property owners who may be pitched on selling their real estate and to assess their willingness to sell. 

  • What type of property? Commercial properties or residential homes. 
  • Who occupies the property? Typically, a homeowner, though foreclosed houses may be unoccupied. 
  • Is this investment right for me? House flipping is for people who have a high-risk tolerance and want to realize profits quickly.   
  • Who should invest? House flippers need extensive knowledge of the real estate market in a specific area. They need to be able to calculate home values and renovation costs and have the funds to cover extra expenses if the renovations do not go according to plan. 

People can lose money with this investment strategy, so you need to know how to mitigate house-flipping risks before you start your first project. 

Industrial Property

Industrial property refers to land and buildings for production, manufacturing, warehousing, distribution, and other related business operations. Though investors can build or renovate industrial buildings for resale, this type of investment typically involves leasing. 

  • What type of property? Warehouses or production facilities. 
  • Who occupies the property? Businesses engaged in manufacturing, distribution, or related operations.  
  • Is this investment right for me? Industrial property investment is attractive because it involves relatively simple buildings that you can rent or sell based on factors such as square footage and location rather than attractiveness or other subjective variables.   
  • Who should invest? Though warehouse and factory projects are relatively straightforward, they usually require more money than residential real estate. Therefore, this is a good option only for people who have proper funding. 

Mixed-Use Property

Mixed-use properties can have both residential and commercial elements. For example, they may have retail on the first floor and apartments on higher floors. Others mix office space with condos. Mixed-use spaces are good for investors because they allow for income from different sectors within the same building.

  • What type of property? Usually larger buildings with multiple units. 
  • Who occupies the property? Typically both residential and commercial tenants.  
  • Is this investment right for me? Mixed-use buildings are often large projects requiring multiple backers. Though they can be profitable, they usually require significant initial investments. 
  • Who should invest? Investors who have the initial funds and want to limit risk by relying on different types of tenants may benefit from multi-use property projects. 

Regardless of your level of experience, there is a wealth of real estate information to access. You can prosper with the right training and a measured approach that takes risk and other factors into account. Thanks to the wealth of resources online, it’s easy to get started immediately

Foreclosure Property

Finally, this isn’t a specific category of properties so much as a strategy for identifying real estate that may be acquired from any of the above categories in which the property is owned, rather than rented. A foreclosed property is seized by the lender (usually a bank) after the owner cannot meet repayment benchmarks. The bank typically resells the property at a discount to recoup as much of their loss as possible. 

The resale offers investors an opportunity to acquire a below-market-price property. 

  • What type of property? Primarily residential buildings but some are commercial. 
  • Who occupies the property? The homeowner; but it is usually vacant once the bank takes ownership.  
  • Is this investment right for me? People who understand the housing market and can spot a good deal at a foreclosure auction may profit from buying and reselling foreclosed homes.  
  • Who should invest? Though you need the knowledge to understand when you are getting a good price, foreclosed homes generally offer the best chance to get a property at below-market prices. 

In some cases, owners avoid foreclosure by selling their property at a discount before the bank takes it. Investors can profit from these pre-foreclosure sales by getting a good property for a low price.

Published by PropStream October 5, 2021
PropStream