The Most Common Real Estate Investment Types
Posted by Gary Ashton on Friday, January 25th, 2019 at 10:14am.
People just starting to research real estate investment should understand that there are many options available. From the purchasing of land for different kinds of development or rental to participation in a trust, investors can decide which investment type is right for them.
Buying Land for Development and Sale
A lot of people get into real estate investment by buying a property, making some improvements and selling it at a profit as soon as it is ready. This form of investment is more commonly referred to as flipping. It is more popular in areas that are due for explosive growth, or in places with rapidly rising home values. Flipping houses is on the smaller end of this type, with the purchase and development of large commercial or mixed-use spaces on the larger end. People who engage in this kind of investment need to have the cash flow and liquid assets to make down payments and keep the mortgage in the clear until they can sell the property.
Purchasing Rental Properties
Many real estate investors buy a property, and decide to hang onto it for some time until they can get a larger profit from it. If they rent out the property or units on the lot to tenants, they can preserve some of their cash flow while they accrue more equity. Regions zone specific neighborhoods—such as Brentwood—for different uses, so investors need to purchase rental properties that are zoned for the type of use they want to own. These types include:
- Single-family homes
- Multi-family buildings (e.g. apartments)
- Commercial properties
- Industrial properties
- Retail properties
With this investment, the owner is required to get the building ready to rent, sign an appropriate lease with tenants, and arrange to receive payment and perform regular maintenance and upkeep of the property.
Real Estate Investment Trusts
The least involved and possibly the lowest-risk investment type is the real estate investment trust (REIT). With an REIT, a group of investors pool their money and create a corporation so that they can buy more lucrative properties, or a series of properties. Participants purchase shares in the corporation, and receive dividends as the corporate profits increase. Buying into an REIT spreads out the risk on any one property, so that one person is not on the line to sink or swim. However, this also means that several people share in the profits on a property, instead of all of it going to one investor.
Choosing the Best Investment Type
It may not always be clear which real estate investment type is the ideal choice for a particular person. Investors who want to put in a fair bit of time and money, but need to discharge the investment within a shorter amount of time, should consider buying property to develop or improve and then sell. People who have the time, or who are willing to give up a little cash flow to hire property management, may be ideally suited to buying property and renting it out to tenants. Investors who are either unable or unwilling to invest a lot of time or money at the outset or during the period of investment might be better off starting with an REIT.
The Value of Investing in Multiple Different Types of Real Estate
Investing in different types of real estate protects you from isolated problems occurring in the industry. While one part of the real estate industry might be affected by an economic downturn or a change in consumer behavior, others may not.
For example, imagine a property owner with a factory where a certain type of product is made. Over time, the product becomes less desirable for the consumer, and eventually, the company that makes that product closes its doors.
The property owner experiences a loss of income when the company shuts down. However, a smart property owner will continue to generate income through other investments, while looking for a new tenant for their factory. This makes it easier to weather the hard times.
Another reason to own different types of real estate: you can take advantage of economic upswings as they occur. Imagine you own a retail building, two restaurants and several rental homes in a community that is experiencing a population increase. Your properties will become more and more desirable as time goes on.
If you're new to real estate investment, you may start off slow and in one type of property. Rental properties is a common place where real estate investors make their start. As you expand, look into new forms of real estate. Diversifying will help you build on your profits, and will make you financially stronger when you need to be.
Invest in Real Estate Today to Prepare for the Future
Real estate investment can be an excellent form of income security for an investor, depending on the type they choose. With an understanding of the basic obligations of each type, people can select investments that are best suited for their needs.
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