Understanding Different Types Of Real Estate Investments
Whether you have the time and money to spend on an investment property, there are many ways to get involved in real estate investing. Let’s explore a few real estate investment examples to decide which option may be best for you.
1. Residential Real Estate
Residential real estate is probably the most widely known and understood type of real estate investment. That said, there are many different types of residential real estate investments, from micro-flipping to accessory dwelling units (ADUs).
Residential real estate investments are usually active, meaning they will likely require significant monetary and labor contributions from the investor – but they have the potential to bring in sizable profits and continuous cash flow.
Since residential real estate investments can be a lot of different things, let’s explore a few of your options.
Long-Term Rental Property
A long-term rental property is real estate that you buy with the intention of renting out to tenants. Long-term rentals can include single-family homes, duplexes or multifamily properties. As an investor, you make money through rental income and/or through appreciated property value if you eventually decide to sell the property.
When managing a rental property, some investors choose to live on-site, which is known as an owner-occupied multifamily property.
Vacation Rental Property
Owning a vacation rental is similar to owning a long-term rental property. You buy a property, typically in an area popular with tourists, and rent it out to visitors who stay for short periods of time.
This can be one of the more work-intensive residential real estate investments because you, a partner or an employee will have to manage the upkeep of the property between guests.
House Flipping
Flipping a house is one of the most active real estate investments. When you flip a home, you purchase a fixer-upper, renovate the property and sell it.
Flipping houses can be one of the riskier ways to invest in real estate. Not only are you investing a lot of your own money, but you’ll need to have the cash flow for any unexpected problems that pop up. If all goes well, however, you could stand to make thousands in profit from the home sale.
Micro-Flipping
Micro-flipping is the less extreme version of house flipping. You buy homes that are sold for less than their potential market value and then quickly resell them, usually without major repairs. This is less profitable than traditional flipping but is also less risky and cost intensive.
Accessory Dwelling Units (ADUs)
Accessory dwelling units (ADUs)are extra living spaces on your property that you rent out to a tenant. Basem*nts and sheds converted into tiny homes are common examples of ADUs. Operating an ADU is typically less cost-intensive than managing a separate property and can be a good option for generating some extra income from your current property.
Pros Of Residential Real Estate Investing
There are a lot of benefits to investing in residential real estate, including:
- High earning potential: You have the potential to make a lot of money on your investment if you know what you’re doing. Finding the perfect property in the right area could net you some sizable extra income each month.
- Property appreciation: Real estate appreciates in value over time. If you buy a property, especially at a discount, make repairs and then sell it later, odds are, you’ll make a decent return on your investment.
- Tax benefits: There are tax benefits to investing in real estate, including tax deductions, depending on your income level.
Cons Of Residential Real Estate Investing
Though residential real estate can be a great investment there are definitely some cons to weigh before committing, including:
- High costs: Investing in residential real estate can be expensive, especially for activities like house flipping that require substantial cash flow and upfront renovation costs.
- Time-consuming management: Managing real estate yourself can be time consuming. Having to do property upkeep or perform various landlord duties, such as collecting rent and overseeing repairs, can eat up your time.
- Lack of liquidity: Managing a property is not an investment with much liquidity. You can’t sell real estate quickly if you need to use money from your investment right away, like with other investment options.
2. Commercial Real Estate
Commercial real estate refers to real estate investments that are typically non-residential. Hotels, warehouses, office buildings and retail stores are all examples of commercial real estate investments.
With commercial real estate investing, you’ll own and rent out a space to a business. Just like residential real estate, you can earn extra cash flow by collecting rent or selling the property as the value appreciates.
Pros Of Commercial Real Estate Investing
- Higher returns: Commercial real estate is known to yield higher returns than residential real estate. If you can afford to manage a commercial space, it can prove lucrative over time, depending on your area.
- Value tied to revenue: The value of commercial real estate is determined in part by how much revenue it generates. That being said, if your property is housing successful businesses, it may appreciate in value much faster than a residential property.
- Lower upkeep risk: Upkeep may not be as risky as residential investments. Since you’ll likely be renting commercial spaces to businesses, there tend to be more professional relationships between tenant and owner.
Cons Of Commercial Real Estate Investing
- Public and tenant concerns: With commercial investments, you have to worry about the public as well as your tenants. You might need professional assistance to keep your property up to standards and to help you manage any issues that might pop up.
- Time demands: Commercial investments tend to be more time-consuming than residential properties. Rather than dealing with just a few tenants, you’re likely going to have to juggle multiple leases with different business owners.
- Increased risk: Since your investment property is public, there’s more risk involved all around. While residential building owners also have to worry about property damage, commercial building investors have an increased risk of someone being injured on the premises or damaging the property.
