There are many benefits to investing in real estate. The industry is quite lucrative, especially if you play your cards right, making it one of the most popular assets. That being said, investing in real estate can be quite overwhelming for newbies, putting them at risk of closing bad deals.
Understanding the different types of real estate is the first step in making a good investment. Before you decide to close a deal, here's what you need to know.
Types of Real Estate
There are several types of real estate investments, but most fall into two categories: physical investments and indirect investments.
Physical Real Estate Investments
1. Residential Real Estate
Residential real estate refers to any property used for residential purposes, such as single-family homes, condos, townhouses, vacation homes, accessory dwelling units, and multifamily residences. Residential real estate investors earn money by collecting rent from tenants and through the appreciated value the property has accrued between when it was bought and sold.
2. Commercial Real Estate
Commercial real estate refers to properties that are non-residential, including hotels, warehouses, and offices. Commercial real estate investors earn by collecting rent from business owners leasing the space.
Commercial real estate investment typically provides steadier long-term income for property owners as they have longer leases and require more rent. Additionally, commercial real estate may appreciate in value faster than residential properties, especially if it generates strong revenues, making it the most lucrative investment. However, these types of properties also come with higher down payments and expenses related to property management and maintenance.
3. Raw Land
Raw land refers to a property without any buildings, paths, or crops. Undeveloped lands are cheaper to invest in than developed land but also appreciate in value over time. Typically, investors purchase raw land with the aim of leasing it to farmers or selling it later at an appreciated value.
While raw land is easier and cheaper to acquire, it is also the type of investment that needs a fair amount of market research and careful planning. As such, it is often the type of investment best suited to someone with a large amount of capital and deep knowledge of the industry.
Indirect Real Estate Investments
1. Real Estate Trust Investments (REITs)
Publicly traded REITs refer to companies that own commercial real estate. If you're planning on investing in these types of properties, you can do so via the stock exchange. REITs are great ways of investing in real estate without as many of the risks associated with directly owning a property.
Depending on the REIT you invest in, you can expect to make a steady income. You can also use REITs to diversify your portfolio. However, it is important to note that REITs won't help you make a lot of money quickly. They are also taxed higher than qualified dividends.
2. Crowdfunding
Real estate crowdfunding refers to the process wherein investors pool their funds and invest in opportunities they would otherwise never be able to finance on their own. This method is a great way to diversify your portfolio without needing to invest a large amount of money. Having said that, some crowdfunding platforms may require you to meet a certain income threshold to qualify. Investors are also taxed based on the dividends they receive.
Best Type of Real Estate Investment for You
The best type of real estate investment to put your money in depends on a number of factors, including your circumstances, goals, market area, and preferred investing strategy. If you're looking to be more hands-off with your investments, REITs and crowdfunding platforms may be the best option. If you're willing to do your due diligence, such as knowing your local market, and are prepared to handle any issues that may arise, traditional real estate properties should be your choice.
