Types of Real Estate Investments: Residential, Commercial, and More
The world of real estate offers many types of real estate investment opportunities for seasoned and novice investors.
For the new investor, the variety of real estate investment options can be overwhelming. Residential properties, commercial spaces, raw land, REITs — each type of investment has unique challenges and rewards. Knowing where to invest, when, and how to manage the investment can be the difference between a lucrative venue and a costly mistake.
However, the potential for growth remains. As cities expand, populations rise, and economies flourish, real estate remains a popular option for all types of investors. Keep reading to learn more about the different types of real estate investments, from residential and commercial properties to REITs, raw land, and mixed-use developments.
- Real estate investment encompasses many opportunities, from residential and commercial properties to alternative investments like REITs, crowdfunding, and other specialized niches.
- Real estate investment offers potential rewards, including passive income, property appreciation, and tax benefits. However, it also carries risks like market fluctuations, property management challenges, and navigating financing options.
- Factors such as location, property condition, local development, and market demand can greatly influence property values and rental income potential.
What Is Real Estate Investment?
A real estate investment is the practice of purchasing, owning, and managing properties to generate income or realize capital appreciation. Investing in real estate isn’t just about owning land or a building; it requires careful consideration and research.
Factors like location play a crucial role. For instance, in an up-and-coming neighborhood, properties can appreciate in value in just a few years. Market trends, such as housing demand and a new major employer or developments in the area, can also influence rental incomes and property values.
At the same time, the property’s condition can affect its rental potential and the costs associated with maintenance. Additionally, investors should be aware of closing costs, which are fees and expenses due at the end of a real estate transaction. These additional costs can affect the overall profitability of an investment, especially when purchasing or selling a property.
Financing options can also affect real estate investment decisions. An investor’s credit score plays a crucial role in determining the types of financing available to them. Mortgage terms and loan types, such as bank statement loans and DSCR loans, can significantly influence an investor’s return on investment (ROI).
For instance, bank statement loans can be suitable for those who might not qualify for conventional loans due to non-conventional income sources. Instead of qualifying using pay stubs or tax returns, the borrower can qualify based on their bank statements.
Of course, investing in real estate comes with risks, such as economic downturns and unexpected maintenance costs. Being able to navigate and mitigate those risks will ensure the success of your venture.
What Are the Benefits of Investing in Real Estate?
Real estate is one of the most lucrative and stable investment options available, which is why it’s attractive to both novice and seasoned investors. While any investment carries risk, the rewards of real estate investments may outweigh the drawbacks. Here are a few of the key benefits of investing in real estate:
- A steady stream of income: Real estate investments have the potential to generate rental income, whether from a residential property, commercial space, or vacation home. This can offer a continuous income stream often higher than the earnings on stocks.
- Appreciation: Real estate values increase over time, making real estate investments a popular choice for long-term investment strategies. Even when we experience economic downturns, real estate is resilient and continues to grow in value.
- Portfolio diversification: Diversity is crucial for a healthy investment portfolio. Real estate offers an opportunity to spread risk because it has a low correlation with other major investments like stocks. Therefore, if the stock market is down, the real estate market may still be up, providing you with a financial cushion.
- Hedge against inflation: Many investments are vulnerable to inflation, but real estate is more resistant. House prices during inflation tend to rise, and so does the amount tenants or homeowners pay.
- Retirement planning: By managing real estate properties, investors can secure a stable income for their retirement. Properties that are fully paid off by then can provide consistent rental income or be sold to access appreciated equity.
- Wealth building: Regular rental income, property appreciation, and reinvesting profits can significantly grow wealth in the long term.
- Tangible assets: Unlike stocks, real estate is a tangible asset. In some cases, you can also use your investment by living in it yourself.
- Tax benefits: Real estate investments come with various tax advantages that range from depreciation deductions and reduced tax rates for long-term profits to benefits associated with property taxes and mortgage interest. For example, as an investor, you can potentially defer capital gains tax when selling one property and purchasing another using a 1031 exchange.
- Building equity: Every mortgage payment made allows investors to build equity in a property. That equity can then be used as collateral in a loan or to enable further investments.
Traditional Real Estate Investments
While the real estate industry has evolved over time to introduce new investment strategies, traditional real estate investments are still the most popular options available. Two of the most prominent categories within traditional real estate investing are residential and commercial.
Residential Real Estate
Residential real estate refers to the properties primarily intended as living spaces, meeting the housing needs of individuals and families.They’re not used for business or commercial activities. Examples of residential real estate include:
- Single-family homes
- Condos and townhomes
- Multi-unit complexes like duplexes, triplexes, and fourplexes
Investing in residential properties can offer consistent income on a monthly basis. Tenants provide a steady flow of rental income, especially if the property is located in a high-demand area. Additionally, residential properties, especially single-family homes, often have an extensive market, making them relatively easy to sell when necessary.
This type of real estate investing also has a low entry point. Residential properties, especially single-family homes, can be cheaper than commercial spaces, making it easier for first-time investors to get started. Owners of these properties also receive tax deductions on mortgage interest, property taxes, and other related expenses.
Unfortunately, like all investments, there are some downsides to residential real estate. Property management requires you to deal with tenants, perform maintenance, and engage in other day-to-day activities that can be time-consuming.
Additionally, there’s always the risk of vacancy, and unoccupied properties mean no rental income.
Commercial Real Estate
Commercial real estate is property used for business purposes. These properties are typically leased to companies and small businesses Examples of commercial real estate include:
- Office buildings
- Retail stores and shopping centers
- Warehouses and distribution centers
- Hotels and hospitality properties
- Mobile home parks
- Storage facilities
When investing in commercial properties, you can typically expect more stable income since commercial leases are often longer-term. Additionally, per square foot, commercial properties can yield higher rents than commercial ones, offering the potential for higher returns.
Many commercial leases are “triple net,” so tenants also pay for property taxes, insurance, and maintenance, reducing the investor’s overhead.
However, these properties typically require a higher initial investment. When office buildings, retail spaces, and other commercial properties are vacant, they may remain unoccupied for extended periods.
Real Estate Development
Real estate development transforms spaces like raw land into something more valuable, like office buildings or apartment buildings. This aspect of real estate requires rigorous planning.
Raw land is underdeveloped land that hasn’t been used for any purpose or had any significant improvements. Investing in raw land offers investors flexibility. With no existing structures, they have the freedom to use the land for various purposes, from residential to commercial and mixed-use developments.
Raw land also comes with lower initial costs because it’s less expensive than developed property. This lower entry point may make it one of the best types of real estate investments for those looking for longer-term commitments. Additionally, unlike properties with existing structures, there’s no need for immediate maintenance or management.
Raw land also has the potential to appreciate in value, especially as the area develops over time. That means you don’t have to build anything on top of it to make it valuable. Instead, you can play a waiting game for your investment to pay off.
Unfortunately, raw land offers no immediate cash flow because it doesn’t generate income until something is built then leased or sold. Additionally, zoning restrictions and entitlement issues can hinder development plans, which is why so many real estate developments take years to complete.
Renovating property is another option for investors who don’t want to develop land. By transforming an existing structure and improving its aesthetics or functionality, you can increase its market value, sell it for a profit, or make it more appealing to renters.
Property renovations can significantly boost a property’s market value, commanding higher rents and offering investors improved ROI. In addition, investors can tailor renovations to target specific markets or tenant needs. Also, unlike new constructions, renovations can often be completed faster, enabling quicker returns.
On the other hand, property renovations typically come with unforeseen costs due to hidden issues like structural problems or outdated plumbing and wiring, potentially reducing your estimated ROI. Additionally, some renovations require permits, which may add to the timeline and overall cost.
First-time renovators may also make the mistake of overestimating the market. This means they’ve over-renovated beyond what the market values, leading to a potentially lower ROI.
Renovations require careful planning, budgeting, and project management to ensure the improvements align with the property’s value and target market preferences.
New construction is the process of building an entirely new structure on vacant or previously developed land.
This real estate investment offers the opportunity to feature contemporary designs, modern amenities, and energy-efficient technologies to draw renters and buyers. Additionally, these properties typically require minimal repairs and maintenance in their early years because everything is new.
With new constructions, real estate developers hoping to create desirable rental properties can build properties that incorporate highly valued amenities and features into the design, which can attract tenants who are willing to pay high rents.
On the other hand, some investors would rather sell a new construction than pour time and energy into renting out and managing the property. When investors or home builders create new homes that are designed to quickly sell for a profit, these are known as speculative homes—more commonly referred to as “spec homes”. With spec homes, developers design properties that are tailored to current real estate trends and their target markets.
Whether you want to build a rental property or a spec home, the downside is that new constructions have high initial costs and require significant capital to purchase land, design, and construct these properties. By the time a property is ready for occupancy, market conditions might change, affecting rental demand and overall property values.
In addition, these projects often come with construction delays due to unforeseen challenges, so you’ll be spending a significant amount of capital without generating an income for long periods of time.
Alternative Real Estate Investments
While traditional real estate investments are still the most popular, there are several alternatives to investing in property. These alternative real estate investments allow more individuals to access the real estate market with lower capital requirements and varied risk profiles.
Real Estate Investment Trusts (REITs)
REITs are companies that own, operate, and finance rental properties. They allow investors to indirectly invest in real estate by purchasing shares of publicly traded REITs. These REITs work similarly to stocks and provide dividends from the properties’ rental income and capital gains.
Unlike direct real estate, where you hold the property, REITs offer liquidity since shares can be bought or sold on the stock exchange. A single REIT can also own multiple properties across different sectors, providing portfolio diversification.
REITs offer the opportunity for investors to gain exposure to commercial properties and larger projects they might not be able to access otherwise due to financial constraints. However, investors who own REITs don’t have any direct control over the properties or how the REIT itself is managed. Also, REIT pricing is influenced by the stock market rather than just the real estate market, making it potentially volatile in the same way stocks are.
Unlike long-term real estate investments, REITs are taxed as regular income, so you’ll pay yearly taxes on your earnings.
Real Estate Crowdfunding
Real estate crowdfunding is a collaborative investing method in which several investors contribute funds to projects via digital platforms. This strategy allows investors to access opportunities without holding onto real estate themselves and offers a relatively low barrier to entry because it’s often more affordable to get started.
With crowdfunding, investors can spread their capital across multiple projects or locations, allowing for diversification. Additionally, crowdfunding offers a more direct connection to specific projects compared to REITs.
Unfortunately, investments in crowdfunding aren’t usually liquid. Your money will be locked in until a property is sold or the project is completed.
Vacation Rental Properties
Vacation rental properties allow investors to rent out a property for short-term stays, typically using platforms like Airbnb or VRBO to facilitate transactions.
Vacation rentals allow property owners to use the property and adjust availability based on their needs. In addition, these rentals can often generate more income per night compared to traditional long-term leases, and hosts can adjust rates based on demand, local events, and seasonal trends to maximize revenue.
Unfortunately, these rentals require intensive management. Short-term rentals require cleaning after every guest leaves, communication, and the ability to resolve issues quickly. Unfortunately, this option isn’t available everywhere. Some cities and neighborhoods have regulations and restrictions on short-term rentals.
Additionally, the short-term rental market can be especially volatile due to seasonality. These rentals are often more expensive than long-term rentals because they’re furnished, and owners must spend time and money marketing their properties.
Triple Net (NNN) Leases
Triple net (NNN) leases are a unique arrangement that places some financial responsibilities on the tenant. With a triple net lease, the tenant assumes responsibility beyond the regular rent payments, covering some or all of the property’s operating expenses. These expenses are divided into three categories:
- Net property taxes: The tenant is responsible for their share of the property taxes for the property.
- Net building insurance: The tenant covers their portion of the insurance premiums for the building.
- Net common area maintenance (CAM): Costs associated with maintenance of the common areas, like hallways, restrooms, parking lots, and shared amenities, are covered by the tenant.
With the tenant covering operational costs, landlords can accurately predict their income each month. In addition, the burden of handling property taxes, insurance, and maintenance becomes the tenant’s responsibility, reducing various management tasks for the investor.
That said, the additional costs may make finding and retaining tenants more challenging, especially since many aren’t familiar with NNN leases.
Specialized Real Estate Investments
Specialized niches that cater to specific sectors and needs are becoming more popular in the real estate investment landscape. These specialized segments arise from particular demographics or trends.
Senior Housing and Assisted Living
Senior housing and assisted living facilities are designed specifically for older adults who may need help with daily tasks but want to live as independently as possible. These communities offer various levels of care, from minimal assistance to intensive medical care.
There’s a growing demand for these properties, making way for more potential opportunities for investors. In addition, once seniors move into these facilities, they typically stay for extended periods to ensure a consistent income for investors. Due to the specialized services and amenities these investments offer, they often command higher rents.
One thing to keep in mind is that this sector is heavily regulated to ensure the safety of the residents. Therefore, you may face challenges meeting these regulations and requirements. In addition, running these facilities requires specialized knowledge and is often considered more labor-intensive than other investment options.
Student housing is accommodations specifically designed for students. They’re situated near educational institutions and are tailored to the needs of students, offering shared spaces, furnished units, and proximity to college campuses.
One of the most significant benefits of student housing is that there will always be demand for it as long as educational institutions remain options. In addition, there’s the potential for higher rents due to shared living arrangements.
However, leases often align with school schedules. Therefore, properties can experience vacancies during the summer months. In addition, with students graduating or moving, turnover is typically high for these properties, necessitating more frequent maintenance and repairs.
Data Centers and Technology Infrastructure
Data centers are specialized facilities designed to house computer systems and provide uninterrupted power supplies, cooling systems, and high security. They’re essential for the smooth functioning of the internet, business IT infrastructure, and cloud services.
By investing in these properties, you can take advantage of the rising demand as the growth of digital services increases. In addition, companies often sign long-term leases for data center spaces, ensuring a steady and consistent income.
That said, investing in data centers typically has a high barrier to entry. The technical and capital requirements to build and manage these data centers can deter competition, but that also means spending a significant amount of capital upfront.
Additionally, data centers consume vast amounts of energy, which can lead to high operational costs and scrutiny over environmental concerns. At the same time, constant technological changes mean data centers may need regular updates.
Explore Your Opportunities With a Mortgage Professional
Real estate investment offers a variety of opportunities to build wealth, diversify your portfolio, and achieve long-term financial goals. From traditional and commercial properties to niche sectors like senior housing, each opportunity has its unique set of challenges and rewards.
To maximize the potential of real estate, investors must be well-informed, strategic, and have capital. Understanding your financing options is one of the first steps in becoming a real estate investor. Securing mortgage pre-approval can give you an advantage, as it shows sellers your financial credibility and readiness to buy. A mortgage can be a tool that helps you leverage borrowed funds to acquire valuable properties.
Let Griffin Funding guide you through the world of real estate investing and help you find the best type of real estate investment. With a team of experienced professionals, we offer tailored solutions to suit your real estate investment goals. Whether you’re a first-time investor or looking to expand your portfolio, Griffin Funding’s personalized approach ensures you get the best terms, rates, and insights to make your investment a success. Apply online today.
For the new investor, the variety of real estate investment options can be overwhelming. Residential propertie...
Purchasing a home is one of the most significant financial decisions most people make in their lifetimes. With...