The 4 Major Types of Real Estate Investment
Real estate investment can get very complicated. There are so many factors that it's easy for an Essex County homeowner to become confused about which type is the best fit for the individual. To get a better idea of how it works, it's time to consider how each type of real estate investment functions in the real world.
Learning the Terms
Whether an investor is hoping to invest in flipped single-family homes or rented apartments, it helps to know the lingo before jumping in:
- Residential: This is a broad definition that can include townhomes, duplexes, and condos.
- Co-ops: This more specific term refers to residential real estate that is under the control of a corporation. Instead of buying a unit, investors buy shares of the corporation that are equivalent to the going rate of each property.
- Commercial: Commercial buildings include offices, storefronts, and land used for business purposes.
- Raw land: This term refers to unadulterated land that has never been built upon before.
Most investments can easily be divided into these basic terms without confusion. However, an apartment building is the exception because it can technically be classified as either residential or commercial. Investors need to look to the state laws to determine how many units a building must have before being classified as commercial.
Type One: Rentals
Likely the most stereotypical type of investment, this option includes buying a property and then charging the market-value rent to the tenant. The rental period can be anywhere from one night to several years, depending on the arrangement the owner makes with the renter. However, it should be noted that short-term rentals (under 30 days) have become more restricted as of late, due to popular websites like Airbnb.
Type Two: Flips
Flipping an investment property includes fixing up the space before selling it to an interested party. This is a valuable skill that has paid off for countless investors—especially in markets that have seen an influx of interest in recent years. The trends in real estate clearly show that move-in ready homes are in high priority, and the profits can be considerable for investors who can either arrange for the improvements or do the work themselves.
Type Three: Raw Land
The concept of buying raw land includes purchasing land in a desirable area, keeping it until it appreciates to the desired price, and then selling to a well-funded developer or another investor. Without the burden of building upon the land, the raw land buyer theoretically only needs to pay the property tax while holding the property. This can leave the investor with serious profits by the end of the transaction.
Type Four: REITs
A real estate investment trust (REIT) is an investment opportunity where investors can spread out their money across multiple properties if they so choose. In this case, they're not buying the property outright but rather buying a certain portion of the building. When rent comes in or the property is sold, the money is split according to the portion each investor holds. The investor doesn't manage the property but instead funds a central group that will care for and make decisions for the property.
There are advantages and disadvantages to each type of real estate investment:
- REITs are recommended for people who don't have a lot of time on their hands. But the downside is that investors still absorb the losses of the trust, and they may not always have as much say as they'd like when it comes to the decisions made.
- Flips are recommended to those who have the special skills to restore homes, but they also need to keep in mind that large profits mean larger capital gain taxes. Between the cost of the materials and the taxes, it can quickly take a healthy bite out of the appreciation.
- Rentals are recommended to people who can either manage the property or find someone who can. Screening and handling tenants is definitely a job in and of itself, so it's important to be prepared before diving in.
- Raw land is recommended to those with almost imperceptible quality to spot a property that's ready to explode in value. Raw land can often take longer than investors think to appreciate though. The longer it sits, the more likely it is for tree roots to branch out or for neighbors to use it as a dumping ground.
Real estate can be a lucrative investment, but there are caveats to every decision. Understanding and exploring the types can make it easier to decide which avenue is best for the investor. Whether renting, flipping, or buying land, it's all about what to expect.