Investors have a lot of options when it comes to real estate. Some are hands on — such as flipping a house — while others are more passive investments.
Before delving into real estate investing, it’s important to know the available options to find what best suits your financial goals. Here’s a look at seven types of real estate investing.
Residential property covers everywhere people can live, including single-family homes, apartment complexes, vacation condos, and more. You can start by renting a room or build up to buying fixer-uppers and flipping them for a profit.
As an investor in residential real estate, you can earn income through rentals or sales. Either approach requires work in maintaining the property and developing it to earn the greatest return on your income. Learn more about what can help you earn you the biggest and fastest return on your residential investment.
Commercial real estate are properties that are leased or rented to another business. This includes office buildings, restaurants, retail space, and more.
Commercial properties typically involve long-term leases, which can mean a steadier stream of income for an investor. However, commercial properties also require a larger investment capital upfront and come with property management fees.
Buying an empty parcel of land gives an investor the most flexibility. Depending on the zoning, it can be turned into residential or commercial properties that you buy or lease.
Land development also requires the most up-front capital and the most real estate know-how. Investing in land development is a better approach for long-term real estate investors rather than first-timers.
While residential, commercial, and raw land investments require you to have a hands-on approach, they are also eligible for 1031 exchanges. A 1031 exchange allows you to defer paying taxes on earnings from the sale of one property by investing them into the purchase of another like-kind property within six months. Find out if you are eligible for a 1031 exchange from your investments.
As an investor in a publicly traded real estate investment trust, or REIT, you buy shares in a company’s property portfolio. REITs purchase, operate, and sell income-producing real estate, such as hotels, restaurants, and malls. REITs are required to return 90% of their taxable income to shareholders every year, meaning you will receive dividends annually.
Through a REIT, you can invest in commercial real estate without taking on the risks that come with owning a property on that scale yourself. They are also more liquid, so you can sell your shares on the stock exchange if you ever need money.
Real estate investment groups, or REIGs, are companies that buy or build residential properties, such as apartments and condos. Investors can then purchase units through the REIG without having to be responsible for the maintenance or management. Typically, rents from the property are pooled together and investors are paid a proportional share, which means you are not out of cash if your specific unit is vacant while others are leased.
Like REITs, a REIG can offer lower stakes for real estate investing. However, like mutual funds, REIGs often charge high fees, so do your research before handing over any cash.
Similar to a REIG, real estate limited partnerships hold a portfolio of properties. RELPs typically operate for a limited time and do not require active management from investors. Although some returns are paid out during the term of the RELP, the greatest income comes at the end when the portfolio is sold.
Crowdfunding platforms can offer the biggest return for investors, but they also come with the greatest risks. Also, crowdfunding platforms are not publicly traded REITs and are instead reserved for the wealthiest investors.
Unlike REITs or REIGs, money invested in crowdfunding platforms can be tied up for a number of years. These investments also do not have a great track record for being recession-proof.