Real estate has become a popular area to make investment decisions. Little wonder the browser history of shrewd investors is filled with lines like homes for sale in New Ulm MN, property up for sale, property on auction, and whatnot. If you’re interested in joining this bandwagon and start making a profit this way, you’ll have several options to choose from.
There are many types of real estate investments, but they can generally be divided into two categories. There are physical real estate investments, such as land or commercial properties. Then, there are other types of investments that don’t require you to own physical property, for example, crowdfunding platforms or REITs.
So, which one of these types should you choose? What exactly stands behind all these confusing names? In this article, we’ll go through some of the best types of real estate investments. Each of them has some advantages and disadvantages which you need to take into consideration in the context of your preferences, skills, and financial situation. If you want to find out which one is best for you, keep on reading!
Residential Real Estate
Experts from Highest Cash Offer define residential real estate as any place where people can live or stay for a prolonged period of time. The most common examples are single-family homes, but other options include duplexes, vacation homes, or condos. It’s one of the most popular forms of real estate investment because it’s known for the consistent profit turnout. As such, it’s also extremely competitive.
As an investor, you will make money by collecting rent from property tenants on a regular basis. You can also rent out a property for a shorter period of time, for example, in the form of vacation rentals. In this case, you will collect regular payments from multiple tenants as they begin their rental period.
The process is straightforward, and it’s easy to get started. However, you’ll be responsible for property management and all the necessary paperwork. You’ll also need to deal with your tenants, and sometimes you’ll have to wait a long time before you finally receive your big pay-off. Additionally, in the case of short-term vacation rentals, you must keep up with property maintenance and cleaning, fast turnover of tenants, and multiple regular expenses. Nevertheless, if you manage your properties well, your profits will be very attractive.
Commercial Real Estate
Commercial real estate involves spaces that are rented or leased by businesses. Experts believe that the best commercial properties to invest in include offices, retail spaces, or industrial, hospitality, and multifamily projects.
Those who invest in commercial real estate praise it for the potential for higher cash flow. When compared with other types, this form of real estate investment offers higher income potential, longer leases, and lower vacancy rates. Additionally, it’s less competitive than, for example, residential real estate. That’s because managing commercial properties can pose a bigger challenge than taking care of residential homes and regular tenants. However, it’s also more difficult to break into, and you may lose income if your storefronts remain vacant. For investors, though, it’s a great way to improve their local community and give local businesses a much-needed boost.
If you want to invest in commercial real estate but don’t want to buy and manage any properties yourself, you may be interested in REITs, or Real Estate Investment Trusts. REITs are companies that own commercial real estate properties. These may include offices, hotels, shops, restaurants, and more. In turn, you can invest in shares on a stock exchange that these companies have.
This option allows you to invest indirectly in commercial real estate without the risk of owning these properties personally. It’s also fairly profitable, with REITs required to return at least 90% of their taxable income to shareholders on a yearly basis. You can also invest in publicly-traded REITs, which offer more liquidity. This means that if you suddenly are in need of emergency funds, you can sell your shares on the stock exchange.
Crowdfunding platforms are websites that provide investors with a number of high return assets. They source money from the public to fund short-term purchase-rehab loans. You, as an investor, can spend your money on a loan, evaluate the property and the borrower, and look over other loans that are currently being funded.
This is a high risk, high reward type of investment. What’s more, crowdfunding platforms are often available to accredited investors or people with a high net worth. Another downside is that some crowdfunding platforms have a short track record, and many of them are yet to get through an economic downturn.
Raw land involves purchasing any vacant land with the intent to develop it later, as there are no properties built on it yet. It’s an attractive form of investment, especially in markets with high projected growth rates.
This type of real estate investment requires a fair amount of specific knowledge and market research. You’ll have to familiarize yourself with flood plans, building codes, zoning regulations, and other legal issues related to real estate. It’s also for people who have a large amount of capital, which means it might not be the best option for someone who’s just starting out. However, it can be extremely profitable, so if you feel you can take up this challenge, you may gain a lot.
The Bottom Line
Investing in real estate is a great idea if you have the skills, time, and resources to do so. With so many opportunities waiting around the corner, deciding on a specific type might be challenging. However, there are some aspects that can help you make your decision. These include your individual circumstances, investment goals, investing strategy, market area, and your location.
Each real estate investment type has its pros and cons, so you need to be sure which option would be the most profitable for you. Some people invest in a variety of different property types – you don’t have to stick to one if you’re feeling more adventurous. However, we advise you to master one area before moving on to the next. That being said, whenever you feel like adding real estate to your investment portfolio, you’ll have plenty of profitable options to choose from.
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