Types of Real Estate Investments
Investing in real estate is a reliable and potentially lucrative way to spend your money, but it’s not as simple as just buying a building. There are many factors that go into successfully investing in real estate. Many first-time investors will initially buy one property to get their feet wet. Some invest by themselves, and others invest together as partners. This is common, whether they are experienced cash home buyers or if it is their first time buying a house.
One of the best ways to learn is by taking action. That holds true with real estate investing as well. They call it the school of hard knocks! Even if investors lose money on their first purchase of real estate, they are often still satisfied with the amount of education they gained from the experience. Where does one start when wanting to invest in real estate?
The first step is understanding what type of house or property you’d like to invest in. Determine your strategy upfront. Figuring this out will depend on several factors. Asking yourself these questions can help you decide on a direction:
- Are you investing in real estate for the short-term or long-term?
- What is your end goal?
- How soon do you want to achieve it?
- How involved do you want to be?
- Do you want to flip houses, hold them for several years, or hold them long-term?
- Are you looking for quick cash or long-term appreciation? Or both?
As you begin your journey, consider the 5 different types of real estate investments you can take on.
A single-family home, sometimes referred to as a detached home, is what we commonly think of as your average house. To be considered a single-family home, the property must not share any walls and must be built on its own piece of land. It must also have its own private entrance from the street and have its own private utilities. If any of these criteria are changed, it may be in violation of municipal zoning laws.
Single-family homes have both pros and cons as an investment. There are two sides to every coin, and many investors would argue that single-family is better than multi-family, and vice versa. They both come with their benefits and downsides.
A benefit of single-family home investing is that your expenses are lower compared to larger buildings. You typically only need one furnace, one water heater, and one HVAC system. Naturally, a single-family home is more forgiving to investors because the expenses are smaller, and mistakes usually do not cost as much. Another benefit to this investing strategy is that there are typically fewer requirements from the city or county that the building is located in. For example, a larger property with multiple units may be required to have things like a fire alarm and sprinkler system. These expenses can drive up your total renovation costs when fixing up a place. Of course, this all depends on where your property is located.
A small multi-family property can legally house more than one family and can have more than one kitchen. This is what some might refer to as a duplex or a triplex. Owning a small multi-family property could be as simple as purchasing one as is. However, it could also be as complex as purchasing a single-family home and converting it into a small multi-family property. This may require less of an investment upfront to purchase the property but will require more of an investment renovating the property to accommodate distinct units. You’ll also have to work with your municipality to figure out zoning and construction bylaws.
A huge benefit of investing in a duplex or triplex, if you plan to hold and rent the property, is spreading out the risk of vacancies. For example, if you own a triplex and one of your units is vacant, the other two units can still help cover the property’s expenses. No one likes dealing with vacancies, as they can be costly. Owning property with multiple units helps avoid months that do not bring in any rental income. Another benefit of owning small multi-family investment properties is the scalability of it. Typically, buildings that have more units than others in the same area are usually worth more. Over time, you can expect more appreciation from the larger properties, which can help you continue to scale your rental portfolio.
While this may be a better option for more sophisticated real estate entrepreneurs, a large multi-family property can be a huge moneymaker. A large multi-family property is what you might refer to colloquially as an apartment building, where your property offers many units available to rent on a single plot of land. Owning a large multi-family property is a huge endeavor both in purchasing the real estate as well as managing it. You’ll be in charge of ensuring that the property is well maintained, rent is paid, and tenants are happy. Property management companies can be contracted out, however, this will affect your bottom line.
A plus side of owning larger multi-family buildings is that everything is located right there. If you manage your own rental properties, it is incredibly helpful to have them in the same area, or simply own one large building. This saves you loads of time when traveling there to handle maintenance requests, collecting rent, moving tenants in, and moving tenants out.
In terms of adding value to a large multi-family building, investors use clever tactics to increase their equity after the original purchase. For example, if the building is older, the investor can make utilities, electric, and plumbing more energy efficient. This helps decrease the overall expenses of the building and ultimately puts more money in your pocket. It may not appear to move the needle much if we are only focusing on one unit. However, if you can save $150/month in utility expenses per unit for a 100-unit building, that is $15,000 per year that you would initially be missing out on.
This type of investment is a great first foray into real estate. Whether it’s for you to live in personally, or to rent out to tenants, investing in a condominium is sure to yield a return. Because of the nature of the dwelling, and the square footage, the value of a condominium is typically less than the value of a single-family home making it easier to start with financially. However, ensure that you are taking the monthly condominium fees into account. These are paid to the property management company to cover building maintenance and amenities and would be in addition to your monthly mortgage payment.
A unique benefit of owning a condo is related to the condo fees! Typically, a condo owner doesn’t have to maintain many of the exterior features of the property. For example, if there is a leak in the roof of the building, the condo owner usually doesn’t have to pay for that to be repaired. This can result in less headache managing the unit, and less monthly repair expenses.
If you’re in the right place at the right time, purchasing a vacant plot of land can be a very lucrative endeavor. With vacant land, you can either build your own dwelling, develop residential or commercial properties, or let it appreciate over time before selling it. Whatever you decide, you’ll need to work very closely with your municipality to ensure the zoning bylaws are in your favor. You will also need an experienced construction partner that is in charge of overseeing all of the trades necessary for building your property.
Vacant land, depending on the size, is arguably the easiest real estate investment to manage. In many large cities, there are small vacant lots that don’t require much upkeep. As long as the grass is properly cut, and there isn’t trash build-up, you can usually let your vacant land sit if you need to.
If you plan to resell your vacant land, it usually requires fewer aspects of the marketing process. For example, you don’t have to host an open house, which can eat up time and weekends. Additionally, you can only take so many photos of a small piece of vacant land. On the other hand, if it’s a large farm or piece of property, aerial drone pictures and videos may be required to market it properly. Buyers can usually get the gist of a piece of vacant land, depending on the size, by viewing pictures and information online.
One final benefit of owning vacant land is the number of possibilities you have with it. Landowners are continuing to get more creative and adding things like tiny homes to their land to rent out. This is a clever way to generate income from your property without having to develop an entire, large building. As mentioned previously, look into the rules and requirements of your city and county to know what is possible for your vacant land.
Summing Up 5 Different Types of Real Estate Investments
There are plenty of avenues to take when journeying into the world of real estate investing. Some offer more risk, and others offer more reward. It is first up to you to decide what strategy you’d like to utilize, and what your end goals are. You can choose from several different ways to make money while investing in real estate.
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About the author: This article on “5 Different Types of Real Estate Investments” was written by Alex Capozzolo. Alex is the owner of the Brotherly Love Real Estate blog and a content writer for the real estate industry. Our focus is on helping people through one of the most important investment decisions of their lifetime by seamlessly providing fast, honest, and professional real estate services.