Real estate investing is one of the oldest and most popular asset classes. The majority of new real estate investors know this, but what they don’t realize is the number of different types of real estate investments available.
Starting in Real Estate Investment
It’s clear that each type of real estate investment has its inherent benefits and risks, including unique financial cycles and credit traditions. There are standards for what is considered suitable or normal, so you’ll want to thoroughly study opportunities before you start adding them to your portfolio.
Forming a Protective Entity
One of the key tools in properly organizing your affairs relates to choosing a legal entity. Almost all seasoned real estate investors use a Limited Liability Company (LLC) or Limited Partnership (LP). Forming an entity to hold your real estate investments allows you the option to place that entity into bankruptcy without risking your personal assets and belongings. This technique is called “asset separation” as it protects you and your properties.
Categories of Real Estate Investments
If you intend to develop, own, or sell real estate, you may gain a better understanding of what you face by categorizing types of properties into several categories.
Residential Real Estate
Residential structures include properties such as homes, apartment buildings, vacation homes, and rental houses where a person or family pays you to live in the property. Their length of stay depends on the lease or rental agreement. Most residential leases last for 12 months in the United States.
Commercial Real Estate
Commercial real estate primarily consists of office buildings and skyscrapers. If you take some of your savings and build a small building containing individual offices, you can lease them to businesses and small business owners who will pay you rent for using the property. It is not uncommon for commercial real estate contracts to last for several years. This can lead to increased stability in cash flow and even protect the owner when rental prices decline. A new trend in commercial real estate is the impact of the work-from-home culture on commercial leasing and occupancy. This evolving trend gained momentum in 2020 and 2021, but its impact varies from region to region, city to city, and industry to industry. For example, a company that uses warehouses cannot have its employees work from home in the same way that an office rental company can.
Industrial Real Estate
Industrial real estate consists of industrial warehouses, storage units, car washes, or other properties that generate sales from customers using the facility. Industrial real estate investments often can include significant fees and service revenue streams, such as adding a coin-operated vacuum at a car wash to increase the owner’s return on investment.
Retail Real Estate
Retail real estate consists of shopping centers and other commercial complexes. In some cases, the property owner also receives a percentage of the sales generated by the tenant’s store in addition to the base rent to incentivize them to maintain the property in excellent condition.
Mixed-Use Real Estate
Mixed-use real estate refers to properties that combine any of the above categories in a single project. For example, an investor in California acquired several million dollars in savings and found a medium-sized city in the Midwest. They approached the bank for financing and built a three-story office building surrounded by retail stores.
Methods of Investing in Real Estate
Additionally, there are other ways to invest in real estate if you do not want to deal with properties directly. Real Estate Investment Trusts, or REITs, are particularly popular in the investment community. When you invest through a REIT, you purchase shares in a company that owns real estate properties and distributes nearly all of its income as dividends.
There are
Tax Complications – Your earnings are not eligible for the low tax rates that you can obtain on common stocks – but they can be a good addition to your portfolio if purchased at the right value and with enough margin of safety. You can even find REITs that align with your favorite industry, such as hotel REITs.
You can also invest in more complex areas, such as tax lien certificates. Technically, lending money to properties can be considered a real estate investment and can be classified as a fixed-income investment. This is similar to a bond because you generate your investment return by lending money for interest income.
Similarly, buying a piece of real estate or a building and then renting it out to a tenant, such as a restaurant, resembles more of a fixed-income investment rather than a true real estate investment. You are essentially financing the property, although this ranges from investing to financing. Ultimately, you will own the property, while its increasing value and profits will return to you.
Frequently Asked Questions
Why is real estate considered an investment?
Real estate is considered an investment because it generally tends to increase in value over time. Occasionally, property values can decline, but the long-term trend is usually upward. Real estate investments can also generate passive income from rent.
How can I start investing in real estate with no money?
There are various ways to start investing in real estate without upfront capital. You can explore owner financing options, where the owner essentially lends you the money, and your monthly payments go to the owner instead of the bank. Hard money loans, which usually need to be repaid within 12 months or less, are a good option for fix-and-flip projects. You can also look into loans from the Small Business Administration or other government programs.
What is a good return on investment in real estate?
The definition of a good return on investment in real estate ultimately depends on the individual investor based on their risk tolerance and investment goals. Generally, returns above 10% annually are considered strong.
Source: https://www.thebalancemoney.com/different-types-of-real-estate-investments-you-can-make-357986
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