Types of Real Estate Investments
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There are several types of real estate investments, but most fall into two categories: Physical real estate investments like land, residential and commercial properties, and other modes of investing that don’t require owning physical property, such as REITs and crowdfunding platforms.
Investing in traditional, physical real estate can offer a high return, but it also requires more money upfront and it can have high ongoing costs. REITs and crowdfunding platforms have a lower financial barrier to entry, meaning you can invest in multiple types of real estate for far less than it would cost to invest in even one traditional property. These alternative real estate investments also offer the distinct advantage of not having to leave your house or put on pants to start investing.
If you’re looking to invest in real estate, here are five types to consider:
Publicly traded REITs, or real estate investment trusts, are companies that own commercial real estate (think hotels, offices and malls). You can invest in shares of these companies on a stock exchange. By investing in REITs, you are investing in the real estate these companies own, without as many of the risks associated with owning real estate directly.
REITs are required to return at least 90% of their taxable income to shareholders every year. This means investors can receive attractive dividends in addition to diversifying their portfolios with real estate. Publicly traded REITs also offer more liquidity than other real estate investments: If you find yourself suddenly needing some cash, you can sell your shares on the stock exchange. If you want to invest in publicly traded REITs, you can do so through a brokerage account.
2. Crowdfunding platforms
Real estate crowdfunding platforms offer investors access to real estate investments that may bring high returns but also carry significant risk. Some crowdfunding platforms are open only to accredited investors, defined as individuals with a net worth, or joint net worth with a spouse, of more than $1 million — excluding the value of their home — or an annual income in each of the last two years that exceeds $200,000 ($300,000 with a spouse).
“Keep in mind, many crowdfunding platforms have a short track record, and have yet to weather an economic downturn.”
But others, like Fundrise and RealtyMogul, offer investors who don’t meet those minimums — known as nonaccredited investors — access to investments they wouldn’t otherwise be able to invest in. These investments often come in the form of nontraded REITs, or REITs that don’t trade on the stock exchange. Since they aren’t publicly traded, nontraded REITs can be highly illiquid, meaning your funds will be invested for at least several years, and you may not have the ability to pull your money out of the investment if you need it. Keep in mind, many crowdfunding platforms have a short track record, and have yet to weather an economic downturn.
» Ready to start investing? Best real estate crowdfunding platforms
3. Residential real estate
Residential real estate is virtually anywhere that people live or stay, such as single-family homes, condos and vacation homes. Residential real estate investors make money by collecting rent (or regular payments for short-term rentals) from property tenants, through the appreciated value their property accrues between when they buy it and when they sell it, or both.
Investing in residential real estate can take many forms. It can be as simple as renting out a spare room or as complicated as buying and flipping a house for a profit.
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4. Commercial real estate
Commercial real estate is a space that is rented or leased by a business. An office building rented by a single business, a gas station, a strip mall with several unique businesses and leased restaurants are all examples of commercial real estate. Unless the business owns the property itself, each business would pay rent to the property owner.
Industrial and retail real estate can fall under the commercial umbrella. Industrial real estate generally refers to properties where products are made or housed rather than sold, like warehouses and factories. Retail space is where a customer can buy a product or service, like a clothing store. Commercial properties tend to have longer leases and can command more rent than residential properties, which may mean greater and steadier long-term income for a property owner. But they may also require higher down payments and property management expenses.
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5. Raw land
If you build it, will they come? Investors typically buy land for either commercial or residential development.
But buying land to develop involves a fair amount of market research, especially if you plan to develop the property yourself. This type of investment is best suited to someone with a large amount of capital to invest and a deep knowledge of all things real estate —building codes, zoning regulations, flood plains — in addition to an understanding of the local residential and commercial rental markets.
Which real estate investment is best for you?
If you’re considering investing in traditional real estate — like residential or commercial properties — doing your due diligence doesn’t just mean coming up with a down payment. Knowing your local market is important. If there isn’t much demand for homes or commercial space in your area, or property values start dipping, that investment could quickly turn into a burden.
If you’d prefer to be more hands-off with your investments, REITs and crowdfunding platforms are easier ways to add real estate to your portfolio without owning physical property.
Some brokerages offer publicly traded REITs and REIT mutual funds.
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