Common Real Estate Investment Types
Investing in real estate is much like any other investment. The more you know, the easier it is to choose an investment that meets your needs for growth, earnings, security and liquidity. Some real estate investment, unlike stocks and bonds, is something an investor can see, visit and point to as something of value. But it is more than that, and there are pitfalls as well as promises involved in any potential real estate investment.
Varied categories of real estate include residential, commercial, industrial, mixed-use developments and retail. There is also raw land, agricultural land, forest land, land suited for recreational development, and land in the path of city and suburban growth. All of these options offer savvy investors an opportunity to make money. Beyond those basics, however, there are also numerous ways to structure an investment, either through personal, hands-on involvement, or through an entity such as a Real Estate Investment Trust (REIT) that can be much the same as owning stock. With that kind of real estate investment, the time and cost involved are very different from an investment in a single house or a strip mall. It's the opposite end of the spectrum from offering financial backing to a house flipper, or becoming involved personally in a development venture.
REITs are another way to diversify an investment portfolio, offer more liquidity and less hands-on involvement, and are potentially less risky. How a person invests in real estate depends on the amount of personal involvement desired, the amount of risk one is comfortable taking, and the amount of return expected. The answers to those questions should point the direction for any venture into real estate investing. In the end, though, how you choose to invest in real estate depends partly on individual temperament as much as financial goals and risk assessment.
Comparing Risk and Return in Real Estate
Traditional wisdom still governs real estate investment, as any investor must weigh the risk and the potential return. Although real estate has typically been termed a great long-term investment, it can be shaky ground in the short term. In addition to the cost of acquisition, an investor must factor in financing and other carrying costs, taxes, expected appreciation, potential use and development costs, future sales price and capital gains liability. All are subject to change based on changing market conditions. And those conditions are sometimes extremely volatile and subject to influences over which an investor has almost no control. And, as already mentioned, funds invested in real estate are not typically recoverable on demand. For anyone who is risk-averse, investments that don't require actually taking title to land or becoming a landlord are less worrisome.
An investor can spread the risk and eliminate recurring costs by buying into an investment trust account (REIT) or another kind of group real estate investment, and they can limit exposure by putting limits on the dollar amount invested. This type of investment requires minimal oversight and less actual market knowledge. The return is likely to be relatively modest, but growth and realized return on investment is typically stable over time.
A relatively new phenomenon—Crowdfunding—can offer high returns, but it also carries relatively high risk. The short track record, a volatile economy, and liquidity concerns merit thorough investigation by potential investors. Some crowdfunding platforms are open only to accredited investors, defined as high net-worth individuals. Others have no minimum investment required, but are non-traded, and therefore bear even more risk.
The Varied Types of Real Estate
Being a hands-on investor can be greatly rewarding, and landlords have a steady income stream as well as the potential for high profits based on property appreciation. There are also long-term tax advantages to owning investment property.
A house, a high-rise, a mall or a factory? Agricultural land in the path of development, urban center buildings ripe for renovation or lake property? There is an almost unlimited variety of possible real estate investments, from a single residential lot in a prime area to hundreds of acres of pasture near a growing suburb to a share of a high-rise office building. All of them can be a good choice for the right investor.
Among the varied options are:
- Houses to flip
- Long-term residential rentals
- Short-term vacation properties
- Multi-family residential
- Strip malls or small commercial developments
- Office buildings
- Warehouses and distribution centers
- Restaurants and retail properties
- Raw land
- Land with build-to-suit potential
- Hotels and resorts
- Conference and convention centers
- Recreational facilities, from mini-golf courses to special event venues
The list is almost endless. The proliferation of professional property management companies is testimony to the wealth of opportunity and the wealth to be derived from owning and leasing different types of real estate. The good news is that an investor who starts with a single property—perhaps even a duplex or four-family residential property—can join the ranks of major real estate investors in time by planning new acquisitions in a structured way, using built-up equity as collateral for new purchases. Real estate investment can be the path to a very secure future.