Types of Real Estate Investment You Should Know
Real estate investment is one of the most popular and profitable ways to generate income and build wealth. However, not all real estate investments are the same. There are different types of real estate investment that have different characteristics, risks, returns, and strategies. In this article, we will explain the 7 types of real estate investment that you should know and how to choose the best one for your goals and preferences.
Residential Real Estate
Residential real estate is the most common type of real estate investment. It involves buying, owning, and renting out properties that are used for living purposes, such as houses, apartments, condos, townhouses, etc. Residential real estate investors can earn income from collecting rent from tenants, as well as from appreciation in the value of the property over time. Residential real estate is usually easier to finance, manage, and maintain than other types of real estate investment. However, it also comes with some challenges, such as dealing with tenants, vacancies, maintenance costs, property taxes, insurance, etc.
Commercial Real Estate
Commercial real estate is the type of real estate investment that involves buying, owning, and renting out properties that are used for business purposes, such as office buildings, retail stores, hotels, restaurants, etc. Commercial real estate investors can earn income from collecting rent from tenants, as well as from appreciation in the value of the property over time. Commercial real estate is usually more expensive, complex, and risky than residential real estate. However, it also offers higher returns, longer leases, and more stable cash flow.
Industrial Real Estate
Industrial real estate is the type of real estate investment that involves buying, owning, and renting out properties that are used for industrial purposes, such as warehouses, factories, distribution centers, etc. Industrial real estate investors can earn income from collecting rent from tenants, as well as from appreciation in the value of the property over time. Industrial real estate is usually less affected by market fluctuations and consumer preferences than other types of real estate investment. However, it also requires more capital, expertise, and environmental compliance than other types of real estate investment.
Land Real Estate
Land real estate is the type of real estate investment that involves buying and owning vacant land that can be used for various purposes, such as farming, development, recreation, etc. Land real estate investors can earn income from selling or leasing the land to other parties or developing it themselves. Land real estate is usually cheaper and easier to acquire than other types of real estate investment. However, it also has lower returns, higher taxes, and more uncertainty than other types of real estate investment.
REITs
REITs (real estate investment trusts) are companies that own and operate a portfolio of income-producing real estate properties. REITs allow investors to buy shares of these companies and receive dividends from their earnings. REITs are a convenient and accessible way to invest in real estate without having to buy or manage any properties directly. REITs are also diversified across different types of properties and locations. However, REITs are also subject to market volatility and regulations that limit their activities and distributions.
Crowdfunding
Crowdfunding is a type of real estate investment that involves pooling money from multiple investors to fund a specific real estate project or deal. Crowdfunding platforms allow investors to browse through various opportunities and choose the ones that match their criteria and preferences. Crowdfunding is a flexible and innovative way to invest in real estate without having to commit a large amount of capital or deal with any hassles. However, crowdfunding is also risky and unregulated and may not offer any guarantees or protections to investors.
Wholesaling
Wholesaling is a type of real estate investment that involves finding undervalued or distressed properties and selling them to other investors for a profit. Wholesalers do not buy or own any properties themselves but act as intermediaries between sellers and buyers. Wholesaling is a fast and low-cost way to make money in real estate without having to invest any capital or take any risks. However, wholesaling is also competitive and challenging and requires a lot of marketing and negotiation skills.
How to Choose the Best Type of Real Estate Investment for You
As you can see, there are many types of real estate investment that you can choose from depending on your goals, preferences, budget, skills,
and risk tolerance. To choose the best type of real estate investment for you,
you should consider the following factors:
Your objective: What are you trying to achieve with your real estate investment? Are you looking for income or growth? Are you looking for short-term or long-term returns? Are you looking for passive or active involvement?
Your resources: How much money do you have to invest in real estate? How much time do you have to dedicate to your real estate investment? How much knowledge do you have about the real estate market and industry?
Your personality: What are your strengths and weaknesses as an investor? What are your interests and passions? What are your risk appetite and tolerance?
By answering these questions, you can narrow down your options and find the type of real estate investment that suits you best. You can also consult with a professional real estate agent or advisor to help you make an informed decision.
Types of Real Estate Investment and Their Demand
Real estate is a popular and diverse asset class that can offer income, appreciation, inflation hedge, diversification, and tax benefits to investors. However, not all types of real estate investments are the same. Depending on the mode, structure, and purpose of the investment, different types of real estate can have different levels of demand, risk, and return.
Physical Real Estate Investments
Physical real estate investments are those that involve owning or leasing tangible properties, such as land, residential, commercial, industrial, or new construction properties. These types of investments can generate income from rents, fees, or sales, as well as appreciation from the increase in the value of the properties over time. However, physical real estate investments also require more money upfront and have higher ongoing costs, such as maintenance, taxes, insurance, and management. Moreover, physical real estate investments are less liquid than other types of investments, meaning they are harder to sell quickly and at a fair price.
The demand for physical real estate investments depends on various factors, such as location, market conditions, demographics, supply and demand, and economic growth. According to a report by PwC and the Urban Land Institute (ULI), the global real estate market is expected to recover from the impact of the COVID-19 pandemic in 2023 and beyond, with some sectors and regions performing better than others. For example, the report predicts that residential properties will remain in high demand due to low interest rates, limited supply, and changing preferences of homebuyers. On the other hand, commercial properties may face challenges due to reduced occupancy, lower rents, and increased vacancies. Industrial properties may benefit from the growth of e-commerce and logistics, while new construction properties may offer opportunities for innovation and sustainability .
Non-Physical Real Estate Investments
Non-physical real estate investments are those that do not involve owning or leasing tangible properties directly but rather investing in securities or platforms that are backed by real estate assets. These types of investments include real estate investment trusts (REITs), crowdfunding platforms, and securitized mortgages. These types of investments can offer indirect exposure to real estate without the need to own, operate, or finance properties directly. They can also offer lower financial barriers to entry, higher liquidity, and greater diversification than physical real estate investments.
The demand for non-physical real estate investments also depends on various factors, such as performance, risk-adjusted returns, diversification benefits, and investor preferences. According to a report by Nareit (the National Association of Real Estate Investment Trusts), REITs outperformed the broader stock market in 2022 by delivering a total return of 36.9%, compared with 28.7% for the S&P 500 Index . REITs also offered attractive dividends and inflation protection to investors. Crowdfunding platforms also gained popularity among investors who wanted to access niche or alternative real estate markets with lower minimum investments and higher potential returns. However, crowdfunding platforms also carried higher risks due to lack of regulation, transparency, and liquidity . Securitized mortgages also offered investors a way to invest in the debt side of real estate by buying mortgage-backed securities (MBS) that are pools of mortgages issued by banks or other lenders. MBS can offer steady income and lower default risk than individual mortgages but also face interest rate risk and prepayment risk .
References:
https://fortune.com/2021/12/02/chinese-real-estate-investing-home-ownership-evergrande/
https://books.google.com/books?id=rTETAAAAQBAJ&dq=introduction+to+real+estate+investment&pg=PA1
https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-emerging-trends-in-real-estate-global-outlook-2023.pdf
https://www.reit.com/news/blog/market-commentary/reits-outperform-broader-market-2022
https://www.investopedia.com/articles/investing/090815/basics-real-estate-crowdfunding.asp
https://www.investopedia.com/terms/m/mbs.asp
https://www.thebalance.com/real-estate-investing-101-357985
https://www.biggerpockets.com/blog/types-of-real-estate-investments
