5 Types of Real Estate Investments: How to Start Investing in Real Estate
Investing money in real estate can be a great option for meeting future financial goals because it tends to offer a strong return on investment (ROI). Investors don't always even need to buy property to invest in real estate (although they certainly can). Whichever real estate option you choose, investors often enjoy steady cash flows, capital gains tax advantages, and passive income. Here are five of the most common types of real estate investments.
Purchase Residential Rentals
Residential rentals can either be long-term or short-term, and each option has pros and cons. Once good tenants are found, long-term rentals generate reliable income. By keeping vacancy rates low, investors can collect monthly rent and quickly gain equity in the properties to eventually make a profit from passive income.
On the other hand, residential homes designed for short-term residents are popular because they typically command higher rental rates. The downside is that short-term rentals are less predictable than long-term rentals. A wisely-chosen location can offset drawbacks and make for a lucrative property.
Buy Properties to Fix & Flip
Whether you choose to DIY renovations or hire contractors, flipping houses can yield serious profits. The investor:
- Purchases a home that is priced lower due to needing TLC or repairs
- Fixes the home quickly to bring it up to standards
- Immediately puts the home back on the market
- Uses profits to invest in another house flipping project
The longer a home sits off the market, the less money it makes. Quickly renovating and selling is the key to house flipping success. You'll want to focus on high-ROI home improvements. Luckily, you can make many changes—from standard repairs to installing smart technology and energy-efficient upgrades.
Try House Hacking
You don't have to buy an entirely new property to start investing in real estate. House hacking can generate income from a home you already live in or provide enough profits to start larger investments in the real estate market. Ways to house hack include renting out rooms in your home, building a second home on your property, or leasing in-demand structures like barns and garages. You can even convert unused spaces like "bonus rooms" into bedrooms for tenants, but keep in mind that homes with multiple bedrooms and bathrooms are usually best for house hacking. By living in the rental, owners can also qualify for types of mortgages with low down payments.
Invest in Commercial Real Estate
Commercial real estate (CRE) is much like residential property, except the building is rented to businesses instead of residential tenants. Leases are usually long-term with high rent, which provides a stable income. When you're researching, consider the five types of commercial real estate:
- Special purpose
Commercial real estate investing is one of the most common ways to break into the market, but you'll want to do a lot of research beforehand. Take into account the current market, long-term market cycles, and unexpected expenses when you're looking for potential investments.
Buy Real Estate Investment Trusts (REITs) or Groups (REIGs)
If you prefer a hands-off approach, REITs and REIGs are the perfect investment choice. With REITs, a corporation (trust) uses investor money to buy properties, generating income that is paid in dividends to investors. In many ways, it's like investing in the stock market since shares are bought and sold similarly. When owners want to move on from an investment, they can sell and choose another.
For residential properties, opt for REIGs, in which investors finance purchases through a company. The company then purchases existing properties (blocks of apartments or condos) using the investors' money. Each investor owns their units but has no role in day-to-day operations. Investors receive a percentage of the profits from the company.
Real Estate Investing Can Be Easy
Anyone can make a solid plan with a starting template for real estate investment. A well-prepared investor is more likely to make profits—and once you start, it's easier to keep up the momentum. Now you're ready to delve into the research you need to be successful.