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Real estate investing comes in many shapes and forms. If you are getting started in real estate, it's helpful to understand the different types of real estate investments so you can determine which type of real estate is best for you. This article will help you understand the three types of real estate and the most common ways to invest in them.
Residential real estate
Residential properties are one of the most popular types of real estate to invest in. This includes any property that is used for residential purposes, including:
- Single family homes
- Cooperative (co-op)
- Individual mobile homes (not an entire mobile home park)
Residential real estate is a common starting point for aspiring real estate investors because it has a lower cost of entry and can be easier to obtain financing for than commercial real estate. Through government-assisted loan programs like FHA or VA, or by utilizing down-payment assistance programs, residential properties can be purchased with a down payment of as little as 3%-10% of the property's purchase price, making it a more accessible investing option.
Ways to invest in residential real estate
There are a wide variety of methods for investing in residential real estate. Some chose to "fix and flip" the property -- treating it as a short-term investment in which they add value for a profit by renovating and selling it on. Others chose to make long-term investments in residential real estate by buying a property for cash flow and holding it as a rental property. These are two of the more common methods, but there are other ways to invest in residential real estate, such as vacation homes, wholesaling, crowdfunding, or mortgage notes.
While you can buy a residential property solely as an investment, there is also the option to turn your primary residence into an investment by renting out extra space such as a room or mother-in-law suite. Depending on the type of loan you have and how long you've resided in the property, you might be able to turn the entire home into a rental after moving into a new primary residence.
Commercial real estate (CRE)
Commercial real estate (CRE) is the second most common type of real estate to invest in. Commercial real estate is any property that is used primarily for business purposes including:
- Office space
- Hotel and lodging
- Self-storage or mini-storage
- Multifamily (e.g., apartment complexes)
- Retail (e.g., strip malls, shopping malls, or single retail spaces)
- Industrial (e.g., warehouses, manufacturing buildings, or data centers)
- Health care (e.g., hospitals, clinics, doctor’s offices, or senior care facilities)
- Special purpose (e.g., church, car wash, or museum)
Oftentimes, commercial property is more expensive than residential real estate or vacant land. Most commercial lenders require a minimum of 20% down, although there are other types of CRE loans, like a small business loan (SBA) that provides financing with as little as 10%-15% down.
For new real estate investors, the larger upfront cost can make it a less popular investment strategy. That said, there are ways to invest with less money upfront like crowdfunding or real estate investment trusts (REITs).
Ways to invest in commercial real estate
Most investors purchase commercial real estate to generate cash flow by renting out the unit(s). Some CRE property types have multiple rental units available such as a multi-unit office building, self storage facility, retail strip mall, or multifamily apartment complex. Others are single unit rental properties like an industrial building, daycare, or single rental office or retail space. Managing multiple rental units can be more complicated than owning and managing single ones.
Below are some of the common ways investors can participate or invest in commercial real estate:
- Real estate investment trusts
- Real Estate Crowdfunding
- Buying and managing a commercial property themselves
REITs and crowdfunding are more passive forms of CRE investment as they do not require the participating investor to manage or own the property themselves. For those who have more time or funds available, it may be an option to buy, manage, and own your own commercial property.
Each type of commercial property is managed, leased, and analyzed in a slightly different manner. Pricing for properties differs depending on the income it produces, and some asset classes provide a higher return on investment than others. Before investing in CRE, do your own due diligence to understand both the property type and the intricacies of investing in that asset class.
Vacant land includes farmland or ranches as well as land that doesn't have any developed commercial or residential property. Sometimes referred to as raw land, this category of investment may also include natural resources such as mineral, water, or air rights.
The cost to invest in land varies dramatically depending on the size of land you are buying, the location, and the zoning or authorized use of the land. In some instances, land can be purchased for as little as a few hundred or a few thousand dollars. In others, the cost can reach tens or even hundreds of thousands of dollars. Land that has been subdivided or where the development process to build residential properties -- like a planned urban development (PUD), townhomes, or commercial real estate -- has already started is typically worth more than raw vacant land.
Ways to invest in vacant land
Land can be purchased as a long term investment, in the hope that the property will appreciate, or be purchased for development by another investor. Investors can also purchase land with a view to developing it themselves. Wholesaling or "flipping" vacant land is another popular investment strategy which typically provides profit by adding value.
As you can see, there are many ways to invest in real estate, including different types of real estate and different methods of investing. As with any investment, before buying a property, it is important to educate yourself on the process based on the specific asset type, and conduct your own due diligence.
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