6 Different Types of Real Estate Investments
Investing in real estate is more than purchasing a piece of property and hoping it will increase in value. It can be lucrative and satisfying, but you need to know what the different options are to make an informed decision.
Below are six different types of real estate investments to consider.
1. Rental Properties
Purchasing a piece of property to rent it out is a common real estate investment. It provides the following:
- Monthly rental income to the property owner
- Leverage to qualify for home equity loans from existing equity in the property
- Appreciation as the property increases in value over time
When purchasing real estate to rent, focus on finding a location that meets your needs for owning a rental property.
Potential renters will be interested in different locations for various reasons, such as:
- Austin, Texas because of the influx of lucrative tech jobs
- New Orleans, Louisiana for its renowned seafood, cuisine, and entertaining nightlife
- Orlando, Florida because it is the home of Walt Disney World
2. Property Tax Lien Investments
Because of historically low interest rates and stock market volatility, many real estate investors are looking for alternative avenues to receive a reasonable rate of return.
Property tax liens are an often-overlooked opportunity. Although they can be risky, investors must understand the implications and pitfalls that come with this type of investment.
A tax lien is put on a property when the homeowner has not paid their taxes in full. The county or city where the property is located attaches a legal claim called a lien on the property for the unpaid taxes.
The process by which properties with liens can be sold varies for each state and local government. There are three different enforcement systems, plus a hybrid model.
It is essential to identify and understand which system each state uses. As an example, see the states below and the type of system they use:
- Maine: tax deed state
- Louisiana: tax lien state
- Texas: redemption deed state
- Mississippi: tax lien state
- New York: both tax liens and tax deeds
3. Invest in Properties to Fix and Flip
Purchasing an underpriced home that needs renovation and reselling it after the repairs can be a profitable investment.
Before undertaking such a task, be sure to get an accurate estimate of how much the repairs will cost. If you do not plan on doing the repairs yourself, look for a reputable and reliable contractor to estimate the costs and manage the project.
Keep in mind that the longer it takes to complete the renovation project, the more it will cost you as you must pay the mortgage until you sell the home.
4. Real Estate Funds
Investing in real estate funds is when you contribute a specific amount of money into a larger fund to invest with others.
The managers of these funds use the capital to invest in various real estate deals, rather than one large deal.
The companies that operate to manage these funds are called real estate investment trusts (REITs). The primary benefit of REITs is that they enable investors to invest in more deals than they could on their own.
To protect investors from losing money, REITs diversify real estate investments. For example, if one deal loses money, others in the fund can make up the difference.
5. House Hacking
House hacking as a real estate investment that involves purchasing a multi-family property, moving into one of the units, and renting out the others.
In this scenario, your renters pay your mortgage.
6. Commercial Real Estate Investments
Investors purchase warehouses, commercial buildings, or strip malls and rent them to businesses that need the space.
Typically, commercial rentals have a longer lease than residential properties. Additionally, company owners are usually responsible for maintenance and repairs.
Commercial real estate is a viable investment for those who have enough money or assets to purchase the property.
Which One Is Right for You?
You must know how much time and capital you can invest. Other questions to ask yourself are:
- What rate of return are you seeking?
- Are you looking for regular monthly income?
- What are your personal goals?
You have to define your goals and understand your needs before deciding on which type of real estate investment is best for you.