The 5 Types of Real Estate Investments
June 19, 2019Are you getting your start in real estate? You’ve come to the right place. There are five different types of real estate that are important to know, especially if you’re starting out as an investor. Whether your interest is in commercial, residential, industrial, mixed-use, or land–we’ve got you covered. Before you dive into real estate investing, however, make sure you have precautions in place to protect you against legal action. While it’s great to be optimistic that nothing will ever happen, it’s a good idea to put your investment properties under an LLC rather than your name. It always pays to be prepared. Now, let’s dive in.
Commercial Real Estate
If you know someone looking to purchase a brick and mortar store for their expanding company, then you know someone interested in commercial real estate. Commercial real estate is property primarily used for business purposes. Examples of commercial real estate include strip malls, restaurants, gas stations, office space, hotels, grocery stores, and even hospitals. Investors typically invest in commercial real estate because the leases are usually run 1 to 10 years, compared to residential contracts, which generally last up to a year. While longer leases mean more stability, you may end up losing out on raising your rates as prices in the area rise. There are four types of rentals in commercial real estate: 1) Single-Net Lease, 2) Double-Net (NN) Lease, 3) Triple-Net (NNN) Lease, and 4) Gross Lease.
Beginning investors may want to steer clear of investing in commercial real estate right off the bat due to the size of the investment. Most banks require 20% down minimum for a 10-year loan which is a lot to swallow for first-time investors, so if you do decide to invest in commercial real estate make sure you have a team of experts by your side.
Having a knowledgeable accountant, a commercial real estate lawyer, and a commercial realtor on your side is a great place to start An excellent realtor who specializes in commercial real estate is key to identifying the property that will give you the best return on investment. Moreover, remember: you don’t have to pay an arm and a leg to get a great one, either. There are full-service flat rate agents that will help you find the property that fits your needs for a fraction of the price of other realtors. How’s that for using your money wisely!
Residential Real Estate
What is residential real estate? Well, it’s pretty simple. Residential real estate is any single or multifamily dwelling that has less than five individual dwelling spaces. In English, this means single-family homes, as well as duplexes, triplexes, and quad-plexes, as well as condos, townhomes, and cooperatives.
People usually buy residential real estate for one of three reasons: to live in themselves, to fix up and sell (also called flipping), or to rent out the home. The type of loan you can get for residential buildings differ depending on what you are planning to use them for, as well as the zoning. For example: if you are a first-time homebuyer and you are using an FHA loan, a condition you may have in purchasing a multi-unit home is that the units’ electricity must be run through the same meter and the house must be owner-occupied for at least 210 days after purchase. Those using this method find themselves living rent-free when their tenants in the other unit(s) begin paying rent.
Those looking to flip homes must choose their investment wisely. If they select a house that has too much work or unforeseen damage and the repairs take longer than anticipated, their return on investment (ROI) can decline pretty quickly. By doing your due diligence before you commit to a property, you have a better understanding of what’s involved.
With the rise in vacation rental businesses like Airbnb, many have begun buying homes near tourist areas to rent them out to vacationers for days or weeks at a time. While initially, this seems like a substantial investment because you can charge more for rent, remember that the laws surrounding this type of business are new and changing, meaning there could be restrictions and fees placed on these types of investments. Before purchasing a home for the express purpose of renting it out as a vacation home, check with your homeowner’s insurance, Homeowners Association, and city regulations to make sure you are staying within the boundaries they set.
Industrial Real Estate
Industrial real estate is as any building used for manufacturing, production, research and development, storage, and distribution facilities. While these buildings seem a tad annoying, they are the lifeblood of the economy, and a pretty substantial investment if you can pick a good one.
The consumption of goods is what drives industrial real estate, which means if the economy is good and people are buying things, industrial real estate is on the rise as well. With the eCommerce era booming, more and more companies are looking to industrial real estate to store their product and prepare for the for shipping. Which brings up a good tip to look for when purchasing industrial real estate: make sure it is near a transport hub if you are planning to rent out or use the space for any amount of goods: shipping or receiving. If you are using the space for offices, that may not be as important to you, but it’s still something to consider in case you ever want to use it as such in the future.
Mixed-Use Real Estate
Mixed-use real estate is a fun investment because it allows you to play with both residential and commercial real estate. The cool thing about mixed-use real estate is that it can be single homes zoned on commercial land, which means a home can become a business such as a barber shop or boutique. It also includes properties like apartment buildings with retail stores on the first floors.
Mixed-use real estate is an excellent investment if you know what to look for. One example of an ideal mixed-use investment is a retail store with apartments above it. This is a great idea because there will be regular foot traffic by the store as the patrons head to their rooms.
It is important to note, however, that mixed-use real estate properties are always zoned as commercial property, and are subject to the taxes and obligations that apply to commercial real estate, rather than residential.
Land
One of the primary reasons people purchase land is to build on. It is not usually a good idea to buy property for investment purposes only. Unless you know that there is going to be a significant development happening further down the road, you are playing an expensive guessing game if you chose to invest in land. Although it is a good idea to speak with a professional, investors typically receive more ROI when they purchase a building and rent it out as opposed to buying property with the purpose of holding on to it and selling it at a later date.
Conclusion
Understanding the different types of real estate is the first step in becoming a profitable real estate investor. Investing in real estate is not a get-rich-quick scheme. There is much patience as well as a willingness to get back up after a mistake occurs. Doing your homework on the properties you are looking at, having a team of knowledgeable professionals, and the patience to see it through will help make your investing experience a great one.