May 3, 2020

Types of Real Estate

If you’ve decided you’re ready to invest in real estate, it’s a good idea to do as much research as possible before jumping in. There are so many opportunities out there but it’s important to find the right one for you. Each requires a different approach and long term goal, not to mention it has to be a good fit for your lifestyle, schedule, and personality.

There are many types of property to invest in and each has a lot of potential and unique things to consider. Let’s take a look at some of the different categories and how to get started investing.

Residential

Residential real estate is one of the easiest types of real estate investment to get into and, if you already own your own home, you’re a step ahead of the game.

There are a few ways you can use a residential property investment and a lot of options to consider. Single-family homes are probably the most popular but you should also consider duplexes, triplexes, apartment buildings, and even mobile homes.

Once you find a property you’re interested in, there are a few things you can do with it. Here’s a closer look at three options for residential real estate investments.

Flip it and sell it.

Thanks to the popularity of home improvement shows and DIY channels, most people are familiar with house flipping. What you see on TV is usually a pretty big undertaking. The flippers buy a house, tear out walls, add expensive extras like hot tubs and granite countertops, and redo the landscaping around the house until the original investment property is almost recognizable.

If you have the time and budget to do this and you know the market in the area well enough to expect a reasonable profit, by all means, do it. In most cases, the more money you put into a real estate investment, the more you get back in return. This approach takes a lot of time and effort. If you’re skilled, you can do some of the work yourself but chances are you’ll have to hire some professional contractors.

That said, flipping a house doesn’t have to be that extreme. Tear up the old carpet and install vinyl flooring. Paint the ugly kitchen cupboards. Change out the light fixtures. If you can, upgrade the appliances. Replace the water heater or furnace or anything else that’s on its last legs. Will you make as much profit as you would knocking down walls and changing the entire look of the house? Probably not. But you will walk away with something that you can use to make your next investment.

Become a landlord.

One of the great things about being a landlord is that after the mortgage is paid off, you own the property outright. At that point, most of the rental income is profit. Getting there, though, takes a little work. This is a great approach to real estate investing if you’re looking for an ongoing investment that’s scalable. Property values are always increasing and you typically have an opportunity to reassess the lease every year. If the investment is lucrative enough, in time, you can use the profits to invest in another income property.

Apartments are a great investment if you have time to put into them. While most people can’t afford to buy a large building with dozens of units, there are plenty of other opportunities out there. You don’t need a large multi-unit property to get started. Look for duplexes or triplexes. To make it a little more affordable, live in one of the units yourself and use the other as a rental property.

Single-family homes are great for attracting tenants, too, especially those with families. If you currently own your own home and are thinking about buying a new one, this is a great opportunity. Instead of trying to sell your old home, hang onto it, and use it as a rental property. Since you’re already familiar with the neighborhood and the property itself, you already know the market, the type of tenant you can attract, and a fair amount to charge for the rent. This is a particularly lucrative investment if you already own the home. If you’re still paying on a mortgage, set the rent high enough to cover the monthly payment, and however much you need to make it worth your time.

Offer it as an online vacation rental.

This is another popular investment strategy thanks to apps and websites like Airbnb, VRBO, or FlipKey. Once you find a suitable property, spend some time making it look nice, just as you would if you were going to try to sell it or find renters. Do some research on how competitive this type of vacation rental is in your area first. If you have a lot of competition, you’ll probably have to put in some extra effort to make your property stand out.

There are a lot of opportunities here, regardless of where your property is located. In big cities and towns, this type of rental is often seen as a more affordable, homey option to a hotel. In the suburbs, it’s a welcoming home-away-from-home that saves guests a lot of money when compared to staying in the city limits. If you have a rural property, market it as a holiday home where guests can get away from the hustle and bustle and relax.

While there are a lot of great things about this approach, there are some downsides, too. For one, running an Airbnb or anything like it is a lot of work. Not only do you have to monitor the listing and worry about marketing but you also have to meet guests, make sure the home is cleaned and stocked between bookings, and keep up with all household maintenance and repairs.

This is not necessarily a bad thing – if you’re successful and have regular bookings, you can essentially run it as a business, quitting your day job and investing in additional properties. But, if you aren’t looking for something to occupy your time long term, you might not be interested in the amount of work this approach entails.

The other thing to worry about here is the legal implications. Before you get started with short-term vacation rentals, do your research. Some cities have strict laws in place about what properties are eligible to be used in this way. You might be required to live on-site, which is easy enough to do if you’ve invested in a duplex or other multi-unit property but not very convenient when it comes to single-family houses.

Another thing you have to look into is insurance. Regular homeowners insurance may not cover damages caused by someone using your home as a vacation rental. In fact, it might not cover them at all. While Airbnb may offer some coverage, it’s likely not enough to cover you in the event that something causes significant damage to the property or injury to the people staying there.

Commercial

Commercial real estate is another option, though it often takes a little more capital than you might have if you’re a first-time investor. Still, if you’ve been flipping houses or running rental properties successfully and you’re ready to take it to the next level, commercial real estate is worth considering.

The most common commercial real estate to invest in is office buildings but this doesn’t have to mean large skyscrapers in big cities. Buying or building a small office building and then leasing out each unit to smaller companies and business owners is a great way to get started in smaller commercial areas and suburban neighborhoods.

One of the nice things about leasing commercial space is that most commercial leases cover multiple years so you don’t have to worry about finding new tenants year after year. Most businesses like to stay where they are once they’ve established a customer base so, if you maintain a good relationship, there’s potential for long term cooperation with a tenant that you know will pay their rent and be respectful of the terms of the lease.  The downside is that property values can fluctuate rapidly. If you own an office building in an up-and-coming area of the city, you won’t be able to renegotiate rates until it’s time for the tenant to renew the lease.

Commercial real estate also includes retail properties, like shopping malls, strip malls, and storefronts. The property owner rents the retail space to the tenant and, in some cases, the rental agreement also entitles them to a portion of the store’s sales.

Industrial

Industrial space covers everything from warehouses to car washes to storage units. Investing in industrial real estate can be a lot of work, depending on the property. Profit is derived from customers generating sales or paying for a service or general fees.

A car wash is a good example of this. Customers come in and pay to have their car washed, either by a machine that does it automatically or by coin-operated bays where they wash the car themselves. To increase revenue, owners can add coin-operated vacuums or shampooing machines or vending machines where patrons can buy air fresheners, glass cleaning wipes, or even snacks. Ultimately, this type of real estate investment is more about running a business and very hands-on. That said, when the property is paid off, the return on investment can be substantial if the business is a success.

Mixed-Use

A mixed-use property can combine any of the previously mentioned examples. So, it could be an office building with retail shops on the bottom floor, a retail shop with a few apartments above it, or a strip mall with shops and office space available.

Mixed-use investing is a great way to guarantee diversity in your investment as you have an opportunity to work with a variety of tenants across different industries. While you may not have enough assets to buy a strip mall, there may be a small building in your neighborhood that has a retail or office space on the ground floor with an apartment or two above that would be a great way to get started in this type of investment.

5 Ways to Get Started

Now that you have a better idea of what’s available, here are five ways to get started investing in real estate.

1. Decide what type of property you want.

This depends on a lot of factors but you have to work with what you have. For example, if you’re moving into a new home, you may be able to repurpose your old one by flipping it, renting it as a vacation property, or renting it out. If you have the available funding, consider buying or building a commercial office building. Maybe a mixed-used building is up for sale in your town and you’re ready to take the jump.

2. See it for what it is… a beginning.

If your overall goal is to own multiple rental properties, don’t lose sight of the fact that it all starts with one. Find one property that suits your time and budget, make it a success, then roll those profits into the next investment property.

3. Secure funding.

There are a lot of ways to approach this. You can spend a few years saving, get a second job, or try to find a profitable side hustle. Home equity loans or a home equity line of credit are viable alternatives if you already own your own home. Try to find lenders and sellers that are willing to work with you on covering closing costs.

4. Research the market.

This is especially important for residential properties. If you’re hoping to flip a home for profit, it’s important to know who you’re selling to. Dual-income married couples have many different needs than a young family with multiple kids. What’s the school district like? Is the neighborhood walkable? How is access to public transportation? Each type of property has its own things to consider so it’s important to do your research.

5. Keep your eyes open.

Finding the right property is not always easy, no matter what type you’re looking for. If there’s a particular area where you want to buy property or rumors going around that a desirable property is going up for sale, you need to know about it. Keep your eyes peeled for good opportunities. Don’t rush! If you wait for the right opportunity, you’re more likely to have success.

About the author 

Eric Bowlin

Eric is an investor that achieved financial independence at the age of 30. He started in 2009 with the purchase of his first triplex and now owns over 470 rental units. He spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate. Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, Yahoo Finance and other financial publications. You can contact Eric by emailing him at [email protected] or with this contact form


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