Real estate is among the oldest of all types of assets. Throughout history, property ownership has often been viewed as symbolic of wealth. And while most new real estate investors have some understanding of this concept, many are unsure of the varying types of real estate investments from which to choose.
The various real estate investment vehicles will each present with distinct advantages & disadvantages. In addition, some investments outperform others based on the chosen investment strategy or, if implemented during a specific market or economic circumstance, like a pandemic.
To determine the most suitable investment property, it is essential to consider various factors and investment options. Several relevant aspects will likely impact your ultimate investment decision – from the location of the investment unit to budgetary limitations, to name a few.
- 1 First, a Word About Location
- 2 A single-family residential property is defined as a stand-alone residential structure that is situated on a private piece of property that most often includes a driveway and a yard. In addition, a single-family home is designed to be used as a single dwelling, which essentially means there is one kitchen without utilities and walls shared with another unit.
- 3 Single-family units are the most common type of residential property that is located outside larger metro areas. They offer families – either owners or tenants, the option to have a swimming pool or hot tub for the family members to use. Single-family properties tend to be quite appealing for many types of occupants/tenants. However, single-family homes in urban areas tend to be more expensive as they occupy a larger piece of land than the other types of real estate investment properties in the residential realm.
- 4 Commercial Investment Property 101
- 5 Outlining Different Strategies for Investment Properties
- 6 The Bottom Line
First, a Word About Location
Every investor has heard the infamous and accurate, if overused phrase – in real estate, it is ‘Location, Location, Location.’ Unfortunately, on some level, its overuse has diluted the value of the message because, without the right location, even the best investment metrics or strategic decisions become irrelevant if a lessee or buyer has no interest in the property due to its location.
More times than not, price & location are inevitably intertwined in a buyer’s decision. While price is important, location dictates everything else with regard to the transaction. The site will determine your investment goals and your choice of investments. Here are two examples of how locations dictate your investment strategy:
- If you choose to invest in housing near a college, you commit to managing those properties based on the fact your tenants are college students.
- If you choose to invest in a more diminished area, you understand that the demand for this unit may be challenging, given the location.
Any way you slice it – an investment in real estate requires a commitment of some sort. And remember, that often a few miles from one property offers an entirely different location, which is why it is vital to understand everything about the location before committing to buy a long-term investment. This would include the investigation of the area’s key economic metrics, which may include:
Let’s find out the various investment property types and the strategies that seek to maximize each property type.
Residential Investment Property 101
Unfortunately, no general overall strategy applies to each property or investor type in residential real estate. Strategies are as unique as people and often vary widely from one investor to another based on budgets, risk tolerance, and other fiscal issues.
So, what are the most common residential property types?
A Single-Family Residential Property
Single-family units are the most common type of residential property that is located outside larger metro areas. They offer families – either owners or tenants, the option to have a swimming pool or hot tub for the family members to use. Single-family properties tend to be quite appealing for many types of occupants/tenants. However, single-family homes in urban areas tend to be more expensive as they occupy a larger piece of land than the other types of real estate investment properties in the residential realm.
Single-family investments are a direct investment for new real estate investors. Choosing to invest in a single family can generate immediate returns and offer long-term appreciation. It facilitates saving for retirement and provides a regular stream of passive income.
A condominium, or condo for short, can also offer an appealing investment opportunity. A condo is a real estate project that includes anywhere from 4 to hundreds of units – all of which own their units but share common areas throughout the project, like a swimming pool, exercise facility, game rooms, or private parklands, among others.
Condominium units are attractive investments as they are often more affordable, which helps new investors overcome the most common investment hurdle – not enough capital! By comparison, a condo is less expensive than single or multi-family properties and offers investors low maintenance options. However, it is important to understand the important drawbacks of investing in a condo. These include:
- Potential restrictions on renting – some condos require owners to own the unit for a year before renting, while other condo regulations may prohibit renting altogether. e
- Financing challenges – financing may require the condo have certain owner-occupancy ratios, among other requirements.
- Condo Association Fees – condo fees are typically assessed monthly and may cover a variety of expenses (like pest services & landscaping, etc.), but can also rise unexpectedly or require owners to be a special assessment for a large project, like a new roof or the painting of the project.
A townhouse is considered one of the most common types of residential real estate across metropolitan areas in the country. Townhomes are defined as attached units that are typically individually owned but share one or more walls with another unit. They typically offer terraces and multiple floors and have a narrow footprint but ample space for those who occupy the unit.
A townhome differs from a condo in that townhome owners own their unit (including interior and exterior walls and roof, etc.), whereas a condo owner would not. Both would, however, be co-owners in communal areas.
A townhome is often costly in urban areas where land is expensive and single-family dwellings are not common. And townhomes, like condos, will typically have monthly maintenance (homeowner’s association) fees and common areas for all owners to enjoy.
A Luxury Home
A luxury home is a modern type of real estate investment explicitly designed for luxurious living to its owners or tenants. A luxury home can include various locations, sizes, and designs but generally includes one common element – they are expensive to purchase and maintain. Luxury homes are found in upper-class neighborhoods near preferred locations, like a beach, etc.
Commercial Investment Property 101
Raw or Vacant Land
Investing in raw or vacant land can offer great investment opportunities (due to the scarcity principle and its limited nature). Still, it can be somewhat risky as raw land offers little in the way of rental income, unless, of course, the land can be used in the cultivation of farming or animal maintenance, which may make it challenging to meet monthly loan obligations.
Investing in vacant or raw land requires skill and knowledge that can take years to acquire.
Investing in commercial property will include buying properties where businesses operate – office buildings, industrial factories, or retail stores, to name a few. Commercial properties can also include large rental apartment buildings that include more than four units.
Commercial properties offer investors two primary advantages –
- It is easier to find a commercial property that offers positive cash flows and growth potential (if tenanted) than that of a residential property.
- Tenants are often responsible for the property’s maintenance as they are given the option to fit out the building to meet their requirements and then return the property to its original condition when their tenancy ends.
But commercial property financing can be somewhat tricky, so be certain you understand its nuances before executing a purchase contract for a commercial property.
Outlining Different Strategies for Investment Properties
In addition to the above-noted property types, there are also various investment strategies to consider based on the investor’s investment plans and personal preferences. Like all strategies, each comes with its own advantages & disadvantages concerning:
- Risk tolerance
- Time investment
- Profitability, among others.
Let’s review three common investment strategies.
Choosing a Long-Term or a Traditional Rental Strategy
The most common, by far, of real estate investments, is the long-term rental, which is also the most traditional of rental strategies – especially for newbie investors. A long-term rental strategy is simply the purchase of real estate with the primary objective of renting it to tenants for at least six months.
The owner of real property, in leasing the property, would become the landlord and require tenants to sign a lease contract, delineating the obligations of both the tenant (making on-time rental payments, etc.) and the landlord (providing services, etc.). The rental income will hopefully over the cost of maintaining the property, which includes:
- Mortgage payments
- Insurance, among others.
A long-term rental is often a strategy used for a townhome, condo, or single-family. This strategy tends to offer the lowest amount of risk, and when the mortgage is paid in full, investors can begin to generate serious amounts of passive income monthly.
It is noted that long-term rentals are long-term commitments that may work against the landlord in times when rents are rising.
Choosing a Short-Term Rental Strategy
A short-term rental strategy – think Airbnb or VRBO – is similar to traditional rentals, with rental terms significantly shorter than its longer-term rental counterparts – measured in days, weeks, or even a few months.
A short-term rental splashed onto the investment scene with the recent emergence of websites using technological advancements in meeting the needs of short-term renters.
A short-term rental can be used with any type of real estate – from condos to single families to luxury homes. However, short-term rentals may be subject to regulations or restrictions, depending on the city or state in which the short-term rental is located. Restrictions may limit rental times or the number of allowable rental days annually.
Choosing a Fix-and-Flip Strategy
A fix and flip real estate strategy has become quite popular over the past decades. It essentially means that investors buy a property in disrepair (needing more than a little TLC) and then renovate the property into a more appealing and habitable condition before putting the unit back on the market for sale.
Fix and flips offer quicker investment strategies than rentals but are considered somewhat risky because of:
- The renovation work that is required to be done to put the unit back on the market for sale
- The capital required to complete the renovations
- The unexpected costs that may arise during renovations, to name a few.
Most residential property can be used with a fix-and-flip investment strategy, as these units tend to be lower in price due to their needed improvements.
The Bottom Line
Real estate investors tend to prefer one investment strategy to the others; however, many choose to diversify their portfolio, which helps hedge against market factors like inflation or interest rate adjustments. But, for serious investors, there are always unique real estate investments from which to choose.
- Are you ready?
- What are you waiting for?
- The next investment opportunity is waiting for its next investor. It is up to you to find it.