Now that you know why you should invest in real estate, it’s time to look at what property choices you have. Below are the various types of assets you can chose from. Each carry a different strategy which we will get into in the next article.
SFHs are exactly what they sound like; a single structure designed for one family. They are by far the most common asset for investors, especially with beginners. They’re easy because there’s just one unit to manage. One flip, one tenant, one purchase, one sale. Many things about SFHs are easier because of their ubiquity. Banks are used to financing these types of mortgages, and contractors are used to remodeling them.
Oftentimes, it’s easier to find tenants for SFHs than it is for apartments. The quality tends to be better too, with tenants taking better care of the property and staying longer, providing stability. They also tend to command higher rents than traditional apartments, leading to more income. Since the market is large, SFHs tend to appreciate, leading to more equity in the property over time.
Small multifamily properties are defined as having between two and four units, like duplexes, triplexes, and quads. One of the great things about small multifamily properties is that they are no different from SFH’s to finance, which makes the process very straightforward and easy.
As you can imagine, the market for these is smaller but most homeowners aren’t looking to purchase them, so competition with other investors should be less. The real benefit of these assets is the rent generation. With ease of financing and multiple tenants paying rent, small multifamily properties can be quite lucrative. You can also use them to “House Hack,” which is a strategy that we will get into in the next section.
Classified as any property with five units or more, large multifamily properties cover a wide array of property types. A smaller row of seven townhomes and a 450 unit complex both fit into this asset type. Investing in one of these properties usually requires some serious real estate experience and a high net worth. Valuing these assets is also different from the previous two, namely because the income that they produce must be incorporated, meaning the financing is more complex, and down payments are much larger.
Mobile Homes & Parks
Mobile home parks imitate large multifamily properties, but instead the tenants own the homes themselves and rent the plot of land their home sits on from you. These parks can be almost any size, from just a few plots to dozens. Plots usually come with cement pads for a mobile home to be placed on by residents.
Commercial properties are assets that lease to businesses and can vary widely on style and use. Everything from a warehouse to a strip mall to an office building is considered commercial real estate. Due to the lower turnover of tenants, these assets can provide more reliable income than the ones mentioned above. Commercial properties have a similar financing structure to that of large multifamily, so this is usually only for experienced investors with significant wealth.
Investing in vacant land is very straight forward. If you’re investing in urban or suburban areas, your investment returns are based solely on the appreciation of value of the land. However, you can also purchase land and rent it out for usage, such as farming. If the plot is wooded, you may be able to sell the timber.
Real Estate Investment Trusts
REITs are investment companies that pool money from many investors and invest solely in real estate related assets or businesses. What’s unique to these companies is that for tax purposes they are required to return 90% of their yearly net income to their shareholders in the form of dividends. They trade like stocks, so they are one of the easiest ways to invest in real estate. All you need is a brokerage account.
Just as the real estate industry is diverse, so are the REITs that you can choose from. You can find ones that are specific to an industry, like healthcare or industrial uses, or ones that specialize in a certain investment strategy, like development or net lease. Additionally, there are many different Exchange Traded Funds, or ETFs, that group REITs and real estate related companies in different ways.
Real Estate Investment Groups
A REIG is a more passive approach to real estate investing. A company builds or buys a complex of condos and then allows other companies or individual investors to purchase units through the company creating the group. The original company manages the units as rentals on behalf of the group, which includes a fee that is deducted from the rents each month. You receive the monthly rent payments as a group member and investor net of fees.
To invest in private notes, you first need to have a significant amount of cash that you’re not using. Essentially, you become the bank by lending to others. By providing a mortgage to someone, you collect monthly payments and interest on your money invested. You also retain all the rights that any other bank would have, such as the right to foreclosure should the borrower fail to make payments.
Now that we’ve explored all of the asset classes you can choose from, let’s explore the strategies you can employ to invest in real estate.