When I was a child, my father always used to say that the majority of the world’s money was in real estate. However, there are several different types of real estate investments, so which are the best?
I recently began investing in real estate, where I bought a series of apartments in my local area (doing a form of house hacking). Prior to this, I had never really thought about the many different types of real estate!
11. Residential
Residential real estate is perhaps the most common form of real estate investing, at the very least, it’s the most well known! This is perhaps thanks to recent years (such as the 2008 recession) but also people’s own experience.
As the name might imply, residential real estate includes any form of property who’s primary objective is to serve as someone’s home. Most commonly, these are houses, apartments and condos.
Compared to most other types of investments, residential real estate has an extremely high yield. On top of this, the ROI per year is also extremely high, averaging at around 10% (compared to 7% for stocks).
With that being said, the costs for residential real estate are also incredibly high. If you have a bad tenant, they may trash the place, causing you to renovate the property. These risks can be mitigated through house hacking.
Who it good for:
- Someone interested in high rewards
- Someone who doesn’t mind renovating every few years
- Someone who (maybe) doesn’t mind living near their tenants
10. Vacation
Whilst on the surface, it may seem similar to residential, vacation homes have a completely different function. Where residential real estate is meant to be lived in for several years, a vacation home is lived in for a few weeks at max.
More often than not, these houses are villas, usually with their own pool (depending on where they are). These houses are meant to have high turnover rates, with one group of people leaving one day and another coming in the next.
During peak season(s), you will have almost constant demand for your property/properties. This in turn, means that for a few months each year, you will probably make more than you would do otherwise.
However, during the off season(s), you will only have minor demand for your property. As such, you’ll generally make less than you do in the peak season. However, it will all equal out to about the same as a rental property.
Who it’s good for:
- Someone who doesn’t mind fluctuating rewards
- Someone who wants to manage a small portfolio of various properties in a touristy place
- Someone who doesn’t mind non-English speaking tourists
9. Retail
In recent years, retail real estate has been hit incredibly hard. Despite that, many real estate investors do see retail real estate as a good deal, or even as their preferred type of real estate.
The term “retail real estate” is quite a broad term. It can apply to literally any form of real estate who’s purpose is to sell something. This can be an independent store, to a strip mall to the Mall of America (if you so desired!)
Due to the latter two’s size, there is a potential to make a lot of money, especially if you own the mall entirely, or at least a large portion of it.
As said earlier, the invention of the internet has caused many stores to close many of their brick and mortar stores to close, in order to compete online. This has led many malls to have many vacancies, causing their investors to lose money.
Who it’s best for:
- Someone who’s short-term focused
- Someone who’s done their research (into the local area)
8. Commercial
On the other hand, you have commercial real estate. Besides residential real estate, commercial real estate investing is among the most common types of real estate investments.
Commercial real estate is any form of real estate used for a commercial purpose. Most commonly, this is through office buildings, however also include (some) warehouses and even gyms.
Recent years have seen demand for office buildings, gyms and warehouses skyrocket. This in turn, has seen prices for them skyrocket as well, netting many investors millions, both in terms of yield and ROI.
However, the internet has once again caused issues. In order to remain profitable, and in light of a lot of recent news, many companies have abandoned office buildings all together, or have downsized, costing investors millions.
Who it’s good for:
- Someone looking to make close relationships
- Someone looking to make lots of money (long-term)
- Someone who can see past the current madness
7. Mixed Use
In recent years, mixed use real estate has become one of the most common types of real estate investment. This is thanks to many people wanting to live and work in the same place in order to cut costs.
For the most part, mixed use real estate consists of a commercial and a residential property, with one being on top of the other. On the higher end of things, penthouse apartments (on top of office buildings) have the same concept.
As you can probably imagine, these types of real estate investments are highly sought after. This is mostly because they have significantly reduced costs, and make running a small business much easier.
However, due to this ease, many investors like the idea of them. As such, when they come on the market, they are rarely there for long, or if they are, they are extremely expensive. This gives them lower overall yields.
Who it’s good for:
- Someone who’s looking for a property that always appreciates
- Someone who doesn’t mind a little risk
- Someone who doesn’t mind a few odd/late payments
6. Industrial
Do you remember earlier, when I said that some warehouses counted as commercial real estate? Well, other warehouses count as industrial real estate. It mostly depends on what it’s used for.
Other than warehouses, other types of industrial real estate include factories and workshops among others. Depending on how you view it, commercial and retail real estate are subcategories of industrial real estate.
Generally speaking, industrial units have longer leases on them than other types of real estate. On top of this, rent is often much higher than for other units, which often yield incredible returns for investors.
By the same token, industrial real estate can soon become outdated. If the building is too small or is laid out weirdly, new and larger machinery may not be able to fit, this will lead many businesses to find other places instead.
Who it’s good for:
- Someone who doesn’t mind renovations
- Someone who wants higher rewards (short-term)
5. Wholesale
Before many real estate investors get into full time, multi-property real estate investing, many of them start out selling real estate contracts, more commonly known as real estate wholesaling.
Essentially, a person will put their real estate up for sale, a wholesaler will then buy the contract for the real estate from the seller. Then, the wholesaler will find a buyer, negotiating a higher price for the contract than they’d paid for it.
Naturally, this reduces most of the risk of investing in real estate. On top of this, it is one of the easiest ways in real estate to make a lot of money. Often, you could make several thousand dollars, without actually owning the real estate!
However, as with most other types of real estate investments, there is no guarantee you’ll sell the contract, or even make any money. Several of friends are wholesalers, one of whom has an entire A-5 book dedicated to the ones that have “burned” him.
Who it’s good for:
- Someone who’s looking to make a lot of money
- Someone who doesn’t mind a mixture of high and low risk
- Someone who doesn’t mind doing the legwork in order to get the sales
4. Fix-and-Flip
In recent years, fix-and-flip houses have become quite notorious. Indeed, just prior to the 2008 recession, this was quite common, with people making a lot of money prior to the crash.
When the property bubble did crash, however, many of these people lost millions. Many of the worst stories were reported by various newspapers around the world, with it putting many off fix-and-flip forever.
Despite this, if it is done correctly, you can still make a LOT of money, even in a recession. You see, during recessions, people are often unemployed (or furloughed) and searching for new jobs.
At the same time, they begin to realize that their home isn’t as big as it once was. So they begin to look for new homes, driving up the price immensely. If you can buy distressed properties and renovate them, you can pocket hundreds of thousands of dollars!
However, by the same token, each recession is different. The 2008 crisis perhaps best shows this, with people not wanting a new home, but were rather trying to keep their current one.
Who it’s good for:
- Someone who likes taking (controlled) risks
- Someone who “understands” the market
- Someone who focuses on only one thing (eg. one property at a time)
3. REITs
In the last five to ten years, REITs have become increasingly more popular. This is in part thanks to people realizing that real estate can be invested in, even when you only have a small amount of money!
Essentially, a REIT is the mutual fund of real estate investing. Investors come together to buy a percentage of a REIT, this in turn, dictates how much they get in dividends at the end. The REIT then invests in other real estate.
As with other forms of real estate, REITs yield fairly high dividends, paid out either monthly, quarterly or annually. On top of this, many REITs have seen large, long-term capital appreciation over the years!
Unlike most other forms of investment, REITs are not publicly traded. This adds an extra layer of risk, as investors are often unable to do in depth research about the REIT to see if it is a good deal.
Who it’s good for:
- Someone looking to grow their portfolio
- Someone looking to make a large amount of money short-term
2. Land
Traditionally speaking, land is one of the oldest and most well known types of real estate investment. However, in the modern day, land has several uses, where it had previously only had maybe one or two.
Land refers to any piece of real estate not at the bottom of the ocean, that is without any “purpose”. Often, land serves as fields, quarries and other things. However, it can also be bought to build other types of real estate.
Raw land itself, once it has been rented out to a farmer (or someone else), you, the owner, don’t really need to do anything. It’s quite difficult to destroy land, or make it so you need to renovate, at least, not without you noticing.
Historically speaking, land was a major source of wealth. There was only just enough food to feed the world’s population. As such, where it was grown, on farms, was highly prized. However, this is not the case today.
Who it’s good for:
- Someone without much initial capital
- Someone who doesn’t want to deal with banks
- Someone who wants an “easy” investment
1. Special Purpose
Special purpose is perhaps one of the most uncommon types of real estate investment. This is partially down to what it is, and investor’s morals, as well as their particularly low yields.
The term “special purpose” real estate can apply to many different types of real estate, including schools, churches and government buildings. Whilst the local government may occupy them, investors tend to own them.
Naturally, many investors won’t go near special purpose real estate. This is often down to morals and ethics, with some investors believing that getting rent out of schools is immoral. Or just doesn’t sit right.
However, for those who do invest in them, although they will earn less rent (per month) per square inch, they are almost guaranteed to get their rent payment each month. Other types of investments don’t have that security.
Who it’s good for:
- Investors looking for the “bonds” of the real estate market
- Investors looking to diversify
Which is The Best For me?
As with almost all other types of investing, it depends on you. If you have millions of dollars at your disposal, you probably don’t want to spend it investing in $5,000 a piece, pieces of land.
Instead, you’ll probably want to buy an entire apartment complex, or maybe several. If you have several thousand, you may want to buy a couple of pieces of residential real estate.
On top of this, if you want security, you should probably diversify, buying several different types of real estate investments. However, you should definitely consider the possibility of over diversifying your portfolio.
If you are looking for something that is low risk, you are probably going to want to invest in something like special purpose real estate or even mixed-use. However, these properties will also yield lower returns.
If you are looking for something with more risk, commercial, residential and industrial units are probably for you. As a result of this higher risk, you also get much higher rewards in terms of ROI and yield.
Alas, I, a random guy on the internet cannot tell you what is best for you. Investing isn’t a “one size fits all”. You will need to do the research and come to you own conclusion about which is best for you.
What are your favorite types of real estate investments? Tell me in the comments!
