Investing in real estate becomes very popular among different population groups, especially millennials at the age of 36. Today this is the largest group of investors, according to the research the National Association of Realtors.
Real estate investing is a good opportunity to receive passive income. It is very important to find out the most suitable type of investment. There is a wide range of real estate types. The buyer of the property needs to take into consideration the categories of investment properties to choose the best option for the final decision.
Categories of Real Estate
There are four main types of real estate: residential, commercial, new construction and raw land. Each category has its pros and cons. Let us look at the following types more closely.
Residential real estate
Residential real estate is the most common category of real estate investing.
The types of residential real estate:
- single-family homes
- multifamily homes
- vacation houses
Single-family houses are the most prevalent category of real estate investment. Residential real estate is the perfect choice for investments because it is a chance to gain consistent profit.
There are several popular strategies in real estate investing. These are the following: buying and holding properties, wholesaling and rehabbing.
Before buying a property for lease, it is necessary to look closely at the condition of the building for rent, whether it needs to be renovated or repaired, to examine the roof and the heating system.
There are some tax benefits that relate to residential real estate.
If your choice is real estate, then you need to get familiar with the market, define the suitable type of property in the area, collect the money for the down payment and consult with the real estate agent before the transaction.
Commercial real estate
Commercial real estate is the type of property for business issues like office buildings, industrial property, hotels, etc. Some types of residential property can be defined as commercial if it has a certain number of units.
The types of commercial real estate:
- industrial buildings
- retail buildings
- medical centers
Commercial property is one of the best options for investments because it is more likely that it will bring more income. Two main ways how to gain profit through investing in real estate are earnings and appreciation.
When it comes to commercial property, it is very important to take into consideration the zoning.
To invest in commercial property, you need to find the proper location, make the analysis of the comparable properties in the area and evaluate the piece of real estate.
One of the benefits of commercial real estate is a long lease. For example, in some cases, the lease may last many years.
Raw land investing
This type of investment can be more profitable than others for the investor. Raw land is the category of real estate when the land area is not prepared for building, unoccupied territory. Undeveloped land is a great choice when you are going to make a long-term investment.
The investor can apply two strategies to gain income from raw land investing. The owner may either resell the property at a higher price or divide the plots of the land for lease.
Raw land types:
- working farms
- vacant land
Before purchasing raw land, it is vital to make marketing research.
One of the benefits of raw land is the low cost of acquisition. The investor does not need to have expertise in the building industry or the knowledge in home types.
It is essential to identify the right area which has the potential to grow. Then the investor should make a plan, whether he wants to develop, hold or divide the land and in some cases, discuss it with the realtor.
New construction homes
New construction is the type of investment when the investor purchases newly or recently built construction. Investing in new construction is very popular in the growing markets.
There is a number of benefits concerning the newly-built construction. It is easy to acquire. It requires low cost for maintenance, it has a potential of high profit.
Investing in new construction has several benefits over the other types of property.
Location means a lot when it comes to choosing a place for rent. New construction houses are often built in a good neighborhood with a well-developed infrastructure: new schools, clean parks, safe roads. The other benefit is good suppliances.
The best type of real estate investment
To define the most suitable type of real estate for investment, you need to revise your goals, market and investing plan. The best method is to make a list of the advantages and disadvantages of each type of real estate.
Of course, the investor should not forget to take into consideration the amount of finance available to purchase a property and extra additional costs that may arise later.
We cannot ignore the fact that the location is a very important point when choosing the most suitable type of property. The next thing is the risks and potential profitability.
For those investors who are willing to buy and hold the property, the commercial and residential categories of real estate are the best choices. Also, they can involve a property manager. The other investors who are interested in a more active role can choose raw land or new construction types.
How to start investing in real estate
After you have got acquainted with each category of real estate, you need to discover where you can find these properties.
Some investors search for a piece of real estate to purchase through multiple listing services. There is also one more method, called FSBO or for sale by the owner. According to this approach, the owner can sell the property without the involvement of a real estate agent or broker.
MLS is available only for realtors or brokers. It is also better to consult a broker or real estate agent while using FSBO because the professionals are aware of real estate in a certain area. Finding the perfect property takes some amount of time, so it would be better for an investor to hire several real property agents to manage this task.
We cannot overlook one more important type of property for purchase. It is called off-market properties which are a real estate selling or which has been already sold without any announcement. These properties may be beneficial for investors from oversaturated markets.
Off-market properties are not included in MLS, although there are some other ways to find them. The investors can search for off-market properties in real estate auctions, visit networking events, talk to contractors, check public records or contact with wholesalers. With the help of these sources, it would be easy to find a property in a specific area.
Tips to get started with investing
Below you will find some useful tips that will help you to get started with investing in the property.
- Define the amount of finance available
Before purchasing any type of property, every real estate buyer needs to come up with a plan of investing.
- Choose a target market
There is a difference between purchasing property near home or choosing an entirely new location. If you buy real estate in your neighborhood, you are familiar with the local market, and it gives you the advantage and better final result. If the prices are too high near your home, then you can search in the area in an hour away. Of course, firstly, you need to do a market analysis.
- Identify the investment property type
First, you need to choose a niche in the market. Then it will be easier to define the target property type.
- Put together a team
It is better to find professionals like real estate managers or contractors who may consult you about finding the most suitable type of property, searching through multiple listing services, or applying the FSBO method.
- Raise the money for the down payment
Of course, you can use leverage to purchase a property but it is better to start building the business with some savings. The amount of money will depend on the target market, your strategy, the category of property you are going to invest in. You can also consult with your team.
There is a various range of property types for investors. The choice of the proper type depends on the different factors like the amount of money, the investing strategy, the role of the buyer of the property (active or passive), the most suitable location, the term of the lease.
You need to do marketing research, make up a team of real estate managers and reliable contractors, put some money down for the initial payment. Also, it is vital to prepare a plan and develop a strategy.
If you are going to choose residential real estate, then you will get a consistent revenue and tax benefits, although you may need to put down some extra money for renovation or repair.
If you want to acquire a commercial category of property, then consider the zoning and the location of the real property. The tangible advantage is the long term of the lease if to compare with the other categories of the property.
For long-term funding, the most suitable type of property is raw land. You may resell the unoccupied piece of the land or divide it into parts for the lease. The main advantage of raw land type is the low acquisition cost.
The last type that we reviewed in the article was new construction homes. The advantages of this type of property are the low cost of acquisition and maintenance and the new infrastructure and appliances.
In addition, before investing, it is better to follow the above-mentioned plan step-by-step, talk to the professionals in the field, use MLS and FSBO methods and get acquainted with the market, gather all the necessary information.
The good team really matters in this case, especially when you are new to investing, and it is your first purchase of the property. The possibility of purchasing off-market properties should not be discarded.
So the key points are your initial budget, perfect team, detailed investment plan, well-developed strategy, and calculated risks.