Many people mention investing in Real Estate, but few are aware of the different types of Real Estate investments available. In this article, we will try to elucidate for this topic while helping you understand which kind of investment may fit you better.
First of all, it is crucial to understand that Real Estate investments can be divided into two main categories:
Direct Investments - Characterized by the existence of physical assets that the investor owns, like land, commercial and residential properties.
Indirect Investments - Investor does not own a physical asset. The investor can buy a property without actually buying the property itself. REITs and crowdfunding platforms are the most common examples of this type of investments.
The Main 5 Different Options:
Commercial Real Estate
In simple words, Commercial Real Estate (CRE) is the type of Real Estate used in commerce and for business purposes.
It can be divided into three main categories:
Office;
Retail
Industrial.
The main advantage of investing in CRE is that, generally, you can lock in longer lease terms compared to Residential properties (having 5 to 10 years contracts is not an uncommon thing in this type of properties). Therefore, this implies having a lower vacancy rate and consistent cash flows from your investment.
However, even if you have a lower tenant turnover, it can be more costly when you have to find a new tenant. Your tenant might ask you to make some changes in your layout or even require some specific features in your space, which will lead to an increase in your capital expenditures.
Crowdfunding
Promoted by the evolution of technology, Crowdfunding platforms allow many individuals to invest small amounts of money, through a digital platform, enabling substantial amounts of money to be raised for a single company or project.
We considered crowdfunding a potential holy grail of real estate investment, and if you want to explore deeper this topic you can find a complete article about it on our website.
Residential Real Estate
Residential Real Estate is any property where people can live or stay, such as single-family homes, condos, and vacation homes. In this type of properties, investors can make money in basically two ways:
By collecting rent from property tenants or short-term rentals;
Through the appreciation of the property value.
In reality, Residential Properties’ shorter leases are not necessarily bad. If the market conditions change in your favor, you have more flexibility to take advantage of this by increasing rents. With CRE, you may need to wait at least 5 years before adjusting your lease terms to the actual market conditions and increasing your rent.
Besides that, Residential Properties are typically more resistant to economic downturns: people will always need a place to live. For instance, would people always need to go to a bar or a nail salon? This type of non-essential business may not survive during an economic recession when people have less disposable income.
Raw Land Investments
Raw Land is a plot of land that has not been developed or prepared for construction.
It is considered an appreciating asset because the land has the two main features for any price to go up: limited supply and increasing demand (while the amount of land that hasn’t been built upon is finite, the population has been exponentially growing).
Once land is bought, one can choose to add the value that he/she prefers. There is room for the previously mentioned investments- commercial and residential- just like there is the possibility of investing in row crops, livestock, or farming.
The Raw Land market usually has less competition than other real estate segments and benefits from having lower maintenance costs (at least in the initial stage). Also, the flexibility provided between choosing to hold (to get profit from selling the same land) or building (to add value to it) is another advantage.
Despite the positive theoretical prospects for land investing, land can have some use restrictions. The investor should consider the access that the land has to utilities and how remote is the property. Furthermore, for the ones complementing Raw Land Investment with row crops, livestock, and/or farming, the possibility of bad weather may ruin an entire production season.
Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates or finances income-producing properties. These companies usually invest in most real estate property types, such as apartments, buildings, offices, retail centres, etc. Most of them are publicly traded like stocks, so it is easy for investors to find them and search for data about them.
The central fact that will definitely attract the reader’s attention is that the REIT total return performance for the last 20 years has outperformed the S&P 500 and other indexes and the average inflation rate.
Adding to the previous fact, REITs provide, among others, two significant advantages:
Since most are publicly traded, REITs are much more liquid than direct real estate investments (one of its main drawbacks);
REITs offer a steady income stream for investors through dividends (and these are often higher than what you can achieve with other investments).
However, the investor should expect low growth with REITs. The majority of the income generated is paid back to investors, so little is left to be reinvested.
Conclusion
Notice that these are the five main options, but there are many subcategories to be explored inside each category.
The massive potential of the market is why Real Estate is one of the trending investment options, and these several ways to invest in it allow agents to diversify portfolios, forearm against potential risks and obtain sustained profits.
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