Primary Types of Real Estate Investments

One of the best things about real estate, as an investment vehicle, is that there are so many different types. This allows you to pursue investments in niches or sectors that align with your investment goals or interests. While by no means a comprehensive list, here are some of the most common types of real estate that investors plug their money into:

• Residential properties. For first-time real estate investors, residential properties are usually the easiest. This is simply due to the availability and familiarity that people have with residential real estate in their personal lives. Within this category, there are several different types of properties – single-family homes, multi-family homes, and vacation rentals (to name a few).
• Commercial properties. As you build an investment portfolio, you might also consider commercial properties as a way to get a different type of exposure and upside. This includes office buildings and retail spaces. 
• Industrial properties. One real estate investment speciality with huge upside is industrial real estate. This includes warehouses and distribution centers, which yield long-term growth and a track record of stability.
• Raw land. While it might not be as attractive to someone who doesn’t know much about real estate, raw land can make for a great investment. Some of these investments are purchased for the purpose of reselling later to a developer. Other raw land investments consist of timberland or farmland, which can produce cash flow.

Again, there are certainly other real estate investments you can make – including mobile home parks, storage facilities, etc. – but these are a few of the most common. And if you’re just getting started, it’s likely that your first investment will happen in one of these categories.

Key Investment Strategies

If you’re buying real estate for investment purposes, there are several different strategies you can use to generate a return on your investment. Some strategies focus on short-term immediate cash flow, while others are more geared toward long-term property appreciation. And then there are some that act as a “hybrid” of sorts, generating some cash flow now while also allowing you to benefit in growth over time. Here are a few key investment strategies:

• Buy and hold. If you have the intention of holding a property for several years, this would classify as a buy and hold investment. Depending on the type of investment, it might be a “pure” hold – where you’re just sitting on a piece of raw land for several years. Or it could be a buy and hold where you lease the property out in the short term and generate monthly cash flow.
• Fix and flip. With a fix and flip, you purchase undervalued or distressed properties, renovate them, and then turn around and sell it for a profit as quickly as you can. This strategy is not as easy as HGTV makes it seem, however, it can be quite profitable if you have the knowledge and renovation skills. The big benefit here is that you can generate a healthy ROI in a short amount of time. However, it’s also possible to make mistakes with your calculations and end up underwater. 
• REITs. If you’re looking to get real estate investment exposure without actually owning the property, you might look into real estate investment trusts (REITs). These are publicly traded companies that own, operate, or finance income-producing real estate and then pass those profits on to the investors. This approach offers diversification and liquidity with lower capital requirements than directly owning the property yourself. This is suitable for investors who want passive income without lots of responsibilities.

There’s no such thing as a “one size fits all” real estate investment. The strategy you use will depend on your time horizon, down payment, financing strategy, location, etc.

Are You Ready to Buy Real Estate for Investment Purposes?

Before diving headfirst into any real estate investment, you have to understand your own financial picture and whether or not you’re ready to buy something. This starts with evaluating your personal finances. 

Begin with a detailed budget so that you can understand your cash flow and identify areas where you can save more to increase your investment fund.

You’ll also need to look at your credit score and mortgage options. Your credit score significantly impacts your ability to secure financing for your real estate investment. A higher credit score typically means better loan terms, such as lower interest rates and higher loan amounts.

Don’t forget to budget for initial and ongoing costs as well. 

• Initial costs include the down payment, closing costs, and any necessary repairs or renovations to make the property rentable or sellable. 
• Ongoing costs encompass property taxes, insurance, maintenance, and property management fees if you decide to hire a management company. These expenses can add up quickly, so it’s important to budget accurately and ensure you have sufficient funds to cover them without straining your finances. 

Additionally, setting aside money for unexpected expenses or vacancies is wise for anyone considering buying real estate as an investment, as this can impact your cash flow and overall investment returns.

One final word to the wise: You’ll want to have an emergency fund for your real estate investments. The market can be unpredictable, and having a financial cushion can help you navigate tough times without having to liquidate your assets prematurely. 

An emergency fund gives you a safety net to cover unexpected repairs, legal issues, or periods of vacancy where rental income might be reduced or nonexistent. Ideally, this fund should cover at least six months of operating expenses, though any amount is better than none at all.