Real estate investment selections come in many forms – from rental properties and commercial developments to REITs and timeshares. The real estate market provides many ways for both active and passive investment, depending on your risk tolerance and experience level. As with any investment, it’s essential to know the pros and cons of each option to make correct decisions.
Here are the types of real estate investments to know:
1. Residential Rentals – An Ideal Entry Point
If you’re just planning real estate investing, buying and renting out residential property is often the most simple and easy approach. You can buy rental homes, condos, or apartments, then lease them out to long-term tenants for income. As a landlord, you’re liable for managing the rental, including vetting and choosing tenants, maintenance, and ensuring rent payments are made on time.
While residential rentals can produce stable cash flow and long-term value, they also engage more work than other options. The property is also subject to risks like tenants damaging the home or non-payment of rent. You may also have trouble finding right tenants in some locations.
2. Commercial Property – Riskier But Potentially More profitable
Commercial real estates like office buildings, industrial warehouses, and retail centers offer the chance for higher returns compared to residential rentals but also higher risks. Lease terms for commercial property are often longer, from 3 to 10 years or more for major tenants. So while leasing out a big commercial property can supply a stable income for a long period, vacancies can last longer if a tenant moves out. Commercial property is also affected by economic downturns as businesses may close or downsize their space during recessions.
3. Real Estate Syndication – Joining Forces To Invest
Real estate syndication involves pooling funds from multiple investors to buy a property that may otherwise be too costly for any individual investor to buy themselves. Syndications are common for big commercial properties and new multi-family housing developments. Investors get a share of the rental income and profits from the syndicated property.
4. REITs – Instant Diversification
Real estate investment trusts or REITs offer a way to invest in real estate without the hassle of owning and managing properties yourself. REITs own and operate income-producing real estate such as office buildings, shopping malls, apartments, and hotels. By investing in REITs, you get exposure to the REIT’s portfolio of properties and earnings. Publicly traded REITs are listed on major stock exchanges, so you can purchase and sell them like stocks through a brokerage account. Returns are generated through property income and possible share price growth over time.
5. Timeshares – More Vacation Than Investment
A timeshare permits you to buy rights to use a vacation accommodation, typically resort condominium units, for a specific period each year. While timeshare companies bill the properties as real estate investments, most do not in fact go up significantly in value over time after adjusting for inflation. Annual maintenance fees also eat into any possible returns. As a result, timeshares are usually a worse investment option compared to other types of real estate but can still be appealing for those wanting an reasonable vacation home.
To Wrap Up
There are several real estate investment vehicles to consider, from active options like renting out properties to more passive investing through syndications and REITs. The best move for you depends on your financial goals, risk tolerance, and how involved you want to be as an investor. But with multiple ways to get exposure to the real estate market, now is a great time to invest in this asset class.