What is considered the best real estate investment? With the U.S. real estate market on the rise, investors are sifting through every available property type to discover which will help them profit. So which sectors and properties are the best moves for investors today? Keep reading to learn more about the best type of real estate investment for you.
Types of Real Estate Investments
There are several types of real estate investors should be familiar with: commercial, residential, raw land, new construction, crowdfunding platforms, and REITs. Each of these types will come with unique advantages and disadvantages that investors should evaluate. Let’s look at each of the options available:
- Residential Real Estate
- Commercial Real Estate
- Raw Land & New Construction
- Real Estate Investment Trusts (REITs)
- Crowdfunding Platforms
1. Residential Real Estate
There are numerous rental property types in residential real estate, though the most common is thought to be single-family homes. Other residential properties include duplexes, multifamily properties, and vacation homes. Residential real estate is ideal for many investors because it can be easier to turn profits consistently. Of course, there are many residential real estates investing strategies to deploy and different levels of competition across markets — what may be right for one investor may not be best for the next. For this reason, choosing the right exit strategy and market is key when it comes to residential real estate.
The most common exit strategies used in residential real estate include wholesaling, rehabbing, and buying and holding properties, which can be used to generate rental income. Investors should be careful to consider which strategies would work best in their market area by conducting a thorough market analysis.
When managed correctly, a residential real estate investment can yield attractive profits. This is because, in addition to earning steady cash flow, the residential real estate benefits from a number of tax breaks.
2. Commercial Real Estate
The best commercial properties to invest in include industrial, office, retail, hospitality, and multifamily projects. For investors with a strong focus on improving their local communities, commercial real estate investing can support that focus.
One reason commercial properties are considered one of the best types of real estate investments is the potential for higher cash flow. Investors who opt for commercial properties may find they represent higher income potential, longer leases, and lower vacancy rates than other forms of real estate. James Angel, Co-Founder of DYL states that “industrial real estate includes warehouses, storage units, car washes, and other special-purpose properties that produce revenue from clients that visit the facility. Industrial real estate investments frequently include major fee and service revenue streams, such as coin-operated vacuum cleaners at a car wash, which can help the owner maximize their return on investment”. Investors may also enjoy less competition in commercial real estate because purchasing these properties can be a larger undertaking than working with residential homes.
3. Raw Land Investing & New Construction
Raw land investing and new construction represent two types of real estate investments that can diversify an investor’s portfolio. Raw land refers to any vacant land available for purchase and is most attractive in markets with high projected growth. New construction is not much different; however, properties have already been built on the land. Investing in new construction is also popular in rapidly growing markets.
While many investors may be unfamiliar with raw land and new construction investing, these investment types can represent attractive profits for investors. Whether you are interested in developing a property from start to finish or profiting from a long-term buy and hold, raw land and new construction provide a unique opportunity for real estate investors.
Investors should be prepared to complete extensive market research to maximize profits when investing in raw land and new construction. This will ensure you choose a desirable area and prevent the investment from being hampered by market factors.
4. Real Estate Investment Trusts (REITs)
Real estate investment trusts or REITs are companies that own different commercial real estate types, such as hotels, shops, offices, malls, or restaurants. You can invest in shares of these real estate companies on the stock exchange. When you invest in a REIT, you invest in the properties these companies own without the added risk of owning the property yourself.
It is a requirement for REITs to return 90% of their taxable income to shareholders every year. This offers investors to receive dividends while diversifying their portfolio at the same time. Publicly traded REITs also offer flexible liquidity in contrast to other types of real estate investments. You can sell your shares of the company on the stock exchange when you need emergency funds.
5. Crowdfunding Platforms
Crowdfunding platforms offer investors access to several assets that offer high returns and are traditionally reserved for the wealthy. While this offers the ease of finding assets to investors, this type of real estate investment also introduces a high amount of risk. Crowdfunding platforms are typically limited to accredited investors or those with a high net worth. Some sites offer access to non-accredited investors as well.
The main types of real estate investments from crowdfunding platforms are non-traded REITs or REITs that are not on the stock exchange. In terms of non-traded REITs, your funds may be invested for several years with no possibility of pulling your money out when you need it.
What Is the Best Type of Real Estate investment?
The best type of real estate investment will depend on your individual circumstances, goals, market area, and preferred investing strategy. While many investors want a more straightforward answer, determining the best type of investment property is a subjective process. Choosing the right property type comes down to weighing each option’s pros and cons, though there are a few key factors investors should keep in mind as they seek the best choice.
When choosing the best type of investment property, the importance of location can not be understated. Investors operating in “up-and-coming” markets may find success with vacant land or new construction, while investors working in more “mature” markets may be interested in residential properties.
Aside from location, investors should also be aware of their own preferences when it comes to investing. Assess your preferred level of involvement, risk tolerance, and profitability as you decide which property type to invest in. Investors wishing to take on a more passive role may opt to buy and hold commercial or residential properties and employ a property manager. Those hoping to take on a more active role, on the other hand, may find developing vacant land or rehabbing residential homes to be more fulfilling.
As you choose the best type of investment property for you, it is also important to keep in mind that many investors find success investing in various property types. It is not uncommon for investors to familiarize themselves with residential real estate before moving on to commercial properties. That being said, there is no reason investors cannot achieve success investing in multiple property types.
Active Vs. Passive Investing
An important distinction to make when choosing an investment strategy is between active and passive investments. Active strategies, as the name implies, require a more hands-on management approach. For example, rehabbing a house is considered an active investment strategy. You will be in charge of coordinating renovations, overseeing contractors, and ultimately ensuring the property sells. Active strategies require more time and effort, though they are associated with large profit margins.
On the other hand, passive real estate investing is great for investors who want to take a less involved approach. Examples of passive real estate investing include REITs, buy-and-holds, or rental property ownership. With these strategies, you can enjoy passive income over time while allowing your investments to be managed by someone else (such as a property management company). The only thing to keep in mind is that you can lose out on some of your returns by hiring someone else to manage the investment. Overall, the right investment approach will depend on your schedule, skill level, and finances.
Direct Vs. Indirect Investing
Another consideration to make when selecting a real estate investing strategy is direct vs. indirect. Similar to active vs. passive investing, direct vs. indirect refers to the level of involvement required. Direct investments involve actually purchasing or managing properties, while indirect strategies are less hands-on. For example, REIT investing or crowdfunded properties are indirect real estate investments. Direct investments include buying or rehabbing properties.