There are several types of real estate investments, but most fall into two categories: physical real estate investments such as land, residential and commercial properties, and other modes of investment that do not require owning physical property. , such as REITs and crowdfunding platforms.
Investing in traditional physical real estate can offer a high return, but it also requires more money up front and can lead to high ongoing costs. REITs and crowdfunding platforms have a lower financial barrier to entry, which means you can invest in multiple types of real estate for much less than it would cost to invest in a single traditional property. . These alternative real estate investments also offer the distinct advantage of not having to leave your home or put on pants to start investing.
If you are looking to invest in real estate, here are five types to consider:
Listed on the stock exchange , or real estate investment trusts, are companies that own commercial real estate (think hotels, offices, and shopping malls). You can invest in shares of these companies on the stock exchange. By investing in REITs, you are investing in the real estate owned by these companies, without as many of the risks associated with directly owning real estate.
REITs are required to return at least 90% of their taxable income to shareholders each year. This means that investors can receive attractive dividends in addition to diversifying their portfolios with real estate. Listed REITs also offer more liquidity than other real estate investments: if you suddenly need cash, you can sell your stocks on the stock exchange. If you want to invest in publicly traded REITs, you can do so through a .
Real estate crowdfunding platforms offer investors access to real estate investments that can bring high returns but also carry significant risks. Some crowdfunding platforms are only open to accredited investors, defined as people with a net worth, or common equity with a spouse, of more than $ 1 million – excluding the value of their own. house – or annual income in each of the past two years that exceeds $ 200,000 ($ 300,000 with a spouse).
But others, like and , offer investors who do not meet these minimums – called unauthorized investors – access to investments in which they would not otherwise be able to invest. These investments often come in the form of non-traded REITs or REITs that do not trade on the stock exchange. Since they’re unlisted, unlisted REITs can be very illiquid, meaning your funds will be invested for at least several years and you may not be able to withdraw your money from it. investment if you need it. Keep in mind that many crowdfunding platforms have little experience and have yet to go through an economic downturn.
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Residential real estate is virtually everywhere people live or stay, such as single family homes, condos, and vacation homes. Residential real estate investors make money by collecting rents (or regular payments for short-term rentals) from tenants, thanks to the appraised value of their property between when they buy it and when they buy it. sell it, or both.
Investing in residential real estate can take many forms. It can be as simple as renting a spare room, or as complicated as buying and making a house profitable.
Commercial real estate is space that is rented or leased by a business. A single company leased office building, gas station, shopping mall with multiple single businesses, and leased restaurants are all examples of commercial real estate. Unless the business owns the property itself, each business would pay rent to the owner.
Industrial and commercial real estate can fall under the commercial umbrella. Industrial real estate generally refers to properties where products are made or housed rather than sold, such as warehouses and factories. The retail space is where a customer can purchase a product or service, such as a clothing store. Commercial properties tend to have longer leases and may charge a higher rent than residential properties, which can mean higher and more stable long-term income for a landlord. But they can also require higher down payments and property management expenses.
If you build it, will they come? Investors typically buy land for commercial or residential development.
But buying land for development involves a fair amount of market research, especially if you plan to develop the property yourself. This type of investment is best suited for someone with significant capital to invest and in-depth knowledge of all things real estate – building codes, zoning regulations, flood plains – in addition to an understanding local residential and commercial rental markets.
If you’re considering investing in traditional real estate, like residential or commercial properties, doing your due diligence doesn’t just mean making a down payment. Knowing your local market is important. If there isn’t a lot of demand for homes or commercial space in your area, or if property values start to drop, that investment could quickly become a burden.
If you’d rather take the guesswork out of your investments, REITs and crowdfunding platforms are easier ways to add real estate to your portfolio without owning physical property.
Some brokerage firms offer publicly traded REITs and REIT mutual funds.