While searching for real estate investment types, the hundreds of thousands of options that lie in front of you can be overwhelming. Where do you begin? Are you looking at investing in residential or commercial real estate? What is the main goal of your investment property? There are pros and cons to almost every one of the real estate investment types out there. However, by understanding the goal of your investment, you may be able to find the perfect fit for you and your lifestyle.
Understanding the different real estate investment types
There are four major categories of real estate investment types. These include residential real estate, commercial real estate, industrial real estate, and mixed-use real estate.
Is your main goal to invest in a property that you will be able to use as a rental property, such as a vacation home on Airbnb, giving you multiple short term tenants? Or is your goal to invest in a single family home, becoming a landlord, with 12-month lease, giving you long term tenants? Would a multi family property interest you? If you are able to make a down payment of 20%, which is extremely important to avoid any obstacles that may arise, and you have done research about the location of your real estate investment property, you are guaranteed to have a rental income. If it is your first time investing in real estate, your best choice would be to invest in a residential real estate property. This is the most simple investment type from all the different types of investment that you can choose.
Residential real estate properties
Residential properties are probably the most popular type of real estate investments. These include houses, apartments, condos, and vacation homes – basically, any type of real estate property that is designed for people to live in. These investment properties may be leased, including for short periods of time, such as Airbnb vacation rentals. If you are looking for something more long term, then possibly a single family home would be one of the best real estate investment types.
However, let’s say you are looking for something a little more different than the traditional real estate investment property. You have enough money and other assets to invest in an office building or a shopping center. Your main goal is to make money in real estate, by renting office buildings or stores out in the shopping strip. Your best option would be commercial real estate properties.
Commercial real estate properties
Commercial real estate properties include offices, hotels, and shopping centers. Commercial properties usually include anything involved in trade, or any way business to make profit. Making sure you can afford a commercial real estate property is extremely important, the mortgage and costs may be very high. Using an investment property calculator can help you get a better idea of the costs associated with commercial real estate.
Calculating the cap rate when investing in commercial real estate is key. This will estimate the net present value of future profits or cash flow. For example, let’s say you decide to invest in an office building. This office building is listed at $2,000,000, generating a net operating income (NOI) of $200,000. The formula for the cap rate would be $200,000/$2,000,000, providing you with a 10% cap rate
Keep in mind that investing in commercial real estate properties is more difficult than investing in residential properties, as you are dealing with multiple units and multiple tenants at a time. In contrast, when you deal with a single family home, you tackle a single tenant at a time, not having to worry about multiple rental units. Although investing in a commercial real estate property is one of the riskier real estate investment types, the income potential is very high, and there is a lot of room for real estate appreciation.
Industrial real estate properties
Industrial real estate properties include warehouses and other buildings that are used to store or distribute goods. The benefits of industrial real estate properties include higher rent, which in turn, produces a positive cash flow. Industrial properties can yield 8%, while residential properties such as houses yield about 4%-5%. Although industrial properties can yield high income, there are also some cons. These include being very expensive, and also risking vacancy. In comparison to residential real estate, industrial real estate is more prone to businesses closing down and the inability to find other tenants.
Mixed-use real estate properties
One of the real estate investment types that involve a variety of real estate investments is mixed-use real estate investments. These investments use commercial properties, residential properties, and industrial properties in one investment. Because mixed-use real estate investments offer a great deal of diversification in comparison with other real estate investment types, they are popular for those with significant assets. The cash on cash return on these real estate investment types is high. A mixed-use real estate investment would probably be better suited for a more experienced real estate investor, so if you are just beginning, this real estate investment type may not be right for you.
There are real estate investment types out there for every budget, and real estate investment types for every goal. If you are looking for investing in a single family home and renting it out long term, then residential real estate is perfect for you. If you are looking for a large shopping mall where you can have a diverse selection of stores, then commercial real estate would be your go-to. If you prefer investing in a warehouse, then the industrial real estate investment type is perfect. If you have the assets, and you are more experienced in real estate investing, then the mixed-use investment will give you the perfect challenge. If you do your research correctly, and decide what real estate investment types best fit your lifestyle, then you are guaranteed a positive cash flow.
For more advice on your real estate investment decision, keep reading on Mashvisor.