Are you thinking about starting a career in real estate investing but you have little experience and knowledge about where to start? Then you’ve come to the right place. One of the best things about the real estate market is that there are different types of real estate which offer anyone and everyone the chance to become a real estate investor. However, with this diversity comes the need to decide which type is the right one for you. Now, this is the tricky part for beginner property investors.
At Mashvisor, we work to help experienced and beginner property investors make smart investment decisions for a successful real estate investing career. In this article, we break down the 4 most common types of real estate and later explain how to determine which type you should go for. So, without further ado, let’s jump right in!
Types of Real Estate #1: Rental Properties
This is the most common type among beginner property investors. With rental properties, a real estate investor simply buys an investment property and rents it out. There are mainly two ways to make money with these types of real estate: long-term rental properties (Traditional) or short-term rental properties (Airbnb).
This is one of the best types of real estate because almost every type of investment property can be a rental. Single-family homes, multi-family homes, vacation homes, condos, townhouses, you name it! However, the type of investment property has to match with the rental strategy in order to have a profitable investment. For example, a vacation home would make a better return on investment as an Airbnb rental property.
Another reason for the popularity of these types of real estate is that rental properties allow for cash flow (monthly rental income – monthly rental expenses). This means that when a real estate investor rents out his/her investment property, he/she will have a stream of income in the form of monthly rent. However, the rental property has to generate positive cash flow in order to profit from it.
Real estate appreciation is another reason to invest in rental properties. Appreciation is the increase of investment properties’ value over time. So basically, the longer a real estate investor holds onto these types of real estate investments, the more their value will increase. Appreciation is an attractive perk in real estate investing because it allows a real estate investor to sell the investment properties in the future for a higher price than the initial investment, thus, making a profit!
Looking for a rental property? Click here to start analyzing the best investment properties in your city and neighborhood of choice!
Types of Real Estate #2: Fix-and-Flips
Fixing and flipping real estate is a great way to make a fast profit. When investing in these types of real estate, a real estate investor finds investment properties that he/she can buy for a cheap price (such as distressed properties, foreclosures, or short-sales), works on renovating them, and then sells them for a profit as quickly as possible.
When compared to other types of real estate, fix-and-flips are considered risky for beginner property investors. It might take some time to find the right investment properties to flip. Moreover, property investors have to keep their finances in order. Otherwise, they could end up spending too much on renovations and not make the desired profit. Not to mention, reselling these types of real estate has to be done quickly – the longer you hold the flipped investment property, the less money you’ll make because you’re paying the mortgage without making any income.
Nonetheless, fix-and-flips are still profitable types of real estate – if done correctly.
Types of Real Estate #3: Wholesaling
If you’re thinking that the only way to make money from real estate investing is through property ownership, then think again! There are types of real estate that allow you to make money and be part of the business without having to become a landlord. Real estate wholesaling is one of those types. In real estate wholesaling, your job is to find a property for sale and sign a contract with the seller. Then, you start looking for an end-buyer for this property before the contract deadline expires. Once you’ve found the right buyer, you work as a middleman between the seller and the buyer.
Real estate wholesaling is one the best types of real estate for beginner property investors because they don’t need to have a lot of cash to buy an investment property and it gives them the ability to make significant money in the short term. In addition, a real estate wholesaler doesn’t have a long-term commitment to a rental property, doesn’t have to look for and deal with tenants, nor is there any need to fix or manage investment properties.
Despite these benefits, there are some challenges associated with real estate wholesaling. Not to mention, Wholesaling (and fix-and-flips) are types of real estate that don’t come with a regular stream of income. Meaning, once the investment property is sold, you stop making money from real estate.
Types of Real Estate #4: REITs
Speaking of types of real estate that don’t include property ownership, real estate investment trusts are an excellent choice. REITs are companies that pool money from investors to buy and manage large investment properties like hospitals and skyscrapers. As an investor, you’ll receive a passive income in the form of dividends. Therefore, investors don’t have to deal with the responsibilities of being a landlord like dealing with tenants, managing rental properties, conducting real estate market analysis and a rental property analysis, etc.
Compared to other types of real estate, REITs are great for beginner property investors as it gives them the ability to learn about real estate investing and the housing market when they have little knowledge. In addition, a real estate investment trust typically invests in numerous properties, meaning a real estate investor will have a diverse investment portfolio and be able to make lots of money in the medium to long-term.
Which Type Is The Right One for You?
There are other types of real estate. However, the above are the most common among property investors. A question that you might be asking right now is which of these types is the best for me. There is no straightforward answer to this question – it all depends on certain factors like:
- Real Estate Market: Some locations have a high demand for certain types of real estate over others. For example, in a location with a growing population, the demand for rental properties is higher than, say fix-and-flips. Savvy property investors study their real estate market to identify which types of real estate make the most profits.
- Type of Investment Property: As mentioned, almost every type of investment property works as a rental. However, your rental strategy has to be taken into account. Multi-family homes, for example, are great as traditional rentals. Cheap foreclosed homes, on the other hand, are best to fix-and-flip.
- Financial Standing and Personal Goals: Not all beginner property investors are lucky to have bags of money to invest. You might want to own a rental property, but you can’t afford to buy one or you didn’t get approved for a mortgage. This means you have to consider other types of real estate like wholesaling or REITs. In addition, you might not be interested in being a landlord in the first place!
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Real estate investing comes in different types, each with its pros and cons which you need to consider before determining which type will bring you the most profits and return on investment. For more information on anything real estate related, make sure to keep reading our blog which includes up-to-date information, step-by-step guides, and tips for actual and future property investors.
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