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Types of Real Estate Investing


Summary

  • Adding real estate as an asset class in your portfolio adds diversity and reduces risk
  • There are four main types of real estate investing strategies- residential, commercial, raw land, REITs

Well-chosen and maintained real estate appreciates over time, making it a tried and true way to earn income and build wealth, if done correctly. The graph below illustrates the monthly house price in the U.S. from 1991- 2020. After taking a dip after the 2008 housing crash, prices have picked up steadily. 

When it comes to real estate investing there are different ways to approach it, with pros and cons to each strategy. 

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – Franklin D. Roosevelt

Residential Real Estate

Residential real estate is one of the most  popular and common types of real estate investing. Residential properties can range from a condo to a single-family home to a multi-unit property and the rental income collected monthly can accelerate your wealth by providing a steady “cash flow”. 

What is Cash Flow?

Cash flow was popularized by “Rich Dad Poor Dad”, a 1997 book written by Robert Kiyosaki and Sharon Lechter. Once a property is set up and bills are paid, cash flow is the cream on the top – providing you with an income that is mostly passive.  

Pros Cons
  • Less amount of capital needed vs commercial property 
  • Maintenance and repair fees/
  • Cash flow income from rental income
  • HOA fees 
  • Potential to build passive income streams
  • Money is tied up in equity
  • Potential for long-term appreciation / the longer you hold the property the more it may appreciate
  • Increased liability for accidents that may occur on your property
  • Borrowing power from the equity built
  • Getting stuck with a “professional renter” who knows how to work the legal system at your expense
  • Diversified asset / not correlated to market
  • Property vacancies
  • Most likely will have to be a landlord as well as an investor

Commercial Real Estate

Commercial real estate includes hotels, office buildings, warehouses, and retail stores. These are typically larger than the residential real estate transactions and where business is conducted. When multi-family complexes exceed a certain amount of units they will be classified as commercial real estate. 

Pros Cons
  • Higher rent is charged in a larger building – leading to more monthly income
  • More building = more risk of repairs needed 
  • Multiple units being charged monthly – leading to higher cash flow
  • Larger down payments
  • Shorter leases 
  • Property management and hiring on professional help

Raw Land Investing

This would be going in and buying raw land that is undeveloped. There are a number of exit strategies when it comes to raw land and one of them could be selling it one day or have an investor/ business owner build a new office space.   

There are different categories of raw land, including:

  • Commercial and residential
  • Row crop and livestock
  • Small farmland investing

In similar fashion, there are different ways to invest in land, including:

  • Flipping land
  • Developing land
  • Buy and hold
  • Buy and lease
  • Buy and sell with owner financing
Pros Cons
  • Easy to acquire
  • Difficult to finance, raw land is much harder to get a loan for than a formal piece of real estate
  • Full ownership of the land
  • Not as many tax advantages- with mortgages comes tax help but with the land, you don’t get the same luxury
  • Property taxes and fees are lower as well
  • Cash flow is not immediate- you can get rental income the moment a tenant moves in but with the land, it sits there with no monthly cash flow
  • Cash is typically needed to purchase instead of financing outright
  • Investor needs to do a lot of research and planning
  • Affordable when comparing raw land to developed land
  • Reduces the front the costly repairs that could occur in commercial or residential investing
  • Little to no competition
  • Less maintenance – there are not any tenants on the land so it’s much easier to handle and manage 

Real Estate Investment Trust (REIT)

A real estate investment trust (REIT) is when a group of investors come together to buy a property. The trust is responsible for buying, selling, and operating income-producing real estate. REITs are exchanged on stock markets and can be bought and sold just like stocks and ETFs. REITs are generally commercial buildings with a focus on healthcare facilities, malls, and office buildings. 

Pros Cons
  • Widely diversified with so many different properties to choose from
  • Longer wait to access funds – long term investment vehicle- tied up funds
  • Traded easily on stock exchanges
  • Risk associated with different property types
  • Not having to use a ton of upfront capital to gain the benefits of owning 
  • Dividends are taxed at regular income tax rate
  • No tenants or issues with maintenance 
  • Can be purchased with the click of a mouse
  • Steady source of dividend income
  • Potential to outperform markets

There are so many types of ways to get into real estate and every single one has its pros and cons. Real estate should be an investment strategy every savvy investor utilizes. 

Types of real Estate Investing

Quick Quiz

Review and answer these two questions to move on to the next section in the course.

What is a REIT?

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What is cash flow?

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