The Pros and Cons of Different Types of Real Estate Investments

Investing in real estate is probably the second most popular thing people tend to invest in, after stocks. Unlike cars, houses and other property types tend to increase in value as the years go on. Even raw land has the ability to appreciate in value, and seasoned investors know how valuable investing in real estate is.

Even if you’re not a seasoned investor, you probably still know that investing is a great way to secure your future, and having a diversified portfolio reduces your risk of losing a lot of money. Here are four popular types of real estate investments, and the advantages and disadvantages of each.

REITs

Real Estate Investment Trusts (or REITs) are companies that own restaurants, hotels, businesses, and other types of commercial real estate. REITs have stocks that you can invest in that are less risky than owning a commercial property yourself. This is a good option if you’re just starting out in the real estate market.

Pros of REITs

Other than being associated with less of a risk, REITs are good for anyone looking to diversify their investment portfolio. Because they are like stocks, you can buy and sell REITs at your leisure, unlike actual real estate, which can take some time. REITs are also a good way to invest in commercial real estate, being that hotels and shopping malls are very expensive to purchase upfront.

Cons of REITs

One of the downsides to REITs is that they tend to be subject to rising interest rates and work better as long-term investments instead of short-term ones. Another drawback is that although REITs diversify your investment portfolio, they are not diverse themselves. They tend to only be associated with commercial real estate, and you can greatly benefit from other types of real estate as well.

Raw Land

This includes an unoccupied or underdeveloped area. Raw land can be used for constructing a home(s), a business(es), farms, or it can sit idle, appreciating in value. Areas projected for increased growth are the best places to invest in land.

Pros of Investing in Land

When investing in raw land, you have the opportunity to develop a property from start to finish. Once you’ve determined the best use of the property, you can turn it into whatever will bring you the most profit. There’s also less maintenance that goes into caring for land, compared to other types of properties. This gives you more peace of mind if you’re purchasing properties outside of your city or state.

Cons of Investing in Land

When investing in land, there’s no way to make immediate cash. Even if you plan on building on the land, this costs more money than what’s coming in. You also have to keep in mind that when building, approval and permits are required, which can end up costing you more money.

Residential Properties

Residential properties are considered to be either single-family homes (including vacation rental properties) or multi-family homes (duplexes, quadruplexes, apartment complexes). This is a common type of real estate investment, as investors are more likely to see consistency in their return on investment.

Pros of Investing in Residential Properties

One of the easiest ways to profit from residential properties is to rent out your own property. Vacation rental websites allow you to rent out your home, over even just a room in your home to travelers in need of a dwelling. A downfall of single-family homes is that they can stay vacant for a while. Luckily, you can eliminate this problem with multi-family homes.

Cons of Investing in Residential Properties

Single-family rental properties come with strict rules in certain areas. Many places don’t allow short-term rentals, so you have to be knowledgeable of the rules and regulations of the city your rental is in. Also, it can be hard to keep up with a rental property— especially if it isn’t near you.

Commercial Properties

Examples of commercial properties include businesses, retail, hospitality (restaurants and hotels), and industrial buildings. They are usually purchased by businesses but can be purchased by individuals with the means to do so.

Pros of Investing in Commercial Properties

Investing in commercial properties gives you the opportunity to earn multiple streams of income. There’s more than one tenant in an office building or shopping mall, compared to a single-family residential property. The leases are also longer for tenants of commercial buildings as opposed to multi-family residential buildings.

Potential Cons of Investing in Commercial Properties

An important aspect to note about acquiring commercial property is that it costs more money upfront. Luckily, there are reasonable loan options available for commercial property investment.

There are costs and benefits of investing in any type of real estate property. The key to being successful in any type is to understand the risks and learn the market of the areas you’re looking to invest in.