The real estate industry is a big and diverse industry. There’s a lot of knowledge to be acquired before investing, and it can be overwhelming. It can become a lot less overwhelming when you’re familiar with two things: the different types of properties you can invest in and the different types of lenders you’re able to borrow money from.
Types of Properties to Invest In
Residential properties are exactly what they sound like— properties where people live. This includes single-family homes, vacation rental properties, and multi-family homes, such as duplexes and quadruplexes. Apartment complexes aren’t typically considered to be “residential”, even though many people live in them because residential properties are defined as five or fewer residential units.
Residential properties are a very common investment in the real estate industry, since they cost much less than other types of properties, but also yield higher returns. Many investors also tend to invest in more than one residential property.
Commercial properties are properties where business is being conducted. This includes office buildings, industrial buildings, shopping centers, and even hotels. Apartment complexes are sometimes considered to be commercial properties because business is conducted in the complex. However, apartment complexes can also be classified as a mixed-use properties.
Commercial properties are a bit more expensive than residential properties when it comes to investing. But, they do tend to see the highest returns, due to the fact that there are more tenants to collect money from, and you have the chance to rent spaces to professionals who don’t plan on losing their space. The vacancy rates are also lower than with residential properties.
With both residential and commercial properties, in order to manage both successfully, you’re going to either have to act as the property manager yourself or hire a property management company. The latter will be very beneficial and less time-consuming.
Real Estate Investment Trusts (REITs) are a very popular way of investing in real estate, and they really diversify your real estate investment portfolio. Similar to mutual funds, REITs are companies that own properties (usually commercial properties), allowing individual investors to earn dividends from these investments. Through this investment method, the investor does not have to deal with tenants, maintenance, or worry about financing the property. Investing in REITs is pretty simple to do, and there are many different types of REITs you can invest in.
Also known as “raw land”, this refers to either vacant land, undeveloped property, farms, ranches, or the like. When you invest inland, you can decide to build on it, or just hold it as it appreciates in value. The land also diversifies your real estate investment portfolio, and the key to finding the most profitable piece of land is in an area that has a high projected growth rate.
Types of Lenders
Most people may not be able to afford to finance a real estate property on their own, so they’ll need to look into working with a lender.
Mortgage Bankers and Brokers
Mortgage bankers and brokers are able to get access to several different loan programs. They can shop around for the best prices and find loans that best suit the needs of the borrower, but many of them charge several fees.
Private lenders operate independently from a bank and government agency. This means that they are able to offer loan terms that more closely match the needs of the borrower. Not all private lenders are actually private companies.
Secondary Market Lenders
This is a market in which loans and servicing rights are bought and sold between a number of different lenders and investors. It’s not exactly a go-to choice for investors, especially those just starting out but it is an available option to consider.
This is just the tip of the iceberg when it comes to the real estate industry. Other things you should know when investing in real estate are: how to find the most profitable property, how to manage a property, and how to manage tenants.
There is much more to learn, but this just skims the surface, providing some information on some of the basic elements of real estate.