Types of real estate investments: a roundup

By Nat Kunes January 3 2020 5 min read
types of real estate investments

Real estate investing can be an ideal way to diversify and grow your wealth. It involves purchasing, managing, renting, owning, or selling various forms of real estate for a profit. It is not as liquid as other forms of investing and can require substantial capital, but can be highly profitable if it’s done using the right strategies. After mapping out your initial strategy and setting your goals, you will need to determine which type of real estate asset class best suits your investment. Here are a few of the types of real estate investments available now:

Residential Properties

Investors first starting in the world of real estate investment most often consider residential real estate assets for their first investments. There are a number of properties that fall under the category of residential assets including multifamily properties, single-family homes, affordable housing for lower-income families, senior properties, and student housing. A property is distinguishable as a residential property if it’s used as a place of residence for one or more individuals.

There are many reasons that investors choose to invest in residential properties, including:

  • Passive Loss Limitation:
    When you are in a higher income tax bracket, these losses can carry forward for an indefinite period of time. It will reduce your taxable rental income in subsequent years and then will be able to reduce your gain or increase your loss when it comes time to unload the property.
  • Tax Deductions:
    If you are mortgaging your investment properties, the interest you will pay can be used as an itemized deduction on your tax return. Even if you choose to refinance a mortgage to pull equity out of the property, any interest paid from either the original mortgage or the refinance will be able to be written off, so that your tax liability can be reduced. Another deduction you may be able to take advantage of is depreciation deductions, which may allow you to write-off the original costs and property improvement costs.
  • Increased Borrowing Power:
    Once you have gained some equity in your residential property, you will be able to leverage that equity into the purchase of other real estate properties.

Commercial Properties

Investing in commercial properties is another way real estate investors may choose to grow their wealth and diversify their portfolio. Commercial property is defined as any property that is used for the purposes of business or commerce. This can include office buildings that lease space, industrial buildings, warehouses, retail centers and properties, hotels, and mixed-use properties, which may include both residential and commercial assets in one property space. Commercial property can either be a free-standing structure, or one that is contained in a large building such as a retail center.

Choosing to invest in commercial real estate assets can come with many benefits to the investor as well, such as:

  • Potential for High Income:
    Commercial properties are designed to hold multiple businesses, which means you are likely to experience a higher return rate than you would with residential properties. Depending on the property size and the number of tenants, you can expect an average return range of between 5% and 15%.
  • Potential for Higher Levels of Equity:
    Not only are you likely to make more by having multiple tenants, but you are also likely to have higher levels of equity in commercial buildings. This means you will have a greater amount to leverage towards the future purchase of other properties.
  • Greater Stability:
    There’s less of a risk of income loss with commercial properties due to the fact that even when you have vacancies, you will be receiving rent or lease payments from other tenants. With residential properties, a loss of a tenant typically means a heavy income loss until a new tenant can be found. Additionally, commercial properties can provide better security as the market for them tends to remain fairly stable, as long as the location is good and improvements are made.

Alternative Properties

While the most common types of properties are residential and commercial assets, there are other property types that can help to increase a real estate investor’s portfolio, with the most common one being land. Land assets typically involve vacant land, ranches, and working farms. The land can be developed or undeveloped, and what you choose will largely depend on your plans for the investments.

Another type of alternative property is industrial real estate. These types of properties can include mines, oil and gas fields, working farms, rail lines, harbors, business parks, and factories. Since some of these types of properties can fall under the category of commercial properties, it is crucial to properly research what they would be classified as, since this can affect not only sales, but also issues with zoning and construction.

Less common types of real estate assets that can prove to provide significant returns are investments in infrastructures, such as electronics, sewage, and water systems, along with debt investments, which involve investing in mortgages or issuing loans on various types of real estate assets.

Depending on the specific type of asset chosen, investing in alternative properties can provide various benefits to investors. Most options will provide investors with a stable rent or income payment, and a chance to develop or improve a property for a return on the initial purchase price. These assets differ from most residential and commercial assets, as they don’t always require as much hands-on management and additional effort to find and retain tenants.

How Technology Can Assist with Your Real Estate Investment

If you are looking to begin your real estate investment journey, or are contemplating finding assets to add to your portfolio, innovative software can help. Here are some ways AppFolio Investment Manager can assist in your real estate investment:

  • Streamlines fund management and syndication
  • Eliminates repetitive, manual tasks and saves time, so you can focus on being more productive and accelerating the growth of your investments
  • Automatically tracks distributions and makes all information available to investors
  • Mobile capabilities let you quickly access your data and investment information 24/7, wherever you are
  • Helps you organize all of your assets in one central, secure hub to mitigate risk