What are the Best Types of Real Estate Investments?

There are many different real estate investments other than just buying and selling. Some have lower requirements, so it’s easier for beginners to manage, but some are more advanced and require more experience or funds. New investors ask me all the time: what are the different types of real estate investment? Which one should I choose to get started?

The best types of real estate investment for beginners typically involve buying and selling single-family residences since they require the least amount of capital.

So let’s talk about the different types of real estate investments you can make and which I feel are the best for new investors like you. 

RESIDENTIAL: SINGLE-FAMILY HOMES

When new investors think about diving into real estate, they typically look at single-family homes first.

As the name suggests, this category includes residential properties designed to house one family (as opposed to multi-family properties, which I’ll discuss below). Of this class, standalone, single-family houses make up the largest portion of properties. However, the single-family home category also technically includes townhomes and single condos (not entire condo buildings).

For new real estate investors, this category makes the most sense for three main reasons:

  • Cost: Single-family homes typically cost far less than multifamily ones and commercial properties, meaning that new investors with limited capital can still purchase a single-family rental property.

  • Familiarity: Whether you own a rental property or not, you’ve likely lived in a single-family home at some point in your life. You inherently understand the tenant and general compliance considerations associated with this sort of investment property. On the other hand, understanding the tenant needs of a business occupying office space requires far more research and experience.

  • Availability: The market includes far more single-family homes than other types of investment properties. This availability makes it far easier for new investors to find an investment property at your specific A) price point, B) desired condition and C) location.

Additionally, from a financing perspective, new real estate investors often find the residential mortgage process far easier to understand than the intricacies of commercial lending—typically because they’ve been through this process with their primary residences.

For investors, common investment strategies with single-family homes include:

  • Fix & flip: Buy, rehab, and sell (at a profit) a home in need of repairs.

  • BRRRR: Buy, rehab, rent, refinance, and repeat – this process aligns well with investors seeking a “buy-and-hold” approach to real estate investing.

  • Wholesaling: With this strategy, investors contract a home with a seller but don’t purchase the property. Instead, after going under contract, they find a third-party buyer and assign the contract, receiving a fee. This strategy typically involves distressed properties in need of repair.

Regardless of which approach you take, new (and experienced) investors need to conduct thorough due diligence in evaluating an investment property before purchasing.

RESIDENTIAL: “PLEXES”

“Plexes” include multifamily properties that fall under the residential real estate umbrella. 

They include the following:

  • Duplex: Two-unit property.
  • Triplex: Three-unit property.
  • Quadplex: Four-unit property.

Once multifamily properties reach five or more units, they qualify as “commercial multifamily,” which I’ll discuss in the next section.

After acquiring a portfolio of single-family properties, many investors decide to test the multifamily waters and purchase a plex. While this makes sense in some situations, investors should consider the following pros and cons associated with this property type before committing.

Pros

  • Vacancy hedge: In a single-family home, you lose 100% of your rental income if you lose a tenant. If one tenant moves out with two- to four-unit properties, you’ll still take a big hit to your bottom line, but the remaining tenants will partially offset the vacancy. In other words, you’ll still have some monthly rent payments coming in to pay your operating expenses.

  • Streamlined financing: If you want to buy four single-family homes, you need to apply for and close on four separate loans, which can be an administrative nightmare. Conversely, if you buy a quadplex, you only need to apply for and complete a single loan, significantly easing your administrative burden (though the qualification standards will likely be higher for a loan on a quadplex).

Cons

  • Availability: If plexes are so great, why doesn’t every real estate investor just buy a quadplex and call it a day? Unfortunately, fewer plexes exist in most markets than single-family homes, meaning that investors will face significant competition from other investors when one comes up for sale.

  • Cost: While affordable plexes certainly exist, most properties cost significantly more than single-family homes, posing a significant obstacle to new investors with limited capital.  Additionally, due to stricter lending standards, conventional mortgages for these properties often require a 25% or 30% down payment (opposed to the standard 20% down for a single-family home

COMMERCIAL VS. RESIDENTIAL INVESTMENT OVERVIEW

As stated above, once plexes surpass four units, they become multifamily commercial properties. While these properties include essentially the same tenants, commercial properties use different financing options.

With residential properties, investors generally use personal mortgages borrowed in your name, not that of a business. These loan products include the familiar 15- to 30-year mortgages. You’ll need to qualify with your own credit, income, assets, and debt-to-income ratios.

With commercial lending, businesses apply for loans (in the case of real estate, investors typically organize properties as LLCs or limited partnerships). This means that the assets of the business, the property’s pro forma financial statements, and the investment track record of the borrower drive approval for commercial mortgages (though new commercial investors will often need to guarantee these loans personally).

Additionally, the actual loan products differ. Whereas personal mortgages align loan term (length of the loan) and amortization (the period that payments reduce a loan’s principal), most commercial mortgages do not. Instead, commercial mortgages tend to have shorter loan terms (e.g., ten years) and extended amortization periods (e.g., 20 years).  This means that your monthly payments are made as if you would pay off the loan in 20 years, but you’ll owe a one-time balloon payment at the end of the 10-year term.

This structure limits the interest-rate risk for lenders but increases this risk for borrowers. If mortgage rates rise by several (or more) percentage points over a ten-year term, commercial borrowers need to refinance into a far worse rate environment.

MULTIFAMILY INVESTMENT

Multifamily aptly describes this property type—properties that house multiple families. For experienced residential property investors, these properties often represent a great bridge into the commercial real estate world, as you’ll be dealing with the same type of tenants as residential real estate.

Furthermore, multifamily properties continue the vacancy-hedge advantage discussed above with plexes. If you lose one tenant in a duplex, you’ve lost half your rental income—a significant hit to your cash flow. If you lose one tenant in a 100-unit apartment building, you’ve only lost 1/100 of your rental income, a far easier vacancy loss to absorb.

Additionally, multifamily properties provide investors with economies of scale advantages. You likely won’t receive a vendor discount if you need to buy one or two water heaters for a single-family home or duplex. But, if you need to buy 100 water heaters for an apartment building, you can use that volume as leverage to command per-unit discounts with most vendors.

Large apartment buildings also often have enough cash flow to justify on-site maintenance and management. In addition to increasing tenant satisfaction—and therefore limiting turnover and vacancy—this on-site support drastically reduces the time investors need to pour into a property, freeing them to pursue other deals.

Major types of multifamily properties include:

  • Garden apartments
  • Mid- and high-rise apartments
  • Student housing
  • Senior/assisted-living facilities

OFFICES INVESTMENT

The next major type of real estate investment includes office buildings, that is, structures that house business offices. Like multifamily properties, this type of real estate generally offers a vacancy hedge. Most office buildings include multiple units, meaning that if one business leaves, the other office tenants help offset the vacancy hit.

Investors sub-categorize offices based on their age, quality, and location. Class A offices tend to be the newest, highest-quality, and best located; Class B includes mid-range properties, and Class C consists of the oldest properties needing the most repairs in the least-desirable locations.

Major office types include:

  • Central business district properties
  • Houses zoned for commercial use
  • Suburban office buildings

INDUSTRIAL PROPERTY INVESTMENT

The absolute variety of industrial buildings makes this property type unique. With residential, multifamily, and offices, investors get pretty standard tenants. Industrial space has a far wider tenant type and actual space use, with each tenant needing a fairly unique property build-out.

However, the unique nature of each of these properties can also make industrial real estate a compelling investment option. Once an industrial tenant moves into a property, they do enough work that they’re unlikely to want to leave quickly. This reality creates a long-term, stable tenant base.

For new investors, though, the complexities of industrial properties and leases—to say nothing of the massive costs associated with purchasing or developing these properties—can make this investment unrealistic.

The major categories of commercial properties include:

  • Bulk warehouses
  • Commercial flex space (part office and part industrial)
  • Heavy manufacturing plants
  • Light assembly facilities
  • Refrigeration and cold storage
  • Commercial showrooms (part office, warehouse, and retail)
  • Self-storage facilities

MEDICAL PROPERTY INVESTMENT

Medical properties comprise the next major type of real estate investment. This includes all property types built around the needs of the medical profession, from your local clinic to full-scale hospitals.

Similar to industrial spaces, the stability provided by medical properties makes them extremely valuable to investors. Regardless of economic conditions, people always need medical care. And, once a medical tenant occupies a space, they don’t have much incentive to leave, which leads to long-term leases (10+ years).

Furthermore, medical properties require extremely industry-specific build-outs. For example, hospitals and doctor’s offices frequently require lead-lined walls, increased plumbing capacity, and wider elevators to support patient movement. These characteristics further disincentivize medical tenants from moving once established—a plus for investors.

Major categories of medical property include:

  • Neighborhood doctor and dentist offices
  • Out- and in-patient surgery centers
  • Urgent care facilities
  • Major hospitals

RETAIL PROPERTY INVESTMENT

Retail properties include all spaces designed for tenants who sell goods or services directly to consumers. Think of your local Verizon store, a neighborhood restaurant, or a coffee shop; the properties these businesses occupy all qualify as retail real estate.

Due to the consumer-centric nature of retail, these properties need to be located in places that maximize consumer convenience. It wouldn’t make much sense to have a fast-food restaurant out in the middle of the desert, away from any major roads, right?  Consequently, these properties tend to be pretty expensive, as a premium exists on this prime location (though retail spaces certainly exist in less desirable markets).

Investors need to consider the long-term trends associated with the underlying tenant businesses in analyzing potential investment opportunities. For investors, the future of retail real estate needs to be measured against the growth in e-commerce. Whereas product-related retail has suffered from the growth of e-commerce, service-related retail (e.g., hair salons and nail parlors) has tended to thrive.

A wide variety of retail property types exist, with the major ones including:

  • Community retail
  • Outparcel or stand-alone buildings
  • Power center (anchored by a major regional retailer like Wal-Mart or Bass Pro)
  • Regional malls
  • Strip malls
  • Neighborhood retail/shopping centers

HOSPITALITY INVESTMENT

Hospitality represents the last type of commercial real estate. These properties serve the needs of travelers, both for business and pleasure purposes

For investors, hospitality properties tend to closely mirror the current economic cycle, for better or worse. Business and pleasure travelers tend to travel more frequently when the economy performs well. On the other hand, in economic downturns, both of these types of travelers tend to “tighten the belt” and scale back travel, which can hurt the operating performance of hospitality real estate.

Major hospitality real estate categories include:

  • Budget / low-cost hotels and motels
  • Extended-stay hotels
  • Full-service hotels
  • Limited-service hotels

LAND INVESTMENT

I’ve included land last because it can lean more towards the residential or commercial category depending on investor intention. But, land truly represents its own class of real estate.

In general, three types of land investment exist:

  • Development: With this strategy, experienced property developers purchase land to build a property on that land, either to retain it as an income-producing property or sell it for a profit.  This type of investing requires significant experience and capital, which entails a large amount of risk.  For these reasons, I highly advise against trying this for new investors.

  • Speculation: Speculation proves a more straightforward process than developing, but it’s not without risk. Investors try to purchase a discounted parcel of land on the outskirts of a developed area, hoping the land will be in the path of development. If development doesn’t approach the land, investors may be stuck with a parcel with limited appreciation potential.

  • Land flipping: Flipping land generally parallels the theory behind flipping houses; it entails far less work, as investors don’t need to rehab land.  These flippers find a parcel of land, make an offer well below tax-assessed value to find a motivated seller, and, if accepted, resell the land for closer to market value – and a profit.

I personally believe investing in single-family homes provides far greater returns than investing in land. Still, investors can certainly pursue this strategy on the side—and land flipping tends to require far less initial capital.

FINAL THOUGHTS

What’s the best type of real estate investment for new investors? I believe that investing in single-family homes represents the best option for new real estate investors. These properties require less cash than some other property types, and plenty of them exist on the market.

Furthermore, new investors tend to be more familiar with single-family homes, making the initial investing learning curve far more reasonable. Conversely, commercial properties tend to include more complexity while requiring significantly larger initial investments.

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