Investing in a property for rental or resale isn’t for everyone, but for those who are savvy about real estate (or, at least, willing to put in the time to become educated), know how to market a property effectively, can afford the financial investment, and have the means to maintain the property, the financial rewards may be great.
Why invest in real estate?
One of the most tried and true techniques, of course, when it comes to investing is the concept of diversification. By spreading financial resources across a range of investments, potential long-term financial risk is lowered. Real estate is often a strong component of a well-diversified investment portfolio. Property prices, too, tend to appreciate, generally speaking; a higher resale price or rental yield is an immediate gain for a real estate investor, whereas increased equity in the property will allow the owner to use that higher value to maybe purchase other investment properties or make improvements that will even further grow the property’s value. Finally, by purchasing an investment property, an investor is also purchasing a future, stable income stream; between 1997 and 2007, interestingly (go to https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp), almost 80% of total real estate returns was due to income flow (property rent) vs. capital value returns. Income return in the form of property rent has been and will likely continue to be a very stable and attractive investment option.
What types of property do investors typically purchase?
When most people start thinking about purchasing a property for rental or resale, they think of a house, a vacation home or a fixer-upper. However, there are actually a variety of investment property types that, depending on the investor, his/her finances, and the economy, are appealing in a variety of ways. Several of the more common types of investment property are listed below.
- A single-family investment property is a house or condo purchased specifically with the intent to rent it out to one sole renter, or to sell it. The goal, of course, is to purchase a property that is as undervalued or reasonably priced as possible with the greatest potential to either lease or sell.
The benefit of purchasing a single-family investment property over other types of investment properties is the fact that they are usually more affordable than other types of properties, and for first-time, more cautious investors in particular, this does make the choice seem just a bit safer. On the other hand, flipping a property – purchasing it, improving upon it, and re-selling – can be somewhat risky, especially when the buyer is not experienced in renovating a property or when the economy goes through downturns, making the home difficult to sell or rent out in the end. Finally, there are losses associated with a rental property that is left vacant for any period of time; even though no rent money is coming in, the mortgage, property management company, taxes, etc. on the property all still need to be paid.
- A second home or vacation home is a house, condo, cabin, chalet, etc. that is purchased with the intent of renting out to multiple individuals over a period of time or as using as a family vacation property that is sometimes rented out when the owners are not themselves using it.
The additional income from renting out a property when it might otherwise sit vacant is a very positive thing, although, on the contrary, if the property is purchased specifically with the intent of leasing it when not otherwise occupied by the owners, the challenge of finding renters when demand may not be high due to weather, the economy, or something else might be too great for some investors.
- A two- to four-unit house or building, or small multi-family investment property, is another common type of investment property for those starting out in the world of real estate investing. Since there is almost always a demand for housing, no matter what state the economy is in – all people need a place to live, after all! – vacancy issues for a property purchased in the right location and rented at a reasonable rate are unusual, as long as no more than one unit sits empty for any period of time. Despite the fact that building and property maintenance is a more major consideration with multiple units, and a higher than expected rate of turnover might have more a more serious impact on profits, the purchase of a small multi-family property is another very stable investment.
- A retail investment property, for more affluent, serious investors, is a property that is made up of one or more retail businesses – a restaurant, clothing store, theatre, and/or shoe store, for instance – in one location. Typically, tenants sign long leases, creating stability for the investor(s), but there is some risk in the fact that long-term success overall of the retail property is closely tied to the health of the economy.
Which type of investment property is right for you?
As with any sort of investment, real estate investing involves a certain amount of risk-taking and a great deal of consideration given to A) the affordability of the property; B) the investor’s budget; C) the ability of the investor to secure financing for the property, if need be; D) the location of the property; and E) the amount of effort the investor is willing to put into marketing the property and maintaining it for its tenants. Any purchasing decision, whether it is to buy a home or condo for rental or re-sale or a commercial retail property for long-term revenue, should be made only after consulting with a competent financial advisor and experienced real estate agent.
For a complete list of income-producing property types: https://www.thebalancesmb.com/types-of-investment-properties-2124869
For more information on the benefits of investing in real estate: