There is a myriad of different types of real estate investments a person might consider for his or her portfolio.
It’s easier to think in terms of the major categories into which real estate investments fall based on the unique benefits and drawbacks, economic characteristics and rent cycles, customary lease terms, and brokerage practices of the property type. Real estate properties are ordinarily categorized into one of the following groups:
Residential real estate investing – These are properties that involve investing in real estate tied to houses or apartments in which individuals or families live. Sometimes, real estate investments of this type have a service business component, such as assisted living facilities for seniors or full-service buildings for tenants who want a luxury experience. Leases usually run for 12 months, give or take six months on either side, leading to a much more rapid adjustment to market conditions than certain other types of real estate investments.
Commercial real estate investing – Commercial real estate investments largely consist of office buildings. These leases can be locked in for many years, resulting in a double-edged sword. When a commercial real estate investment is fully leased with long-term tenants who agreed to richly priced lease rates, the cash flow continues even if the lease rates on comparable properties fall (provided the tenant doesn’t go bankrupt). On the other hand, the opposite is true – you could find yourself earning significantly below-market lease rates on an office building because you signed long-term leases before lease rates increased.
Industrial real estate investing – Properties that fall under the industrial real estate umbrella can include warehouses and distribution centers, storage units, manufacturing facilities, and assembly plants.
Retail real estate investing – Some investors want to own properties such as shopping centers, strip malls, or traditional malls. Tenants can include retail shops, hair salons, restaurants, and similar enterprises. In some cases, rental rates include a percentage of a store’s retail sales to create an incentive for the landlord to do as much as he, she, or it can to make the retail property attractive to shoppers.
Mixed-use real estate investing – This is a catch-all category for when an investor develops or acquires a property that includes multiple types of the aforementioned real estate investments. For example, you might build a multi-story building that has retail and restaurants on the ground floor, office space on the next few floors, and residential apartments on the remaining floors.
You can also get involved on the lending side of real estate investing by:
Owning a bank that underwrites mortgages and commercial real estate loans. This can include public ownership of stocks. When an institutional or individual investor is analyzing a bank stocks, it pays to pay attention to the real estate exposure of the bank loans.
Underwriting private mortgages for individuals, often at higher interest rates to compensate you for the additional risk, perhaps including a lease-to-own credit provision.
Investing in mezzanine securities, which allows you to lend money to a real estate project that you can then convert into equity ownership if it isn’t repaid. These are sometimes used in the development of hotel franchises.
There are sub-specialties of real estate investing including:
Leasing a space so you have little capital tied up in it, improving it, then sub-leasing that same space to others for much higher rates, creating incredible returns on capital. An example is a well-run flexible office business in a major city where smaller or mobile workers can buy office time or rent specific offices.
Acquiring tax-lien certificates. These are an esoteric area of real estate investing and not appropriate for hands-off or inexperienced investors but which — under the right circumstances, at the right time, and with the right sort of person — generate high returns to compensate for the headaches and risks involved.