Overview of Real Estate Investment Niches

Thursday Jul 18th, 2019

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Choosing Your Real Estate Investment Niche The following list includes the most common property types that real estate investors deal with. Each has many subsets as well, but remember, you don’t need to know about them all. This is merely a list to help you understand what options are available, from a 20,000 foot view.

Raw Land: Raw land is nothing more than basic earth. Land, on its own, may be improved (adding value), and it may be leased or rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose to buy raw land with hopes (or plans) to someday sell it to be used in external developments like the construction of a freeway or a housing development.

Single Family Houses Perhaps the most common investment for most first-time investors is the single family home. Single family homes are relatively easy to rent, sell, and finance. That said, in certain areas, the rents derived from single family rentals (SFRs) won’t be enough to provide positive cash flow.

Multifamily Houses: Duplexes, Triplexes, and Quads Small multifamily properties (2–6 units) combine the financing and easy-purchasing benefits of a single family home. Bought properly, these can produce a good amount of cash flow, and there is often less competition than you’d run across bidding on single family homes. Best of all, these properties can serve both as a solid investment and a personal residence for the smart investor. By buying a small multifamily property, you’ll be taking advantage of the economies of scale, because only one loan is needed to secure multiple units. One of the things that makes these investments so appealing is that most banks evaluate small multifamily properties (less than five units) with the same guidelines as a single family house, which can make it easier to qualify for the loan.

 

Small Apartments: Small apartment buildings are generally made up of between 6 and 50 units, although the line between small and large apartments is not set in stone. Properties with more than 50 units can be more difficult to finance than single family homes or those with two to four units, because they rely on commercial lending standards rather than residential ones. However, these properties often provide significant cash flow for an investor who can deal with the more management-intense nature of these properties. Additionally, there is generally less competition for this property type, because they are too small for big professional Real Estate Investment Trusts (REITs) to invest in (more on this below), but too large for most novice real estate investors. Instead of being priced based on comparable properties (often referred to as “comps”), the value of these properties is evaluated based on the income they bring in. This creates an enormous opportunity to add value by increasing rent, decreasing expenses, and managing the property effectively. These properties are a great place to utilize on-site managers who manage and perform maintenance in exchange for free or decreased rent.

 

Large Apartments This class of property refers to the large complexes across the country that often have pools, work-out rooms, full-time staff, and high advertising budgets. These properties can cost millions, but they can also produce stable returns with minimal personal involvement. Many large apartments are owned by syndications—small groups of investors who pool their resources.

 

Real Estate Investment Trusts In the most simplistic definition, an REIT is to a real estate property as a mutual fund is to a stock. A large number of individuals pool their funds together, forming an REIT. This alliance makes it possible for the REIT to purchase large real estate investments, such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of single family homes. The REIT then distributes profits to its individual investors. You can buy shares in an REIT via your stock account, and they often have a relatively high dividend payment. This is one of the most handsoff approaches to investing in the real estate business, but you should not expect the returns to be as great as those produced by hands-on investing.

Commercial: Commercial investments can vary dramatically in size, style, and purpose, but ultimately will involve a property that is leased to a business. Some commercial investors rent buildings to small, local businesses, while others rent large spaces to supermarkets or big-box megastores. While commercial properties often provide good cash flow by way of consistent payments, they also may carry much longer holding periods during times of vacancies; commercial properties can often sit empty for many months or years. Unless you are starting from a very solid financial position, investing in commercial real estate is not recommended for beginners.


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