Investing in real estate is an excellent way to generate an additional stream of income. However, there are many ways to invest in real estate, some of which require more work than others. The best investment for you will depend on your chosen market, your risk tolerance, and the amount you have available to invest. Below, we will discuss ten types of real estate investments listed in no particular order, each of which comes with its distinctive advantages and disadvantages.
- Rental Houses
Advantages: Investing in rental houses is one of the easiest ways to become a real estate investor. Additionally, suppose you intend to hold the property long-term (i.e., anything over 5 years). In that case, property values tend to appreciate over time, and you stand to recoup a substantial long-term return on your investment.
Disadvantages: Owning rental houses is not fun and comes with handling emergency tenant and building issues in the middle of the night. Moreover, you typically have to wait at least ten years before seeing a decent return on your investment. However, having a reliable team can help minimize and possibly eliminate this stressor.
2. Rent-to-own Houses
Advantages: When you purchase the property and subsequently sell on a rent-to-own basis, you can enjoy higher rent and monthly cash flow. Additionally, buyers/renters are typically responsible for all maintenance costs of the property.
Disadvantages: The bookkeeping for a rent-to-own house can be complicated. Moreover, most rent-to-own tenants don’t complete the transaction, which means more work for you. However, this could also be an advantage, as the tenant has essentially paid you higher rent and wasted their money on the transaction.
3. Low-income Rentals
Advantages: Typically, low-income rentals generate higher monthly cash flow. While you are increasing your passive income, you will also be doing your community a service by provided affordable housing options for those in need. There are also substantial tax benefits for this type of real estate investment.
Disadvantages: In general, these rentals have the same drawbacks as other rentals, but they also require more repairs and tenant issues, which is a headache for most landlords and property managers.
4. Flipping Properties
Advantages: Investing in fixer-uppers can be fun and generate a quick return on your money. Properties in need of substantial repairs are usually seen as less desirable and often are offered at a discounted rate to compensate for their condition. Fixer-uppers provided a considerable opportunity to turn sweat equity into cash if you have an eye for a property’s potential.
Disadvantages: These types of investments are higher risk, and the return can be unpredictable. Additionally, investors are taxed heavily on any capital gain they generate when they sell the property.
5. Purchase Land, Divide it and Sell it
Advantages: Depending on the situation and the local market conditions, you can often increase the total value of a parcel of land by subdividing it into smaller pieces –lots – that are then sold to one or more buyers. This is a relatively easy way to invest in real estate, with the possibility of earning substantial profits.
Disadvantages: Generating a return can take a while, and you won’t have any cash flow while you wait, despite the fact you will have property expenses and maintenance costs.
6. Purchase Property for Cash and Sell it for Terms
Advantages: Assuming that you can get a fair price, you can generate a high return rate if you pay for the property in cash. By selling the property on easy terms, you can enjoy the benefits of a higher sales price and high-interest rates.
Disadvantages: Your capital is tied up for a long time compared with other types of investments.
7. Invest in Boarding Houses
Advantages: You can generate higher cash flow by renting a house by the room, especially in larger college towns.
Disadvantages: Renting a house, by the room can be a headache and can require a lot of work and management, this is especially true if you are renting in a college town.
8. Invest in Commercial Real Estate
Advantages: In general, investing in commercial real estate is relatively low maintenance. Notably, if you can secure long-term, triple-net leases, you can enjoy high returns with little management.
Disadvantages: Becoming a commercial real estate investor is a more challenging industry to break into. Additionally, with commercial real estate, you run the risk of units being vacant for months and sometimes years at a time until the perfect tenant can be secured.
9. Purchase Property, Live in it, and Sell it for a Profit
Advantages: The new tax law allows you to fix it up and sell for a big tax-free profit after two years and do it all over again. Expressly, you can exclude up to $250,000 in capital gain from taxes if you’re single; $500,000 if you’re married filing jointly.
Disadvantages: You have to be ready to move when the market is good, and you also have to be prepared to move a lot.
10. Speculation. Buying and holding the property until the prices are High
Advantages: Buying property in growing markets and holding it until the property values appreciate can generate large profits. This is especially true in you purchase cheaper properties.
Disadvantages: The market and prices are not predictable. As such, while you are waiting for the “right time,” you will still have property expenses that must be paid. Additionally, transaction costs can significantly eat into your profits.