For many Americans, owning a home is a fundamental part of “living the American dream”. This holds true for a number of reasons – beyond just providing a place to call home. Home ownership creates distinct economic benefits as home owners begin to build equity from their home purchase. More and more, however, Americans are leveraging home ownership to create lucrative revenue streams, through the acquisition of investment properties intended to provide more than just the roof over their head. Real estate investing, when successful, can create opportunity for higher returns compared to other investment tools, and can actually be one of the quickest ways to become a millionaire. In fact, real estate investing has played a role in helping to create an estimated 90% of the world’s millionaires.
Mastering the market is no easy task, however, and there are a number of different approaches to generating the much desired passive income a solid real estate investment portfolio of properties can provide. Most new investors in real estate have the common desire to reach that goal, but what they don’t know is how many different types of real estate investments exist. From residential single family to multi-family to commercial – each type of real estate investment has its potential benefits, risks and specific nuances.
There are many questions one should ask when determining what is the best type of real estate investment that will help you reach your financial goals. Should you invest in a single family home or a multi-family duplex? Is the commercial world of real estate investing more aligned with your business goals? What does investing in office buildings or warehouses really entail compared with traditional single family home investments? Do you want to be a landlord and collect rent or do you have a knack for finding ‘fixer-upper’ properties, repairing them and reselling them quickly for profit? What are the real differences among all the various property types one can add to their real estate portfolio?
Thanks to television programs like “Fixer Upper”, the single family home is a highly popular and widely known point of entry for first time investors. Often times, it can be leveraged to enter the real estate investing market. By definition, a single family home is a stand alone property, not connected to another house, often found in residential areas. Easy to find and available at a number of different price points, single family homes present many opportunities to the investor. Commonly, investors will buy low, and purchase a single family home in need of rehabbing, and then either “flip” for a profit, or leverage as a rental property to create passive income. For those want a more simplified, slow and steady approach to developing their real estate assets, a single family home may be a logical first step.
For the more experienced investor, or someone who has a more aggressive strategy, and willing to take on more of a risk (with the potential for a larger pay off) multi-family housing may be the way to go. Multi-family homes have two, three or four units in one building (commonly referred to as duplexes, triplexes and quadplexes), essentially allowing multiple families to live on the same plot of land. Multi-family housing can generate multiple rent payers for a single real estate investor – each and every unit is a unique financial rental opportunity. This helps mitigate some of the risk associated with having an empty unit in between tenants – a challenge many face when investing in single family homes. In a duplex, if one unit is vacant there could still be rental income from an occupied unit. As an investor, you could be eligible for an owner-occupied mortgage rate if you reside in one of your units. The multi-family market as a whole has significantly less inventory than the single family home market, and therefore can be more expensive to enter.
Thinking even bigger than the traditional home markets? Commercial real estate – including office buildings, large apartment complexes and industrial parks – is a very different business model than other real estate investment types. Tenants are often businesses, instead of home dwellers, and can be more low maintenance once into the space. Lease terms are longer, purchasing and selling requires a different skill set, and the competitive landscape is uniquely different, requiring a very specific level of expertise.
With so many options and opportunities within the various types of real estate investments, understanding the options, and having experts in each guide you to the right type of investment to align with your goals is the first step to setting you up for success in this complex and competitive industry.
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