So you want to invest in real estate. That’s great! There are a lot of different type of real estate that you can choose to invest in. Keep in mind that, as a passive investor, you won’t be doing the work yourself to manage the investment, regardless of which type you choose. But, there are still some compelling reasons to choose one type of investment over another.
A few common types of real estate are: Single Family Homes, Retail (like a restaurant building, or a department store building), Land (where nothing has been built yet), and Apartments. Let’s look at each of this and discuss a few of the pros and cons of each.
- Single Family Homes – This is a perennial favorite for smaller investors who are wanting to try out real estate investing on their own. Most investors try to find homes that are within their budget and then they do everything associated with the investment. In our home area, most rental properties are around the $80-$100k range. (Yours might be different). The investor would almost certainly be responsible for paying the taxes and any upkeep that is required. A single family home has the advantage of being something that can be sold to either another investor, or a person simply looking for a new place to live. On the downside (get used to hearing this), this is a single-tenant property. If you lose the tenant your income drops to zero. That’s painful.
- Retail (like a restaurant building, or a department store building) – Retail properties are typically a lot more expensive than single family homes. This can create nice positive cashflow. Most tenants are on multi-year leases (anywhere from 5 to 20 (or more) years) and leases for this type of property are often something called Triple-Net. In a nutshell, this means that the property owner/investor is hardly responsible for anything. The tenant pays the taxes as well as almost all maintenance costs. On the downside, this is typically a single-tenant property, or a very, very small number of tenants. As long as you have a tenant, things are great. But when you don’t, profits can erode quickly, and, depending on the economic environment, it isn’t uncommon for a property like this to stay vacant for a year or more between tenants.
- Land (where nothing has been built yet) – Land is a great thing to own in a few different ways. Maintenance and upkeep are minimal, and if you buy in the right location, it can appreciate many-fold. On the downside, land is speculative. If progress doesn’t move in the planned direction the land might not increase much in value. And, land typically doesn’t earn very much for the investor during the “hold”. You don’t see much (if any) money until the sale.
- Apartments – Per family unit living space, apartments are typically cheaper than single family homes. But, the overall cost is typically higher (possibly much higher, depending on the number of units). The investor is responsible for taxes and maintenance. A huge advantage of apartments is the number of tenants. If one tenant moves out, you still have income from the other tenants. And, many items in the building are shared. If you have to replace the roof in a 12-unit building, you only have to replace one roof and not 12. (Granted, the one roof will likely cost more than a single family home roof would, but almost certainly not as much as 12 roofs)
As asset managers who give investors the opportunity invest, we particularly love apartments because it lets us, the little guys, pool money together and share in returns that are typically not available to a single investor. We’d love to discuss this with you in more detail.