Expanding your portfolio into real estate investing is a smart move because you stand a chance to grow your wealth quickly. Of all the opportunities you can explore in this industry, property investment is the most popular and also a lucrative option. The benefits of buying properties in real estate investing are numerous. For instance, properties offer multiple earning opportunities for the owner and ensure high ROI.
But one discouraging factor is that you need some good amounts of money to invest in a property. We usually advise investors to use their savings to start, but in the absence of such, loans from banks can suffice too. The truth is that many veterans today started out with loans, and today, they’re big shots. So, you too can explore that financing option and start.
However, to be successful in property investment, there’s a need to understand the types available, the merits and demerits of each type and the factors to consider as well. With this information at the tip of your fingers, you can succeed in your adventure. This is especially necessary for new beginners in the industry.
So, in this article, we will try our best possible to explain the different types of property investment and how you can utilize them for wealth expansion. Also, we’ll outline some of the risks if any, on each type of real estate property investment. Just as the stock market presents a level of risks on financial instruments, real estate has the good, bad and ugly too.
So, read on and learn more.
Types of property investments.
There are three different types of property investments in the real estate industry.
• Residential Property Investment
• Commercial property investment
• Land investment
Residential Property Investment
This type of property investment encompasses every kind of building which can be sold or rented. It includes single family properties, multifamily properties, duplexes, apartments, and vacation homes. Amongst these residential properties, many investors usually prefer single-family properties because they have a higher demand.
The single-family units are those types of standalone homes that has a driveway and a yard. You can find them at different prices and in almost every corner. People usually love these properties because they’re private and functional. Also, investors receive many financing opportunities and programs designed to fund these types of investments. But, one downside is that they’re very expensive compared to the returns they generate.
That notwithstanding, residential properties generally offer easy and consistent returns on investments. For instance, multi-family homes offer a wider room for more returns. It includes quadplexes, triplexes and duplexes, which accommodates more than one family translating to multiple rental income streams.
However, no matter the category you prefer, making profits require some skills, analysis and strategies. These strategies may differ from one investor to another, depending on the market wherein they operate.
So, if you’re venturing into residential properties, you have to choose your market and exit strategy carefully. Some of the exit strategies include buy and hold, wholesaling and rehabbing. It is, however, advisable to conduct a detailed market analysis before adopting any of these approaches because your market area will determine the best exit strategy to employ.
Advantages of Residential Property Investment
Investing in residential properties has the following benefits:
1. Tax advantages; Residential properties offer some tax benefits to the investor in the sense that interest on loans and every other expense on the property are tax deductible.
2. Rental income; collecting rents from properties helps investors to recoup their investments faster. Sometimes, homeowners rely on rents to complete their mortgage payments.
3. Leverage; residential properties can serve as a leverage for more loans even when you’ve not completed the first mortgage payments.
4. Resell income; the value of residential properties tend to rise faster depending on the location. Once the value rises, you can put up your property for sale and bag the differences as profits
5. Savings; investing in residential properties is another to save since it’ll necessitate the monthly mortgage payments.
Risks of residential property investments.
Some of the risks associated with residential property investments include the following:
1. Lack of tenants; this could be a major setback to residential property earnings. If no tenants are occupying the space, you’ll operate at a loss.
2. Rise in interest rates; one major shift in the financial market could result in paying higher on loan interests than the initial plan.
3. Tenant issues; lots of tenants don’t pay as at when due. Some stubborn ones might even create problems for the landlord, which may lead to a rise in maintenance costs.
4. Fall in price of properties; sometimes, the price of properties may remain static for longer periods or even fall in the long run. As such, you can either hold the property for too long or resell at a loss.
5. Time; being a landlord is too time-consuming unless you’re not an active investor.
Tips for a successful residential property investment
1. Make sure you carry out extensive research into the market as well as the property you want to purchase
2. Choose the best location based on your research because where your property is will determine the availability of tenants and the rate of value increase.
3. Manage your property very well to ensure marketability and also handle your tenants well for sustained patronage.
4. Analyse the implications of a possible fall in house value or interest rate fluctuations on your investment plans.
Commercial Property Investment
This area encompasses office buildings, Warehouses, retail, industrial and leisure. Sometimes, even multi-family units fall under this type of property investment option, especially when they’ve exceeded a particular number depending on the market or State. Retail, commercial properties include shopping centres, high street shops, retail warehouses and supermarkets. Leisure properties include hotels, leisure & fitness centres, restaurants, cinemas, casinos, etc. Industrial properties cover manufacturing units, logistic units, warehouse, storage yards, sheds and industrial units.
The aim of investing in commercial properties is usually to make returns from business owners who need spaces to operate their companies, sell goods or offer services. Also, commercial properties serve as a way of increasing business activities in a locality. Once an investor constructs any of these buildings in a particular area, many tenants will collect the available spaces for one business activity or the other.
Each of the different categories of commercial properties is popular and in high demand, because people must rent them for their businesses or companies. So, any category you choose to invest in will ensure that you recoup your investments very fast. But, even as we’ll see later, location is very important when it comes to commercial property investment. You must invest in properties located in areas where business activities are booming.
Advantages of commercial property investment
There are many benefits attached to investing in commercial properties.
1. Higher ROI; commercial properties ensure that an investor makes good profit after all the hassles. The reason being that this type of investment option entails multiple renters for one investor. SO, no matter what you spent in your initial capital requirement, you can recoup it faster once you fill up the units with renters.
2. Flexible financing; we’ve said that commercial real estate can repay every cost spent on the project in the shortest time possible. One encouraging aspect is that sometimes, you may not spend a cent of your income. You can acquire loans from different lending institutions and kick-start your investment. Many banks and other institutions usually make different kinds of offers to commercial property investors for financing viable investment opportunities. So, utilizing these options equips you for any project with the promise of a high ROI.
3. Consistent cash flow; another advantage of investing in a commercial property is that you can be sure of a continuous flow of income. Due to the number of units that each property has, it will be possible to enjoy multiple income streams. Sometimes, occupants may sign the triple net lease which will mandate them to pay the taxes, bear maintenance cost and pay for the property insurance.
4. Long lease periods; the most interesting aspect of commercial property investment is the leasing contracts. An investor is sure of getting business owners who will take the space for many years. Under such agreements, you can make significant cash flows and impressive returns every month.
5. Less Competition; Investing in commercial properties is not a simple feat due to the huge capital requirement. As such, the level of competition is very low because only a few investors are willing to face the perceived difficulties in such opportunities.
Disadvantages of Commercial property investments
Commercial property investors also face some difficulties. You can’t expect it to be all very easy. So, here’re some cons to these types of property investment.
1. Time-Consuming; commercial properties require more attention and presence due to the increased number of tenants. To maximize your ROI, there’s a need to be present so that you can handle issues such as maintenance issues, public safety requirements, CAM adjustments, etc. Since you’re handling multiple leases, your responsibility as the landlord comes in multiples too.
2. Huge Initial Capital Outlay; undertaking a commercial property project requires a huge amount of money from the start. From the time of purchase, you will be spending money until you’ve developed it to a habitable state where renters can take over. Also, since these properties come in numbers, the costs you bear will also be higher than on a residential property.
3. Requires a professional; sometimes, a commercial property necessitates the presence of a professional who’ll oversee the maintenance issues. Unless you have the license for such but if not, you’ll need to employ someone else to do the job, thereby incurring additional costs. So, before you enter into this area, decide on whether to be an owner-manager or if you’ll outsource the role.
4. Difficulty in termination of the contract; this is one issue to bear in mind. As a landlord, once you’ve signed the lease agreement, you no longer have the right to terminate it until the lease period expires or if the lessee breaches the contract. The problem is that these lease contracts run for many years, and there’s no way to increase the rents until the time of the lease has expired.
5. Location affects tenancy; we don’t need to overemphasize this, but if you want to get tenants easily, invest in a well-situated commercial property. This is another disadvantage of this type of investment. In the case of residential properties, the farther it is from noise, the higher the demand. But a commercial property requires the crowd to boost business operations. So, if you miss this point, you may have difficulties acquiring tenants for your property.
Risks of Commercial Property Investment
Here are some of the risk you might face as a commercial property investor:
1. Business risks; these may include an increase in operating costs, inflation, increased taxes, labour costs, changes in government regulations, etc.
2. Increase in Interest Rate; sometimes, banks or other lending institutions you used might unexpectedly increase the interest rates on the loans you collected.
3. Environmental regulations may change from what it was to more stringent measures that will affect businesses operations negatively in your area. This might lead to a lack of tenants.
4. Property risks such as functional obsolescence, accidents, or even property damages due to uncontrollable circumstances.
Tips for a successful commercial property investment
If you want to venture into the commercial property investment space, follow these tips:
1. Determine the “why” of every property before you acquire it. Is it for office, industrial, retail, leisure, etc.?
2. Consider your budget and returns on investment goals
3. Concentrate on properties that are in good locations to ensure ROI
4. Research the local property market thoroughly to know what moves
5. Consider mentorship or professional consultation
Land Property Investment
Apart from investing in residential and commercial properties, you have another option which is purchasing vacant land. Buying vacant land is a viable opportunity to make healthy returns, especially if you bought farmland. The downside to this type of investment is that you won’t be making any passive income from it.
The truth is that land investments may not be ideal for every investor, and success depends on the market conditions. The land value fluctuates depending on the changes in demand. If such a property is located in areas where a significant infrastructural project is situated, the value will be on the high side and vice versa.
So, if you want to explore the opportunities in land investment, you must do your research to be abreast of developments that may affect the value of lands in a particular area. With these timely insights, you can easily identify viable investment opportunities to explore for high ROI.
Advantages of Land property investment
Consider some of the reasons for investing in vacant land:
1. Ability to decide on the Use; investing in a vacant land gives you the freedom to build any type of property you want. But, you’ll research thoroughly to identify the type of property that’ll be marketable in that area.
2. Direct ownership; purchasing a land gives you the full ownership right on the property. The reason is that you’ll buy the land with cash and there’ll be no origination fees and mortgage interests to pay.
3. No maintenance; vacant lands require no maintenance and therefore, you’ll be free from the associated costs. Moreover, issues such as vandalism won’t ever arise
4. Vacant Lands are affordable; that’s right, you’ll buy land far lower than what you’ll pay for an already developed property.
Disadvantages of Land investment
The downside to investing in lands are as follows:
1. Financing difficulties; traditional financing institutions are often sceptical about financing a vacant land. So, unless you’re lucky to find a willing lender, you may have to tie down your money on the investment for many years.
2. No Immediate Cash flow; lands don’t produce cash flows to the investors. This may seem unimportant since you’re not paying a mortgage. But, if you fail to sell off the land faster, all your money will be tied down in one place.
3. Need for Approvals and permits; this is another headache to investing in vacant lands. It may take years before you get the approval you need to start a development project. Also, zoning could affect the type of structure you can erect on your land.
Risks of Land property investment
Before deciding on land investment, consider the following risks:
1. Zoning Classification; this includes land use specifications. For instance, some lands may be zoned for residential, commercial or industrial purposes. If the class matches what you have in mind, you’re lucky, but if not, there is a serious issue to face.
2. Zoning Restrictions; this has to do with the size of the allowable development on the land, which includes, height, accessory buildings, floor area ratio, lot coverage, etc.
3. Environmental issues; such as instability of the soil, high levels of asbestos, radon and excessive floods.
4. Zero access to utilities; what if you can’t get hold of basic services such as running water, telephone, sewer, gas, Internet, cable, etc. How would you develop your land and expect to make an income?
Tips for a successful Land investment
Follow these tips from experts to record impressive success in your land investment
1. Invest only in lands that are free of liens; a lawyer can help you
2. Watch out for upcoming trends and buy before they occur
3. Hire a surveyor to redo the land survey
4. Consider the tear-down properties
5. Don’t forget the importance of doing due diligence
6. Find a builder who’ll check the land before you invest
7. Consider possible hazards such as land erosions, flood plains and mudslides.
8. Don’t forget the effects of zoning to know what you’re allowed to build
9. Hire an agent who’s an expert on land purchases
10. Check the availability of access and roads to the land
11. Find out who your neighbours are before buying a land
12. Hire a planner
Investing in a property is one of the viable options in real estate. Although there’re other ways to invest in real estate, we recommend that you try out property investment if you’re up for it. We’ve tried to discuss each of the options available in the industry. You can also do further research on your own to learn more.
Also, working with an agent may be great too. At least, you can leverage his/her experience to make the most out of your investments.
But, whatever you plan to do, always remember that location is very critical in making huge returns on any type of property investments.