9 Types of Real Estate Investments

There are dozens of strategies and types of real estate investments, but most real estate assets fall into one of three classes: 1. Residential: 1-4 apartment units. 2. Commercial: anything above 4+ units. 3. Land: semi-developed land or active farms. Real estate investments are a particularly effective source of income to create passive income or reach financial independence and can help you to effectively diversify your investments both between stocks and other asset classes. As you expand and diversify your real estate portfolio, consider the following 9 types of real estate investments.

1. House Hacking.

The house hacking model involves buying a small multi-family property, moving into one apartment, and renting out other units to other people who will pay off most of your mortgage. In the best-case scenario, all the rents should cover your own mortgage and other property-related expenses. And remember, cutting housing costs is great also, as it is one of the people's biggest personal expenses and also gives a great opportunity to boost savings as well.

2. REITs.

You can buy shares in real estate investment funds, as it is a quick and easy way to diversify your real estate business. Where you can find yourself buying and selling instantly with no commission on many brokerage accounts. REITs tend to pay extremely high dividend yields because they are required by law to pay shareholders at least 90% of their profits as dividends. However, REITs do not tend to go up in prices as quickly as traditional stocks or funds. The downside of this is volatility, where REIT can quickly drop in value, just like other stocks do.

3. Land.

Landowners don't have to worry about the same legal and regulatory requirements as homeowners, as they have no rent controls, no lengthy checkout process that takes months. Since you can buy uncultivated land inexpensively, this reduces the minimum cash requirement and also makes it easier for investors to diversify by distributing money between multiple sites. Also remember, investing in the land may be a cost-effective strategy, but it also requires a unique set of skills. New land investors can easily fall for scams without having a solid foundation of understanding on how to invest in land, so before investing, make sure you study the basics carefully to learn exactly how to do it the right way.

4. Wholesaling.

Wholesalers can find a lucrative real estate deal, enter into a contract with it, and then sell the rights to that contract to a real estate investor. Wholesaler never gets ownership of the property, so this means they don’t have to worry about financing or investment real estate loans, they don’t have to worry about checking tenants or property damage or answering phone calls. They don't pay any closing costs and don't take on any of the headaches associated with owning a property. All real estate wholesalers need to do is just find good deals and build a network of investors to source these deals. 

5. Buy-and-Hold.

Long-term leasing represents the most common buy-and-hold real estate strategy, where you sign a lease agreement for a tenant who plans to stay for years to come. The most successful landlords typically aim to place excellent tenants and then keep them as long as possible. Where they also benefit from a wide range of rental property tax deductions, as well, from mortgage interest, maintenance, property management fees, insurance, to property taxes. Investors can buy turnkey properties ready to rent or buy fixer-uppers and refinance with another loan. Of course, new investors need to be careful not to overleverage, where they can find themselves with a negative cash flow. The upside of buy and hold properties is that investors can forecast their average monthly cash flow.

6. Private Notes.

If you are in a good financial position, you can also loan money directly to real estate investors you know and trust in the form of personal notes. As a private lender, you have a little remedy, unless you have difficulty registering a property lien, which is often impractical in the case of personal notes. After taking a personal note, you can discuss your own terms, and make sure to offer private notes to investors you know, trust, and the ones who have a long history of success. But when you find good borrowers, you can make great returns on the truly passive side.

7. Flipping Houses.

If a house flip is done correctly, it can result in predictable, quick returns and if done incorrectly, it can lead to very costly mistakes. Many new house flippers run into problems, as they find themselves with contractors who don't provide exact calculations for the project, and without considering too frequent or “unexpected” costs in the middle of renovation projects they tend to extend the project timeline which cost them much more than they initially thought it would. Underestimating costs such as shipping and marketing also, so always add a buffer for repairs that cost more and take longer than indicated.

8. Real Estate Syndications.

These are large commercial real estate buildings in which you can invest passively or actively in order to become a shareowner. If you choose to take the passive side, the real estate syndicator will oversee the purchase and management of the real estate, while you can passively earn money as a partial owner of the property. Many invest in real estate syndications in one way or another, and most of them are just for accredited investors only.

9. Short-Term Rentals.

With the explosive growth in popularity of Airbnb and similar vacation rental websites, there are more owners than ever before and are starting to try their hand in the hospitality industry. Landlords in some markets may earn higher profits but at the expense of significantly more labor, as these apartments must be cleaned during each guest's stay, and they must provide furniture, decorations, and pay for all the utilities. If you consider using this strategy, make sure to carefully calculate the numbers before launching your own hospitality business. Also remember, many vacation rental markets experience seasonal changes in demand and prices and like any other type of real estate investment, vacation rentals require their own unique skill sets.

For the new real estate investors now you have the full range of options available, but also remember, the best way to invest in real estate depends on your long-term goals, risk tolerance, and willingness to learn how to invest in real estate directly. For those not interested in learning the ropes, they can still diversify into real estate through REITs and syndicated real estate deals. But anyone who is looking to master real estate investing themselves can benefit from tax advantages, predictable returns, and a host of other real estate benefits over stocks for early retirement and financial independence.