Investing in Real Estate
Real Estate is one of the most popular investment vehicles for many investors, generating substantial returns over the years and offering advantages over other types of investments. It is a tangible asset that feels more “real” than stock portfolios, and it typically comes with tax deductions and accelerated depreciation write-offs to increase your bottom line.
However, investing in real estate can be confusing because of the multifaceted nature of this industry. Whether you are looking to invest in commercial, residential, industrial, raw land or other special purpose properties, it is important to understand the different categories of real estate in order to make sound decisions.
A real estate is a piece of land plus all the permanent structures affixed to it, including buildings, parking lots, garages and even trees. It also includes resources like water and valuable mineral deposits that are present on the land, as well as the rights to possess, sell, lease or use the property in any way desired by its owner. Real estate, unlike personal property (which can be anything from jewelry to automobiles), is considered more permanent and thus more valuable.
There are five main categories of real estate, which include residential, commercial, industrial, raw land and specialty uses. Residential real estate encompasses all single-family homes, apartments, condominiums and townhouses. Commercial real estate refers to office buildings, strip malls and warehouses. Industrial real estate is used for manufacturing, product distribution, research and development or storage. Raw land is any undeveloped land, such as working farms and ranches.
In addition to purchasing existing property, new investors can also enter the real estate business through “wholesaling.” This strategy involves finding a property that is under contract but has not closed. Investors then act as the middleman between the buyer and seller, taking a fee for saving the other party time and money. Wholesaling can be an excellent entry point for those who want to get involved in real estate but lack the funds or credit to purchase a property.
Another common strategy is to invest in a real estate syndicator. Rather than buying a single-family home, apartment building or office building outright, you become a fractional owner of the project and receive regular cash flows and distributions from the company that owns it. The property then sells at a profit when you are ready to retire or exit the investment, and you receive a hefty payout for your participation.
A growing number of investors are entering the world of real estate development and construction. This type of real estate involves the purchase of raw land, zoning and construction of new buildings, which can be used for housing, offices, retail stores, distribution centers or even warehouses. The development process is complex and requires a team of professionals, including developers, architects, engineers and contractors. Investors can participate in this phase of the real estate cycle by purchasing a stake in the development company or investing directly through REITs.