7 Main Types of Real Estate Investing

There are many ways you can get involved in real estate investing. Before you put money into a deal, you should first learn about the different types of real estate and the various ways to invest in them. While some paths require more time or result in larger profits than others, it still benefits you to familiarize yourself with different strategies so you can find the one that’s best for you. The main types of real estate investing are:

1. Land. Yep, you read that right. Owning a patch of land or an acre of grass, is a type of “real estate” if you will. Some people purchase areas of land they believe will be profitable in the future with the hopes of making more money when they sell it for a higher value. For example, if investors suspect that developers will soon build new homes near an area of land, they might buy that land knowing that its market value will increase as the area develops and increases in value. More often than not, people inherit land, especially when a relative who owned the land passes away. When this happens, people may elect to keep this land in the family as a way to pass on wealth. Other times, people build homes or commercial buildings on the land in the hopes of creating more investment opportunities. Some real estate investors specialize in finding undervalued land and selling it to contractors or other investors for a profit.  I don’t plan to do real estate investing through the purchase and sale of raw land, but many other investors prefer this method.

2. Single Family Homes. When I mention real estate investing with single family homes most people think I am referring to the purchase of a residential home or the renovation of an older home (similar to something they’ve seen on HGTV). As you can imagine, real estate investing is more complicated than that. For starters, the term “single family home” is what real estate investors call a house built for a single family (i.e. a 3 bedroom/2 bath house, a 4bedroom/3bathroom house, or some similar variation). To be a real estate investor with single family homes you don’t just buy a home and live in it. (Doing that simply makes you a homeowner). Real estate investors who focus on single family homes do more than that.

   They can purchase homes below market value (via a foreclosure or through savvy negotiations) and then sell them for a higher price (i.e. wholesaling). They can purchase an old home, renovate it themselves to increase its market value, then sell it to people looking to purchase a new home (i.e. Fix and Flip). They can also purchase a home, renovate it (by adding some modern appliances and newer fixes) and then refinance it with a bank (to withdraw some of the “equity” or value in the house as cash) and sell it. Lastly, people can purchase a home, rent it out to tenants, and use part of the tenants’ monthly rent check to pay off the mortgage in an effort to build wealth long term.

3. Small Multi-family Homes. This refers to duplexes, triplexes, and quadruplexes. Single family homes are built for one family, but small multi-family homes are build for...you guessed it: multiple, smaller families. Usually, it comprises 2-4 “sets” of 2bedroom/2bathroom family homes that are all connected to each other as a single building with separate walls and doors for privacy. Investors who prefer this type of real estate usually purchase or build these small multi-family properties and rent out each unit to a different family. For example, the owner of a duplex will have two different “families” or tenants living in the building (one on Side A and the other on Side B). Each family will pay the owner a monthly rent.

   Another way investors make money from small multi-family homes is to “house hack” or live in one side and rent out the other side. For example, if a real estate investor just purchased a triplex (3-unit multi-family home), he or she may choose to live in one of the units and rent out the other two units. Many investors like this method because it allows them to purchase a property to live in and invest with simultaneously. Plus, small multifamily investing allows them to collect a large amount in total rent money (since they receive multiple checks) without having to purchase multiple homes.

4. Large Multi-family Homes. Technically this refers to multi-family homes larger than 4 units, but usually this is just the fancy term for “apartment buildings.” Believe it or not, apartment buildings aren’t nearly as hard to invest in as people may think. Although it is unlikely that you will have the time, desire, or money to purchase an entire apartment building on your own, most of the times, people invest with others. In fact, most apartment buildings are owned by a group of people. When people decide to put their money together to invest in an apartment as a group we usually call that a “real estate syndication.”

   In real estate syndications you have general partners and limited partners. The general partners act as “active investors” and they are the people who find potential apartment buildings to purchase, evaluate the properties, and secure the financing from the bank. The limited partners act as “passive investors” and they are the people who put some of their money into the deal (along with other people) and leave all the details up to the general partners.

   Together, the general partners and limited partners invest in apartment buildings and tend to make a large profit. The details of real estate syndications can be quite complex, but essentially investors make money by purchasing undervalued apartment buildings. They then increase the value of these apartments by renovating them and raising the monthly rent. After a few years, these investors will either sell the building for a higher price or refinance it with the bank. Either way, the investors make a profit.

5. Commercial or industrial buildings. This type of real estate typically refers to strip malls, warehouses, or commercial buildings (ie. doctor’s offices, grocery stores, etc). Investors purchase these buildings, or build them, and then rent them out to companies or business owners who need the space. It is very similar to renting out a house. Instead of your tenants being ordinary people who want the space to live in, your tenants are business owners who want the space to sell products or services to consumers.

   The lease that tenants sign to rent space in these types of buildings is for a longer period of time (multiple years) and the business owner usually takes care of most maintenance problems and repairs him or herself (instead of calling the owner of the building every time the toilet gets clogged or the lights need to be replaced). As a result, owning these buildings gives you more assurance that you will get your monthly rent regularly and requires much less hassle.

   The downside is that these buildings are expensive to purchase. Unlike apartment buildings, there aren’t nearly as many syndications available. Investors typically purchase the building on their own, or with very few partners, which may cost them several hundreds of thousands of dollars, if not millions.

6. Real estate funds. This is when people put a certain amount of money into a large fund to invest with other people. Unlike real estate syndications, the managers of these funds use the money to invest in a variety of different real estate deals, not just one large deal. These funds are operated through companies and are officially called “real estate investment trusts (REITs).”

   Through these REITs people get to invest in more real estate deals than they would have been able to do on their own. As a result, REITs help investors diversify their investments and protect them from risk. If one real estate deal doesn’t work out, then they can count on the other deals in the fund to protect them from losing money. Many people prefer to invest in real estate using REITs because it is “passive.” You are not someone’s landlord, you do not have to do repairs or collect rent payments. You simply put your money into the REIT and let the manager of the fund handle all the details.

7. Debt servicing. Instead of finding deals, raising money, and managing the property some investors want to be much less involved. They like the high returns and profits that can be made through real estate but loathe everything else. As a result, they may choose to work on the debt side as a private money lender or tax lien investor. A tax lien investor typically pays the property taxes on a home that someone else has failed to pay. In order to prevent the home from going into foreclosure (being seized by the bank or the state), the homeowner must return the property tax money to the tax lien investor who paid them, with interest. Thus, the tax lien investor makes a profit from paying the property taxes of someone else.

   Private money lenders, on the other hand, are investors who loan money to other people that want to purchase real estate deals. Even though many people get loans from banks, real estate deals can be expensive and banks may refuse to loan you all the money you need. For example, a bank may loan someone 70-80% of the purchase price for an investment property, but then require that person to bring in 20-30% of his/her own money. If the person doesn’t have all of the money they need, they may choose to seek a private money lender instead. Typically private money lenders are sought out by people seeking to renovate an old home and sell it within a few months. Many wealthy people prefer to be private money lenders because they can get their money back much quicker and often times they can make a much larger profit lending the money at a high interest rate than they would have made if their money just sat in a savings account.

To Summarize, there are many different types of real estate. Your first step as a real estate investor is to familiarize yourself with each of them so that you can choose the route that is best for you. You can buy land on which to build or purchase it with plans to sell it to someone else. You can focus on single family homes and seek to rent them out, purchase them wholesale (for a low price) and sell to someone else for a higher price afterwards, or fix and flip them. You can try to house-hack, rent out small multifamily deals, or instead choose to focus on apartment buildings through real estate syndications. Once you have a decent amount of money, you may want to look into commercial and industrial buildings that you can rent out to other business owners. If you want to be much more passive and invest some of the retirement money you got from your job, REITs might be good option. Lastly, you can choose to be more on the debt side and invest in real estate through the purchase of tax liens or by being a private money lender. As you can see, there are many ways to invest in real estate. These are just some of the main types. All you need to do is pick the route that best fits your goals and lifestyle.

Tell me, which route of real estate investing do you think would be best for you? What questions or concerns do you have before getting started?

Benefits of Real Estate Investing, Part 2

In addition to helping you purchase assets, increase your net worth, and lower your tax rate, real estate has other benefits as well…

1. You can invest in it using leverage aka “other people’s money.” When you purchase real estate, either as a home to live in, or as an investment property, you don’t have to pay the full cost of it upfront.

   When people buy a home, they usually pay a small percentage of the cost as the “down payment” and then get a loan from the bank (i.e. a mortgage) to cover the rest. This method can be used in the investment world as well.

   For example, you can buy a home to rent out to family members or even buy an entire apartment building in your local city with the help of a loan from the bank. In fact, many investors fund a majority of their real estate deals using other people’s money (whether that’s money from the bank or money from investment groups, private funds, grants from local city governments, or small loans from family and friends).

   Experienced real estate investors raise money for the down payment from other rich people and then get a loan from the bank to cover the rest. By using other people’s money to fund the down payment and securing a loan from the bank to cover the rest, these investors get to own real estate properties even though they didn’t use any of their own money to purchase them. Quite a deal, if you ask me.

   Although they have to pay back these funds eventually, there are several investment strategies (like refinancing) that allow these investors to pay back that money much sooner while still keeping a big profit for themselves. You can do this too.

   Having the ability to use other people’s money to make a decent profit for yourself, and for them, is a pretty sweet deal.

   Investing in the stock market doesn’t really offer this kind of advantage. Banks, private funds, and wealthy businessmen are far more willing to loan you money for a real estate deal than for almost any other kind of investment.

2. You can protect your assets. As you can imagine, the more money you get the more you are going to want to protect it.

   The last thing you want is to get into a car accident or make a costly mistake on your job and have someone sue you for every dollar you’ve ever earned (yes, people do this). Thus, “asset protection” or protecting your net worth from creditors and lawsuits is an area of extreme interest for wealthy people in America. Real estate can be great for that.

   Oftentimes, when people purchase a piece of real estate with the goal of making money from it, they don’t purchase it the way you would normally think.

   Instead of having money in their checking account and simply paying for all or part of it, they set up a protection entity called an LLC. The main goal of setting up an LLC and buying the property through that LLC is that it protects the value of your investments from lawsuits.

   Thus, if someone sues you personally they cannot get any money or value that is within the LLC and if one of the tenets in your property decides to sue to the apartment that is held within the LLC, he or she is not able to get any of your personal money or net worth.

   In other words, the LLC separates your personal money from your investment money, even though you are in charge of both. In fact, many rich people and smart investors set up tons of LLCs.

   For example, they may partially own 20 houses and set up a different LLC for each home. That way, if someone sues them personally or someone sues one of their LLCs, that person cannot get any of the money in any of the other properties.

3. You have the freedom to decide how involved you want to be in the investment. You can invest in real estate “actively” and use it as a job OR you can invest in real estate “passively” in your spare time. You get to decide. It caters to everyone.

   Many of us enjoy our day jobs. We like the work we do and the impact it has on others. However, our jobs often take up a significant portion of our time and don’t leave much room for anything else, especially for those who have a spouse or kids.

   One of the things I love about real estate investing is that once you learn some investment basics, it doesn't have to take up much of your time.

   If you’re the opposite of me and you hate your day job entirely, there are other types of real estate investing that are more active and can be used to completely replace your old job.

   In other words, if you want to quit your job and instead make real estate your career, then you can invest actively. However, if you love your job and just want to use real estate as an additional stream of income then you can invest passively.

   Both types of investments make money, you just have to decide which side you are going to be on.

   Theoretically, the active investors put themselves in a better position to make more money (or use less of their own money in the deals) than the passive investors, but believe me, both types of investors walk away from the investments very happy (provided they found the right deals in the first place).

My point? In addition to things like extra monthly income, lower taxes, and appreciation, real estate offers several other benefits. It gives you the chance to invest using other people’s money which makes it less of a risk and a much lower financial burden for you. Real estate investing also has several entities, like an LLC, which will allow you to protect the money in your investment from lawsuits and creditors. Plus, there are so many different forms of real estate investing that you can choose how involved or uninvolved you want to be in a way that caters to your lifestyle and competing demands.

Tell me, are you considering real estate investing? Which advantage of real estate investing appeals to you most?

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Benefits of Real Estate Investing, Part 1

There are several different investments you can make, but I think real estate is one of the best.

1. It allows you to buy an asset (something that goes up in value). Now I know some of you may be thinking back to the housing market crash of 2008 or the impending downturn many speculators think will happen in 2019, but hear me out.

   Even though the housing market may experience dips here and there, it always recovers. As a whole, houses, apartments, and commercial buildings increase in value over time, even when you factor in inflation.

   In 2009, studies showed that the average cost of a 3 bedroom house in my home state of Florida was around $175,000. Although prices dipped in 2012 to $125,000, they recovered soon afterwards. As of January 2019, the average price for a 3 bedroom home in Florida was around $230,000, an increase of $55,000 from 10 years ago.  

   Since houses increase in value over time, they are a great investment to have. So instead of using your money to buy liabilities like cars, clothes, and phones that decrease in value from year to year, investing in real estate allows you to buy something that increases in value.  

2. It can be used to increase your net worth through “appreciation.” For those new to real estate investing, appreciation is the fancy term used when something increases in worth. When you subtract your debts (student loans, credit card bills, and any bank loans) from your income and assets (things you own) what is left over is deemed your net worth.

   Investing in real estate gives you the chance to further increase your net worth through a principle called appreciation. In general, there are two forms of real estate appreciation, “forced” appreciation and “unforced” appreciation.

   Forced appreciation is when real estate increases in value due to circumstances you can control. Examples of this forced appreciation are when people buy rundown properties and renovate them afterwards (in an effort to increase their value) or when apartments increase the monthly rent (in order to increase their revenues).

   Unforced appreciation, on the other hand, is when real estate increases in value due to circumstances you cannot control. For example, a person may purchase a home and then 5, 10 or 15 years later he or she may realize that the home is worth significantly more than what they originally paid for it.

   Many times, the homeowners didn’t do anything special to cause the value of the home to increase besides pay their mortgage and mind their own business. The value of their home increased simply because more people were looking to buy in their area, the local economy had improved as whole, or the land on which the house was built became more valuable. Either way, the homeowner didn’t have much to do with the appreciation. It occurred do to factors he/she had no control over.

   Thus, whether it’s forced or unforced, as real estate appreciates in value your overall net worth increases as well.

3. Investing in real estate can increase your cash flow. Cash flow is what real estate investors call the money that is deposited in their bank accounts for investing in certain deals. It’s their profit or the money they get to keep after subtracting their expenses from their revenue.

   Since it typically shows up as a check or a direct deposit into one’s bank account, investors call it “cash” and since it happens periodically (every month or quarter) it “flows,” hence the term “cash flow.”

   Real estate investors usually generate cash flow by charging their tenets a monthly rent. After investors collect their rent money, they pay for any expenses or repairs, send a check to the bank to pay the monthly mortgage, and keep whatever is left as their cash flow. This cash flow ends up serving as an extra stream of income to supplement the money they already make from their day jobs. It’s a pretty sweet deal that puts more money in their pocket each month.

4. Investing in real estate can help you save money on taxes. For the most part, any time you sell something, or make money from providing a service or job, you owe the government taxes.

   The government provides several free services and protections we all benefit from (ie. firefighters, police officers, schools, national defense, social programs, etc) so when we make money, we must pay a certain percentage back to government in return.

   Technically speaking, a real estate owner is supposed to pay taxes on the profit or cash flow they collect in rent. However, not many of them do, legally.

   The reason real estate investors don’t pay taxes on this profit is because the government actually wants people to invest in real estate. It understands that citizens need a place to live and housing options can be scarce. Thus, it wants to incentivize its citizens to rent to each other.

   One way it does this is by allowing real estate investors to subtract out any real estate losses from real estate gains. The real estate loss that most investors claim on their tax returns in order to minimize the amount they pay in taxes is something called “depreciation.”

   Depreciation is the real estate concept used to describe the reality that the materials (bricks, windows, pipes, etc) used to make a home or apartment building will wear out over time and need to be replaced.

   Because of this fact, the government allows real estate investors to subtract a percentage of the real estate that “depreciates” or wears out over time from the profit they make. By the time most investors subtract out this “depreciation” they end up reporting a much lower amount in overall profit and this allows them to pay a much lower percentage of taxes than they would have otherwise.

   Plus, many good real estate investors take advantage of other government incentives, in addition to depreciation, that virtually wipe out most of the taxes they would have had to pay. In other words, real estate investors put money into deals, make a profit from those deals, and avoid paying taxes on most, if not all, of that money due to various government incentives in the tax code. If you start investing in real estate, you can begin taking advantage of some of these incentives as well.

My point? Real estate investing offers many benefits. It allows you to purchase something that increases in value and gives you the opportunity to raise your net worth through different types of appreciation. Plus, it can serve as a second stream of income by providing you with monthly cash flow. With the help of a good advisor, it can also make you eligible for government incentives that lower your tax rate.

Now that you know some of these incentives are you willing to give real estate a try? Are you more open to the idea of looking into some real estate deals?

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