Many new real estate investors start with dreams of becoming the next real estate tycoon, the reality is that most investors need to start with the basics and work their way up to tycoon status.
As you get started, it's worth learning about different types of investment property, the pros and cons of each, and think about which type might be best for a first investment opportunity.
Why Choose Residential Real Estate?
Residential real estate can be a straightforward investment that earns consistent cash flow. When managed correctly, residential properties can yield attractive profits. You gain several tax advantages and receive steady cash flow and benefit from the properties' appreciation.
Advantages of Commercial Real Estate
Commercial real estate offers potential for higher profits and greater cash flow than you might see with residential property. Although they typically represent a larger initial investment, commercial properties have higher income potential, longer leases, and lower vacancy rates than other forms of real estate investing.
A land investment, whether only vacant ground or a tract zoned for future development, can diversify an investor's portfolio. With a land purchase, you are, in effect, speculating on the likelihood of future expansion to increase the land's value.
The Downside of Residential Real Estate
When you invest in real estate, your money is tied up for as long as you own it. It is a non-liquid asset. Managing the property as a rental is time-intensive – showing the property, signing new tenants, cleaning and maintenance, and handling tenant issues can be both demanding and unpredictable. You need to go in with a mindset that accepts the time burden or hire a property management company to handle the daily operations.
The Downside of Commercial Real Estate
Vacancies are more common in commercial buildings than in residential rentals. While it's important to have stringent lease requirements, it might mean you wait six months or more for a suitable tenant. Plus, commercial real estate lease agreements are complex – you may need to work with a lawyer to finalize a version that protects you and your tenants.
The Downside of Investing in Land
Land on its own does not produce cash flow, and you still pay taxes on parcel. It's also more difficult to find a lender to help you purchase vacant land. If the market changes and it looks like your parcel is no longer a development prospect, you may be sitting on that land until you decide to build on it yourself or sell it as is.
The choices you make to invest in real estate, and your investment goals and risk tolerance should drive the type of property that suits you as an investor. Real estate is an investment that can grow with you as you do your homework and learn it.