Back To CourseReal Estate Exam Prep
16 chapters | 191 lessons
Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.
There are many types of property involved in real estate investing. Almost anyone can imagine buying a house but there are many other options to consider. Why invest in a house when you can invest in a duplex? What about investing in office buildings or warehouses? Do you want to be a landlord and collect rent or do you have a knack for finding 'fixer-upper' properties, repairing them and reselling them quickly for profit? Let's look at some different types of real estate investments and their advantages and disadvantages.
The single family home is probably the first thing that comes to mind when someone imagines a real estate investment. The 'detached single family home' is the fancy real estate way of saying a typical American house. It is a house surrounded by a yard, driveway or sidewalk that isn't connected to somebody else's house.
Single family homes are just about everywhere and can be found at a variety of price points. These are the most desired types of housing by tenants. The volume of prospects make it possible for a savvy buyer to find a good deal. When trying to sell a single family home, many types of buyers may be interested. There are many financing programs and opportunities for investors to borrow money to make the purchase. However, single family homes can be expensive relative to the amount of income they generate for property investors. If the property goes vacant, there is zero rental income for an investor until a new tenant is found. It may take a long time to rent a single house.
Multi-family housing includes duplexes, triplexes and quadplexes. These homes have two, three or four units in one building, allowing up to four families to live on the same plot of land. Each unit is a unique rental opportunity. Because the units share walls, tenants will see and interact with their neighbors more than in a single family home but probably less so than if they lived in a large apartment building. Multi-family housing means multiple rent payers for a real estate investor. In a duplex, if one unit is vacant there could still be rental income from an occupied unit. If the owner lives in one of the units, an owner-occupied mortgage rate can be obtained. This is cheaper than a commercial mortgage. Like single family housing, investors have many financing options. The multi-family market is often smaller than the single family home market. It may be more expensive to buy a four unit building than a single family house and if the investor sells the property, there will probably be fewer buyers.
Drive around town and what do you see? If buildings don't have someone living in them, they are probably commercial properties. Commercial real estate investments include office buildings, industrial buildings or even large apartment complexes. These buildings have benefits and challenges that differ from residential real estate. The tenants are generally going to be businesses rather than individuals. Rents might be negotiated in different ways from housing. For example, the rent could have scheduled increases over the life of the lease or be partially based on a percentage of sales. Commercial tenants are often more self-reliant than residential tenants and are more likely to stay for a longer duration than residential renters. Buyer qualification will depend less on the individual's income and more on the strength of the deal and the buyer's business qualifications. Commercial properties will require larger cash investments from the buyer. Commercial financing has different and more restrictive standards. In case of an economic downturn the property may sit vacant for years rather than a few weeks or months. There are fewer potential buyers compared to residential real estate.
Don't want to be a landlord? Consider property 'flipping,' or property redevelopment, as a way to make money in real estate. Flipping is buying a property with the intent to sell it for a profit. Flippers make money in many ways. Profit can be made through market appreciation or making improvements to increase the value of the property. They may find a property and be able to buy it for a deep discount, only to sell it at full retail price a few weeks later. A handy person might be able to find a fixer-upper, do the work himself to fix it up, and then sell the property. The less time the investor owns the property, the less is paid in holding costs. These are the taxes, insurance, interest and mortgage payments the owner must make until the house is sold. It's possible to make a large amount of money in a short amount of time with the right property flipping deal. However, when the property market fluctuates, the property investor may owe more than the house can sell for. Cost overruns or increasing holding periods can cut into profits. Flipping tends to be less tax advantageous compared to other investing opportunities. Flipping requires more cash or access to short term lending as lenders offer fewer low cost financing options for property investors buying single family homes which are not owner-occupied.
There are many advantages and disadvantages to investing in different types of real estate. Buying and renting single family homes can offer long term rental income but could involve significant holding costs. Multi-family properties such as duplexes could generate greater revenue as rentals but could be more difficult to sell in the future as there are generally fewer buyers for them. Commercial properties can involve special sorts of lease terms that could increase profit for investors, however they can also sit vacant for longer than other types of investments, resulting in financial losses. Property 'flipping' includes higher risks and rewards depending on the fluctuations of the property market.
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Back To CourseReal Estate Exam Prep
16 chapters | 191 lessons
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