According to a 2019 survey by Bankrate, real estate is Americans’ favorite long-term investment choice (28%), having topped the list in five out of the seven years before that. And it’s easy to see why: the total value of the global real estate market was $326.5 trillion in 2020.
Real estate investments fall under two broad categories—traditional and alternative. Traditional or conventional real estate investment involves owning and managing land and buildings. Alternative real estate investors, on the other hand, don’t interact with the physical asset.
Here’s a look at the different types of real estate investment and their characteristics.
1. Residential real estate
It is perhaps the most well-known and easily understood type of real estate investment. Residential real estate can include vacation homes, townhouses, apartments, and single-family homes.
Investors in residential real estate can generate profits by collecting rent from tenants or selling the property. Investments in residential real estate are often labor and time intensive but can pay off with substantial profits or reliable revenue streams.
Investments range from minor ones like renting out an extra room to something as complex as purchasing, upgrading, and selling multiple properties (home flipping).
2. Commercial real estate
Commercial real estate refers to buildings and land used for business purposes instead of living space. The goal is to generate a profit, and it includes a variety of structures, such as:
- Rental office space,
- Gas stations, and
- Multi-family apartments.
The property owner can either conduct business activities to generate income or lease it to other businesses and collect rental income. Alternatively, the investor can hold on to the property until it appreciates in value and then sell it.
3. Real estate investment trusts (REITs)
REITs are corporations that manage a diversified portfolio of real estate holdings on behalf of investors.
REITs have a high level of transparency since they must report their financials frequently, like other publicly traded stocks. They also offer easy entry for investors because REITs function similarly to equities.
The great thing about investing in REITs is that they must pay at least 90% of their taxable income back to their investors as dividends every year.
However, dividends from preferred stocks don’t qualify for the low tax rates available to common stocks. Still, if purchased at a fair price and with a substantial buffer, they can be valuable to the proper investor’s portfolio.
4. United States Property Coins (USP)
United States Property Coin, or USP, is a security token project tied to real estate in high-demand areas in the US. Its financer, Primior, is a major real estate investment company that has developed more than $1 billion worth of real estate projects.
USP aspires to be a first-rate savings vehicle and hedge against inflation. One reason for its development is to act as a viable alternative to the unstable US dollar, utility tokens, algorithmic-backed coins, and dollar-backed “stablecoins” by securitizing real-world, income-producing properties in major urban centers across the United States. Its main characteristics include the following:
- It serves as a more secure medium of exchange and savings. It offers a fractional ownership stake in a diversified portfolio that stands to gain from both short-term and long-term income increases in the value of the real estate assets backing it;
- While stablecoins and the fiat currencies tied to them can lose value, USP is expected to gain from the immediate cash flow revenue and the long-term capital growth of the underlying real estate assets.
5. Real estate crowdfunding
Crowdfunding platforms use social media to connect investors to real estate investments. In the arrangement, numerous people raise the little capital they have, which can raise large sums of money.
Crowdfunding is a quick way for companies to raise large sums of cash if they have a great business idea but lack access to capital. A crowdfunding drive offers an investor the chance to become a shareholder in a real estate asset.
Like REITs, this type of investment has a low entry barrier and high passive income potential. The biggest drawback of crowdfunding is investing in a firm with scant financial history, which can put investors at risk of losing everything.
6. Raw land
Investing in raw land means buying an undeveloped property and aiming to transform it into farming land or commercial or residential real estate. However, if you plan to develop the land on your own, conduct considerable market research before making any purchases.
Investing in raw land requires in-depth knowledge of all aspects of real estate, especially building rules and zoning regulations. Astute investors typically combine raw land with other properties (assembly) and rezone it to increase its value.
There are many types of investing in real estate. Investing in commercial, residential, and vacant land is the most common. REITs and crowdfunding offer a path for entrepreneurs to invest relatively smaller amounts of money and earn from shares in a property.
A novel way of investing is the United States Property Coin (USP), which allows entrepreneurs to try out blockchain-enabled real-estate investing. Since US real estate tends to appreciate over time, it is one of the best inflation hedges.