You've likely heard about the potential money you can make by investing in property, but if you're like most people, you don't understand the nuances that make such profitability possible. If you're new to the world of property investment, there's good news and bad news—the good news is, property investment is much more approachable than you think. The bad news is, there are still a lot of complexities and nuances to learn before you can use it to build wealth.
In this article, we'll take a look at the major types of property investment that exist, and how to get started as an aspiring property investor.
Types of Property Investment
Let's start by taking a look at the different types of property investments that investors use to make money:
- Residential rental property. One of the most common types of property investment is residential rental property, in part because it helps you make money in several ways. Ideally, you'll collect rent from a tenant in excess of your monthly expenses, resulting in a net profit every month. Even if you only break even, you can sell the property for a profit later. The only real downside here is that you'll need to invest time into the upkeep and maintenance of the property, or work with a property management firm to ensure the property stays in good condition. There are many options within this category; for example, you could choose to start with a single-family home, or opt for a multi-family home, where you can house multiple tenants simultaneously.
- Apartment buildings. Apartment buildings are very similar to residential rental property investments—in fact, they can be considered residential rental property investments. However, they tend to have many individual units available. This reduces the impact a single vacancy has on your bottom line, making your income more consistent, but apartment buildings are also much more expensive to invest in.
- Speculative property. Some people purchase property because they believe they can sell it for a higher price later, usually as a short-term play. In many cases, this means buying a property in poor condition for a great price, fixing it up, and reselling it almost immediately—a strategy known as flipping. In other cases, a buyer may hold the property for a few months to a year or longer and sell it when prices in the area increase.
- Flipping houses can be very lucrative, but it requires planning, skill, and hard work. Before getting started, you should research your market, secure your financing, and build a team of real estate professionals and contractors.
- Commercial property. Some investors prefer to buy commercial property—in other words, property that can be leased and used by businesses. Business tenants may be harder to find than residential tenants, but they also pay more and stick around longer, assuming they have a good business model in a favorable location.
- Raw land. You may also be interested in purchasing property in the form of raw land. Once you have the land, you can develop it however you choose, or sell it for a profit when it rises in value.
- REITs. Some people don't like the idea of searching for a single property that meets all their needs, or building a property investment portfolio from scratch, but they still want to be exposed to the real estate market. The ideal option for these investors is a real estate investment trust (REIT). REITs trade much like stocks, allowing investors to put in however much money they want in exchange for a portion of ownership in a property investing company.
Choosing the Right Property
Most of your success as a property investor, regardless of how you choose to invest, will come down to your ability to find the right property. In most cases, that means getting a property in a good area, with lots of potential for growth, for the lowest possible price.
This is challenging, especially for new investors, because it's not always easy to tell a good deal from a questionable one. Additionally, there are a lot of hungry property investors out there, and they might all be competing to eat up the good deals once they hit the market.
You can increase your odds of success by working with a real estate agent, or even by becoming one yourself. Real estate agents often get access to good deals before they hit the market, and they have a good understanding of the ebb and flow of prices in specific neighborhoods.
Learning From Experience
New property investors almost always fail, or at least make mistakes, with their initial investments. It's part of the learning process. If you're interested in getting started as a property investor, consider talking to other property investors in your area, or finding a mentor who's willing to share their wisdom with you. There's no real substitute for experience when it comes to education, but guidance from others can help you on your journey.
