There are a lot of different types of real estate out there, and the one you choose to invest in could change everything about your financial future. In this blog post, we’ll explore the seven most common types of real estate and their benefits and drawbacks. We’ll also give you some examples of each type so that you know what to expect when investing in any one of these areas.
Real Estate in a Nutshell
If you’re wondering, ‘what is real estate?’, simply, real estate is the ownership or control of land or buildings by individuals or businesses. It can also be a term for the business of buying, selling, and renting out real property.
Real estate investment refers to the acquisition of real property by an investor with the primary objective of generating income from it either through rental payments from tenants or through capital gains when the asset is sold at a higher price than was paid for it. The types of real estate you decide to invest in will massively influence whether or not you see cash flow, appreciation, or both.
The 7 Types of Real Estate
- Residential Real Estate
- Commercial Real Estate
- Industrial Real Estate
- Land
- Mixed-Use Real Estate
- Special Purpose Real Estate
- Digital Real Estate
It’s important to note that real estate investing is kind of like ice cream—everyone is going to have their favorite flavor. Each type comes with its specific set of rules, benefits, and drawbacks.
Residential Real Estate
Residential real estate is one of the most popular choices among investors because it offers a diverse range of investment opportunities and is one of the easiest ways to start investing.
Pros:
- Plentiful throughout every US state, you can invest in your backyard or try buying a rental property out of state.
- Arguably the easiest, most beginner-friendly way to invest in real estate
- Multiple types of residential real estate (single-family, multifamily, etc.) make it scalable for any real estate investor.
Cons:
- Highest competition of any type of real estate investment.
- Appreciation is (usually) based on comparable homes around you, not the income you bring in.
- Most residential investment loans will require at least 20% down.
Examples of Residential Real Estate
Here are some of the most common types of residential real estate investments:
- Single-family homes: Residential properties that can house one family.
- Apartments: Small apartment complexes that house up to four families.
- Condos: “Owned” apartments that usually fit up to one Family.
- Multifamily homes: Duplexes, triplexes, quadplexes. Usually, just one property that can fit multiple families.
Commercial Real Estate
Commercial real estate is any property that’s used for business purposes. It can be a standalone building or part of a larger development. Examples include retail shops, office buildings, and warehouses.
Pros:
- Lower competition, so finding deals can (sometimes) be easier.
- Wide variety of different types of properties that an investor can specialize in.
- Can be purchased using a low-money-down SBA (small business administration) loan.
Cons:
- A much more challenging learning curve than investing in residential real estate.
- Most investment loans will require at least 20% down.
- Higher prices mean higher down payments and more cash to get the deal done.
Examples of Commercial Properties
Commercial real estate is an incredibly diverse investment property type, and as such, it attracts investors from all walks of life. Here are some of the most common commercial properties:
- Shopping centers: This can be a strip mall or an entire block of shops, but this tends to be a multi-tenanted type of commercial real estate.
- Self-Storage: Even small-time investors can invest in self-storage, with dozens of tenants renting out space in one facility.
- Hotels: Short-term rentals but on a MUCH larger scale.
- Parking Facilities: Rent by spot with hundreds of tenants at one time.
- Mobile Home Parks: Mobile homeowners or renters will pay you a fee to park their homes on your spot.
Industrial Real Estate
Industrial real estate can be a great investment, as it can often bring in higher returns and has more potential for growth. Warehouses, distribution centers, and manufacturing facilities are popular types of industrial real estate.
Pros:
- With the modern world’s heavy emphasis on logistics, Industrial is becoming a highly demanded type of real estate.
- Most industrial leases (triple net leases) put the burden on the tenant to pay for repairs.
- Longer rental terms allow for five, ten, or twenty-year leases.
Cons:
- Less availability as industrial real estate tends to be very big and very expensive to build.
- A high-cost barrier to entry as many industrial real estate investments starts in the millions of dollars.
- Will often require at least 20% down from the investor.
Examples of Industrial Real Estate
Industrial real estate may seem allusive to the average investor, but you pass by these buildings all the time.
- Warehouses: Many businesses need industrial-level storage to keep their massive supply of materials.
- Factories: For manufacturing, businesses often lease out industrial rental properties.
- Flex Space: This refers to manufacturing, warehouse, and office combo that many industries still use as standard.
Land
Land is the most basic form of real estate. It’s any piece of land that can be owned, used, or developed by individuals or companies.
Pros:
- Can be lucrative when buying in a well-researched area of the country.
- Low barrier to entry without much (if any) management needed.
- Potential for high price appreciation (without doing much work!)
Cons:
- Land investing can be speculative as there is only one exit strategy (selling!)
- Illiquidity tends to scare off many investors as unwanted land is very hard to sell
- Very hard to finance as you’ll need to show a clear path to profit for the investment.
Examples of Land Investing:
Even though it’s just “land,” there is more than one way to invest in it.
- Timberland: Land that will be used to harvest wood.
- Farmland: Land that can be leased to farmers to grow crops.
- Residential and Commercial Development Land: Land that can be developed in the future/is on the path of development.
- Mineral Production Land: Land that has mineral rights attached to it that can be used for mining.
Mixed-Use Real Estate
Mixed-use real estate is exactly what it sounds like—it’s mixed-use! That means that one property can serve multiple functions, often operating as a sort of commercial/residential hybrid.
Pros:
- Multiple exit strategies as you can lease to different types of tenants.
- Tenants of commercial parts of the property may benefit from exposure to residential tenants in the property.
- Residential tenants can see being close to shops and commercial stores as an amenity.
Cons:
- Noise from either tenant may cause the other to complain and conflicts can arise.
- Traffic may be increased causing safety concerns and a lack of parking for residential tenants.
- It can be difficult to finance mixed-use facilities unless there is a clear sign of demand.
Examples of Mixed-Use Real Estate
“Mixed-use” may sound like a new term, but there’s a high chance that you’ve shopped (or even lived) at a mixed-use property before.
- Apartment complexes with stores on the bottom: This is common in dense and urban areas of cities.
- Gyms with residential housing above them: Another very common layout that most people have seen or experienced.
- Stores with industrial space behind: This is when a store might be the forward-facing part of a property while having a manufacturing/storage/commercial property in the back, often tenanted by another business.
Special Purpose Real Estate
This is a broad category that encompasses everything from medical facilities to retail stores and schools. Special purpose real estate is often used for single, specific use and is built for a particular industry or activity.
Pros:
- With limited space for specific industries, landlords may be quick to lease tenants that fit their requirements.
- Tenants may pay for alterations to the building to fit their own needs (at no cost to you).
- Rent can be flexibly adjusted as there is often a low supply of special purpose buildings for a certain tenant type.
Cons:
- Limited exit strategies as a special purpose property can only be rented out to one type of tenant.
- Conventional lending may be difficult as most lenders find special purpose real estate risky.
- Expensive build cost due to the specific needs of a type of tenant.
Examples of Special Purpose Real Estate
- Schools
- Bowling Alleys
- Movie theaters
- Oil-change locations
- Marinas or boat storage
- Gas Stations
- And a lot more!
Digital Real Estate
Digital real estate lives on the blockchain and takes all the physical work out of real estate investing. There are no maintenance calls, plumbing issues, or any of the “traditional” real estate-related headaches, but this does come at a cost.
Pros:
- With growing interest in blockchain, digital real estate is becoming more popular.
- You can buy (and manage) your digital real estate investment from anywhere in the world.
- Buying and selling digital real estate is quick and easy on the blockchain.
Cons:
- As a new industry, digital real estate is highly speculative and could see intense price volatility in the future.
- There is no regulation on digital real estate so the government can’t protect your property.
- There is a very low chance you’ll secure a loan for digital real estate (at least from a conventional lender).
Examples of Digital Real Estate
Even though the term “digital real estate” is usually reserved for blockchain “properties” there are also a few other types of virtual real estate to invest in.
- Digital properties: These can be bought, sold, rented, or flipped on sites like The Sandbox. Metaverse real estate also falls into the digital properties category as well.
- Media Files: These can be purchased, rented, or licensed out in the form of music or other types of media.
- Software Programs: One of the most popular types of online real estate, you probably already pay for a few types of software!
- Websites: With affiliate marketing or website flipping, millions of digital entrepreneurs have already made substantial profits.
Pick The Type of Real Estate That’s Right For You
Real estate is a broad category. It includes everything from rental houses and apartments to commercial buildings and land. The type of real estate you decide to buy will depend on several factors, including your experience level, budget, and goals. Before you buy your first piece of property, make sure you know the pros, cons, and risks of each. Find the one that you’re most passionate about and dive deep into learning more about how it works. This will pay you back well into the future as your expertise leads you to bigger and better deals.
