Types of Real Estate Investment

The Asset Class of Real Estate property is considered as one of the desirable source of profits in the long-run. Over the past 20 years, investor allocations to both public and private real estate have grown dramatically.

If you play your cards properly, Investing in real estate has a lot of advantages, which is why it's one of the most popular types of investments.

What is Real Estate Investment?

When considering real estate investing, buying an investment property and renting it out could be the first thing that may come to mind. While this is definitely true, it is just a small portion of the real estate investment options available to you. There are several distinct forms of real estate, and there are also numerous ways to invest in it. Ideally, real estate investment is when you purchase real estate in form of a piece of Land, a building, infrastructure, or any tangible asset. It can be simply defined as tangible asset that is often immobile yet transferable.

Types of Real Estate Investment

Real estate investment can be broadly categorised into active and passive investments. Let's learn what they actually mean:

1. Commercial Real Estate

Investments in real estate that are generally not residential are referred to as commercial real estate. The investments include hotels, distribution centers, office buildings, and retail outlets. This kind of investment, also frequently seen as active, entails the investor owning and renting out a Facility to a company that will use it. Commercial real estate may be rented out or sold for a profit when its value increases, just like residential real estate does.

Pros of Commercial Real Estate

• Low maintenance risk since tenant and owner relationships are more formalised because you are most likely renting out commercial space to businesses
• The amount of money a piece of commercial real estate brings in contributes to its worth. Having said that, your property can increase in value considerably more than a residential one if it houses successful enterprises
• It is well-recognised that commercial real estate produces greater profits than residential. Depending on the region you're in, managing a business space might eventually pay off if you can afford it

Cons of Commercial Real Estate

• Commercial investments often take more time. Instead of having a few renters, you'll undoubtedly have to deal with multiple leases and a variety of potential issues
• To maintain your property up to code and to help you Handle any problems that may arise, you can require expert assistance
• Property damage is a concern for both commercial and residential building owners, although investors in commercial buildings may have more concerns about injuries or property damage

2. Residential Real Estate

Most people are familiar with and understand residential real estate as a real estate investment. Having said that, there are several distinct residential real estate investing strategies that you may or may not be aware of, ranging from micro-flipping to Accessory Dwelling Units (ADUs). Residential real estate investments are often active, so you'll probably need to commit a lot of time and money to make them profitable. However, they have the potential to yield substantial returns and steady Income flow. Laws established by the Central and State Governments of India regulate residential real estate.

Pros of Residential Real Estate

• Real estate appreciates in value over time
• Depending on your income level, investing in real estate has tax advantages, including tax deductions
• Purchasing a property in a prime destination can make a big difference in your investment

Cons of Residential Real Estate

• It might take up a lot of your time to maintain the property or handle other Landlord responsibilities like collecting rent and supervising renovations
• Residential real estate investment may be highly pricey since you have to invest your own money into buying and upgrading property as needed
• It is not a very liquid form of investment. You can't just sell anything immediately and use the money from your investment right away

3. Real Estate Crowdfunding

It enables investors to come together, usually online, to pool their money and engage in chances they couldn't otherwise afford. Similar to REITs, this form of investment also requires very little Capital upfront and is regarded as a passive investment. While many online real estate crowdfunding sites demand users to demonstrate a particular degree of income before participating, some are accessible to all investors

Pros of Real Estate Crowdfunding

• It provides access to special opportunities to properties for investors
• This requires relatively little work, like paperwork and documentation, and can usually be completed online
• With crowdfunding, you can diversify your financial Portfolio without having to spend exorbitant sums of money

Cons of Real Estate Crowdfunding

• Platforms for crowdsourcing may charge customers a fee to utilise their service
• Dividends received by crowdfunding investors are taxed
• Investors are often intrigued by crowdfunding because of the low entry cost. However, it’s not always the case because certain investment platforms often require a minimum income level to become eligible to join

4. Raw Land

A piece of property that has no structures, pathways, crops, or anything else on it is referred to as raw land. Investing in undeveloped land is typically less expensive than doing so in developed land, and like other types of real estate, it also increases in value with time. If you want to develop the land, you can also take a land loan to buy it as raw land. Many owners of raw land Lease their property to farmers for agricultural use, or they look for sites with potential for development so they may sell them at a profit in the future.

Pros of Raw Land

• The expense of maintenance is not high
• With raw land, you have a wide Range of alternatives like buying and holding, leasing out, constructing something, and so on
• Compared to many other assets, raw land is simple to obtain
• In comparison to developed land, buildings, or homes, it is far less expensive

Cons of Raw Land

• If you acquire land with the intention of owning it, you might only have to wait for it to increase in value while conceivably renting it out for other uses
• Few tax benefits come with vacant land
• Zoning is not always simple. It might be challenging to acquire clearance from the neighbourhood township for whatever you may want to create on the site

5. Real Estate Investment Trusts (REIT)

In India, investors who want to participate in real estate but lack the necessary funds can purchase units of SEBI-approved real estate investment trusts that are listed on the stock exchange. The funds thusly gathered are invested in various real estate ventures.

Pros of Real Estate Investment Trusts (REIT)

• Depending on the REIT you invest in, you might anticipate receiving little but consistent income
• The burden of active real estate investments is completely eliminated
• Although many REITs are technically stocks, they can help diversify your portfolio because they are real estate assets and have a high level of liquidity

Cons of Real Estate Investment Trusts (REIT)

• REITs are taxed more heavily than eligible dividends
• Since you don't own or manage any of the buildings or loans in a REIT, you have limited influence over your assets
• REITs are less useful in case you are looking out for quick money because they are best used as long-term investments that pay you increasing sums of money over time

The Bottom Line

The most efficient strategy for real estate investment ultimately depends on your long-term objectives, risk tolerance, and desire to learn how to invest in real estate directly. Those who don't want to spend time learning the ropes can still diversify their investments in real estate by using REITs, crowdsourced loans for real estate, and possibly even real estate syndications or private notes. The advantages of real estate over equities for early retirement and financial independence are numerous, but anybody who is ready to learn direct real estate investment may gain from tax advantages, consistent returns, and a host of other advantages. It is advisable to review the investment options before making your decision.