Before knowing anything about real estate, the information can be overwhelming. I’ve tried to put together a simplified explanation of the six main types of real estate investments.
Residential Real Estate
When you think of real estate investing, this is probably most likely what comes to mind. This is probably the simplest and most common type of real estate investment. In this situation, you would invest in residential property, such as single family homes, vacation houses, town houses and apartment buildings. Then, you can rent the property to a person or family that will pay rent money every month to live in that property. The duration of their stay is decided in a rental agreement. Residential real estate is also the type of investment that is also “flipped”. A flipped property is one that was bought at a low price, repaired, and sold at a higher price in a short amount of time.
Commercial Real Estate
As the name suggests, this investment consists of office buildings. You can use your savings to purchase or construct a building with individual offices and earn a rent by leasing them out to small business owners and companies. This is usually too expensive for most investors to get into, at least as a first property.
Industrial Real Estate
This investment could be a car wash, storage units, or other special purpose properties that generate income from those who temporarily use these facilities. For example, these investments generate cash from fee and service income streams, such as placing coin-operated vacuum cleaners at a car wash garage to increase the return on real estate investments. Storage units can be a great investment for someone who has a large piece of land located near a busy area.
Retail Real Estate
Retail real estate investments are properties such as strip malls, shopping complexes, and other retail outlets where you earn by receiving rent from tenants of the store. In some cases, you can also choose to receive a percentage of sales made by the tenant in addition to the base rent so that a property can be kept in a good condition. Just like commercial real estate, retail is usually too cost prohibitive for most first time investors.
Real Estate Investment Trusts (REITS)
A REIT is a trust, corporation, or association that acts as an agent in a real estate investment or real estate mortgages. They trade like bonds and stock in the market and have a well-diversified portfolio of underlying real estate mortgages and real estate property investments. I don’t have a lot of experience with these, but I have heard from others who have invested in them with really good success.
Property Tax Liens
Property tax liens are probably the least known of all the real estate investment options. State, county, and city governments raise money to provide benefits and services by taxes. One type of taxation is a tax on real property. According to the law, the owner of a parcel of real property is assessed a dollar amount to pay based on the value of that real property. The assessed value is almost always much lower than the fair market value. In our area, for instance, the county is required to assess property at no more than 60% of its fair market value.
This assessed tax, in virtually all cases, is collected by the county where the property is located. If the owner of the property fails to pay the tax, the amount of the tax becomes a lien against the property. Governments don’t like property liens, as they don’t help the county and local governments pay for the services and benefits they have promised to provide for their citizens.
The county wants the money as soon as they can get it. It needs that money in order to fulfill its budgetary obligations. By state statute, each county is authorized to collect the taxes due that remain unpaid by selling at public auction, either a Tax Lien Certificate or a Tax Deed.
Most counties have a real estate tax lien auction once a year. Bidding per tax lien begins at a high interest rate (18% where we live) and decreases per bid. The investor who bids the lowest interest rate before the time expires gets the lien. The property owner then owes the new tax lien owner the amount of the lien plus the interest. If the property owner continues to default on their real estate taxes, the original tax lien owner is given first priority on the purchase of the subsequent liens. After a set amount of time (between 18 months and 3 years for most counties) if the property owner has still failed to pay their taxes, the tax lien owner has the right to foreclose and obtain the property. This amounts to almost no risk for the tax lien owner. If their tax lien is paid, they make all of the interest money. If the tax lien remains unpaid, then the tax lien owner will get the property. This is great for those who are hesitant to invest in real estate. However, it can be difficult to find all of the information you need to invest in tax liens. Check with your local county tax office to find out more information.