Real Estate Investment Options Overview
Single family residential
The ultimate goal of investing in single-family homes is to obtain disposable returns from rental income and potential appreciation. Investing in multiple single-family residential properties can accomplish this goal, but unfortunately the costs can outweigh the benefits. Taxes, legal hurdles, property documentation, and other paperwork requirements affect the property’s value and the rental income it generates. Investor value is lost in the bureaucratic regulatory structure, magnifying costs in a recession. It is better to leave the single-family residential investment in more favorable times.
Multifamily Residential
Multi-family residences have an advantage over single-family residential properties. Various economies of scale reduce costs while maintaining profitability. Total purchase cost is less per square foot than with multiple single-family properties. Also, the fact that multiple families use the same property means that the total income from that property is higher than with single-family homes. The costs are lower and the income is higher; this is very good for any investor. Spreading costs across multiple units also means that the unit price is lower. Multi-family residential properties avoid many of the problems associated with residential investment.
Commercial real estate
Commercial real estate is a completely different animal compared to residential investment. Commercial properties have different financing requirements and have different formulas. A popular formula is the capitalization rate or capitalization rate. The capitalization rate is calculated by dividing the annual income (subtracting the fixed and variable costs) by the total value. The higher the capitalization rate, the better the performance. Capitalization rates are used with net operating income to calculate value. Net operating income is calculated by subtracting operating expenses from operating income. The result is the net operating profit if it is positive, but the net operating loss if it is negative. Capitalization rates are regularly reported in the real estate media, which shows their importance.
Real Estate Investment Trusts (REITs)
REITs are traded on exchanges just like stocks. They are trusts that invest directly in residential and commercial real estate. Investors often prefer REITs over any other real estate investment method. Getting in and out of the market is as easy as buying and selling stocks. REITs are highly liquid and can pay high returns, giving investors a great return on their money. REITs can invest in physical property, mortgage notes, or both, giving investors more options. High dividends are what attract investors to this asset class. The performance of REITs can serve as an indicator of the real estate market as a whole, providing investors with a great set of indicators.
Mobile homes
Mobile homes are a unique opportunity for real estate investors, especially compared to single-family homes. Rents are caught in a downward spiral thanks to oversupply. Investors are actually cutting rents to attract tenants and beat the scourge of vacancies. Mobile homes are in a different situation due to their high moving costs. Typically, the cost to move a mobile home is $ 3,000. Nobody wants to pay $ 3,000 in response to a rent increase of $ 10 or $ 30 per month. This makes rents more flexible for investors.