Types of real estate investment and strategies for success

With the right knowledge and strategy, real estate investment can build long-term wealth. It’s a strong passive income stream, offering stability against inflation and more control than investments like stocks and bonds. But with options ranging from residential properties to commercial real estate, it’s not always easy to know where to start.

Below, you’ll find the tools you need to develop a successful real estate investment portfolio. Discover the most popular types of real estate investments, their primary benefits, and effective strategies to get ahead.

What are the different types of real estate investments?

Here are the most common examples of real estate investment, along with their benefits and drawbacks.

Residential real estate investment

Residential properties are the most common investments in the real estate world. Many types of residences fall under this umbrella, including:

— Single-family homes

— Multi-family properties (like apartment buildings or duplexes)

— Condominiums

— Townhouses

— Vacation homes

These investment properties have a relatively low barrier to entry, making them popular with new investors. Capital expenditure and ongoing expenses are typically lower than with other types of property in real estate like industrial land and commercial buildings. However, some investors find it time consuming to manage tenants, repairs, and legal red tape.

Commercial real estate investment

Commercial investors own properties like office buildings, retail space, and hotels. This form of real estate investment has similar responsibilities to residential rentals, but the scale of expenses and operations is much larger. While this scope can make the investment riskier, it also multiplies the potential returns. 

Undeveloped land investment

Buying undeveloped land, also called raw land, often means lower prices and less competition. Ongoing expenses are also minimal, and there are far fewer obligations to tenants — lessees are responsible for land upkeep and expenses. This property has high appreciation potential and offers a lot of flexibility, allowing investors to develop it based on market demand.

On the other hand, unlike rentals, you won’t pull in any income until you’ve found a lessee or developer. Investors can also face challenges during development, including zoning issues, environmental regulations, and lot clearing expenses.

Real estate investment strategies and how they work

Real estate investment strategies come in two main flavors: direct and indirect. Direct strategies involve purchasing and managing properties yourself or hiring a property management company to do so. Indirect strategies are when investors buy a stake in real estate assets, typically through a trust or mutual fund.

Let’s take a look at what the pros and cons of different types of real investments are.

Direct investments

Rental properties

Rental properties, also called buy-and-hold properties, are a viable way to generate a regular income stream. They’re flexible and work with many budgets, whether you start with a simple single-family home or invest in a large apartment building.

Rental property investors need financial planning expertise and strong interpersonal skills for managing tenants. They also have to ensure the property is profitable long-term so they aren’t stuck with a money pit that eats away at their savings. That means thoroughly analyzing metrics like cash-on-cash return and capitalization rate, plus expenses like repairs and property taxes.

Rental properties can be a good option for patient investors looking for steady, long-term growth rather than quick but risky profits. However, managing tenants, handling repairs, and keeping up with legal and regulatory requirements takes a lot of work. You also have limited liquidity since selling the property takes a substantial amount of time and effort.

Flipping homes

Flipping houses involves scouring the market for undervalued homes, fixing them up, and (hopefully) turning a profit from the sale. Flippers can make significant returns in much less time than other investment approaches. Skilled renovators can refurbish and sell property in months rather than waiting for gradual rental income over the years. But these investors take on a lot of risk — if they miscalculate expenses, face a market downturn, or have trouble finding a buyer, the entire investment could fall through.

House hacking

House hacking involves purchasing a residential property, living in a portion of it, and renting out the rest. With this strategy, the rental income you bring in could cover all or most of your living expenses, and you may even generate a profit.

While it’s a clever strategy, it comes with a high up-front investment because you need enough space to accommodate other tenants. You’ll also have to manage them, including screening, enforcing rules, and handling turnover, which can be stressful.

Indirect investments

Real estate investment trusts (REITs)

REITs are a type of property investment that allows multiple people to pool money into large-scale real estate. REIT companies own and manage a land portfolio — typically commercial — and anyone can buy shares in this business. This gives you exposure to real estate assets and gradual income without the burden of direct management.

These trusts are among the best types of real estate investments for generating passive income, as they’re typically low risk and low effort. You’ll need to dedicate time to choosing a promising REIT and keep an eye on your portfolio’s value and payout, but you can sidestep these tasks by working with a financial advisor.

Crowdfunding

With this method, you pour resources into projects and developments with other investors via an online platform. A company purchases land, then gathers investors to buy shares in the property. After buying in, you own a fractional stake in the managed real estate or portfolio and make financial gains if they succeed. While it’s similar to REIT, investors buy shares of the land rather than shares of the company.

Crowdfunding is typically a straightforward approach to quickly diversify your portfolio and spread out risk. While this is an accessible option for people with spare funds, it offers less diversification than REITs and less control than direct investments.

How do I analyze or choose which type of real estate to invest in?

Deciding where to focus your investment efforts means weighing a variety of factors. Here are the most common:

— Investment goals and risk tolerance: Consider what you hope to achieve with your investments. Patient investors seeking steady long-term growth may prefer renting out properties, while people who want quick gains and don’t mind the risk might love flipping houses.

— Market analysis: Review market demand, rental rates, and comparable sales in your location to determine the strategies with the highest profit potential.

— Financial resources: Never buy more than you can afford. Consider your financial situation, income goals, and ongoing costs to determine a sustainable investment.

— Diversification potential: If you’re looking to limit risk by holding a diverse portfolio, consider indirect investment options like REITs and crowdfunding.

Tax implications for real estate investments

Investing in real estate comes with certain tax implications, which can affect your bottom line. Here’s what to consider:

— Deductions: You can deduct many rental property expenses, including mortgage payments, insurance, and repairs, reducing your taxable income.

— Capital gains tax: Every time you sell a property, you’ll pay taxes on the profits. Keep in mind that holding the land for over a year is considered a long-term gain and is taxed at a lower rate, while short-term gains are taxed as typical income.

— 1031 exchange: You can defer capital gains tax by reinvesting your earnings from a sale into another property of the same type. This practice has a strict timeline — investors must identify the new land via written notice in 45 days and complete the entire acquisition process in 180 days. 

— Depreciation: If you’re managing rentals, you can deduct the cost of the property over 27.5 years for residential and 39 for commercial. This counts as depreciation, even if the land is gaining value.

Financing options for real estate investments

Here are the most popular ways to fund your investments.

Conventional loans

Conventional loans are familiar, widespread, and come with favorable terms if you have a solid credit profile and income.

Better offers conventional loans with a fast online application process, so you can start investing in a fraction of the time compared to traditional lenders. You can get pre-approved in minutes, with funds available in as little as seven days.

...in as little as 3 minutes – no credit impact

Debt service coverage ratio (DSCR) loans

A DSCR loan allows a borrower to qualify based on projected property earnings rather than personal income. They often have a quick approval process and don’t impact debt-to-income ratios, making them a good choice for buy-and-hold investors scaling their rental portfolios. However, they have higher interest rates than conventional loans and require bigger down payments.

Hard-money loans

These are short-term loans heavily based on the property’s value rather than your financial information. While lenders may look at your income or credit score, they barely impact the decision. Lenders typically approve hard money loans quickly, so they’re a popular pick for house flippers following a rapid renovation process. However, they aren’t common with standard investors due to the high interest rates, which average around 9–11%.

Kickstart your real estate investment journey with Better

From single-family homes to sprawling commercial complexes, there’s a huge variety of options for investing in real estate. Determine your goals and finances and pick an investment type, then secure a lender who simplifies financing from start to finish.

Better provides a fully online application process that takes as little as three minutes to complete. Get pre-approved for an investment loan and show sellers you’re serious with a strong, credible offer. There are no hidden fees, and investors get 24/7 support throughout the process.

Streamline the process and invest confidently with Better.

...in as little as 3 minutes – no credit impact