Real estate investing is a huge industry, but you need to know what each type of property is, and how they work, before you’re going to be able to effectively invest in any of them.
Understanding different kinds of real estate properties are also good for anyone who wants to buy a property to develop passive income, business owners looking to learn more about the properties available to them, and anyone else thinking about investing in property in the near future.
Here’s what you need to know about the different types, how they work, the pros and cons of investing widely or narrowly in real estate, and how you can make sure you have the real estate agent expertise you need to invest wisely.
What Are The Different Types Of Property?
There are three major different types of property, but a lot of subtypes within those types.
The three major types of property are:
In addition to those three, two other types of property are a little more specialized:
- Special purpose
That’s 5 total types of property you need to consider, though special purpose properties are rarely privately owned.
Each of these types has a slightly different purpose, both as an investment and functionally. It can be a good idea to invest in more than one type of property, but it can be just as good to specialize in one type and diversify your investment portfolio in other ways. Let’s talk more about the details.
Residential properties are places where people live. Think of single-family homes, condos, and similar structures. Larger buildings with many dwellings or properties like mobile home complexes are considered commercial because they’re built to make money on the property while making money is a secondary consideration for most residential properties.
These properties are usually more affordable, have a lower starting investment, but also offer lower ROI than commercial properties.
Commercial properties include any property that is built specifically to make money. There are a lot of different kinds of property that fall under this umbrella, and almost anything that is meant to make money but isn’t directly involved in the industry probably counts under this umbrella.
Hotels, restaurants, retail spaces, and offices are all different kinds of commercial properties.
There are two basic kinds of land properties that you need to think about when you’re in the land market, especially for development. There are pros and cons to both types of land, but understanding the differences can help you make better investment decisions regardless of which type of land you’re buying.
Brownfield properties are properties that have already been developed, and usually still have standing structures on them, but that needs a little cleanup or re-development before they are ready for resale or use.
Greenfield land is land that hadn’t been previously developed, which means that it’s ready for new development work. However, getting this land zoned, utilities run, and other development costs may be higher.
Industrial use involves research, development, distribution, storage, and manufacturing of goods. These properties tend to be larger, are often highly specialized, and are geared toward a specific niche.
It’s also especially important to pay attention to zoning restrictions with this kind of property because many industrial zones are reserved for specific kinds of industry, and the exact definitions and requirements of each type of industry vary from place to place.
Special purposes are properties like schools, libraries, and cemeteries that have a specific purpose in society, but that doesn’t really fall under residential, industrial, or commercial use. These properties are often, but not always, owned directly by the government overseeing their care and upkeep.
Should You Invest In Different Types Of Property?: The Pros And Cons
Most people know that having a diverse investment portfolio is generally a good thing because it can protect you from changes in one sector or market downturns that may benefit a different part of the market at the same time.
But does the same principle apply when you’re talking about property investments?
Well, yes and no, and largely it depends on what kind of investor you are and what kinds of expertise you bring to the table.
There are 4 basic things you should consider when you’re deciding if you want to invest in one or more types of property, and we’ll discuss the pros and cons of diverse property investment in each category:
- Down Payment Requirements
- Management Style
- (Your) Knowledge and Expertise
- Market Volatility
Down Payment Requirements
Depending on the type of property you’re interested in investing in you’ll need to meet a different level of investment hurdle.
For instance, where residential properties usually only require a 20-30% down payment on the property, commercial properties generally require a much high initial investment in the form of a 40-50% down payment.
Some commercial properties with 30% down payments are available, but they’re not very common, and the lower initial investment may indicate that there is a problem that will require more funds to address after you own the property.
There are pros and cons to both kinds of investing. In general, commercial properties will help you earn more and offer a better potential ROI than residential properties. But the barrier to entry on residential properties is lower, and the market is usually more consistent in the residential market than in the commercial market.
Management style is also an important consideration because it has a big impact on what kind of real estate investing you’re going to be successful with.
If you don’t mind more hands-on high-demand management, residential properties may be a good option. Costs of this kind of active management are generally pretty reasonable for the management company, but they’re more regular and take more time to handle.
On the other hand, commercial properties usually need less direct management, but problems tend to be bigger and cost more to solve when they come up.
Dealing with the occasional problem with the property shouldn’t be a problem for any real estate investor that isn’t just flipping the properties in question, but knowing what kind of management you’re willing to do is important when you’re deciding which properties you want to buy.
Knowledge And Expertise
Know a lot about housing and know how to tell the difference between quality renovations and cheap lookalikes? That could be a huge asset in residential real estate but probably won’t make as much of a difference in the commercial market.
On the other hand, if you have a lot of knowledge about how to build successful business spaces, or how to design an office for functionality and efficiency, that’s the kind of information that will make commercial real estate investing easier and more profitable.
Another big factor to consider when you’re deciding whether you want to invest in a wider range of properties is market volatility.
Having some residential properties can help pad your portfolio if there’s a downturn in your commercial investing, but, as we saw in 2008, residential investing isn’t as safe as we once thought it was. There is the potential for prices to go down or for the markets to crash, though it should be less likely after the reforms that came out of the last recession.
If you’re able to capably manage more than one kind of property, diversity does offer some protection, but no amount of real estate diversity is going to help if all real estate takes a big hit.
Worse, poor management of one type of property investment can steal profits from another, more successful, investment. If you aren’t confident in your ability to evaluate and manage a certain type of property, it’s probably not a good idea to invest in it even if doing so would add more variety to your portfolio.
Real Estate Expertise To Help You Determine Which Type Of Property Is Right For You
Finding a real estate agent that can help you not only find the right property, but also find the right kind of property for your investment goals might seem like a daunting task, but it doesn’t have to be.
There are a few key things you should look for in a real estate agent that can help you make sure you’ve got the right person on your side.
Real Estate Agent Vs Real Estate Broker
Any real estate agent that is working with non-residential properties at all will have gone through some additional training and possibly certification before they started working on those additional property types.
But, brokers have even more training, which may put them in a better position to help you determine what kind of property is right for you.
They Have A Wide Network
A real estate agent that’s helping you find investment properties should have a wide network of contacts, including other real estate agents, professionals from other industries, and construction and contracting companies they trust and recommend to clients.
When you hire a real estate agent with a wide network you aren’t just getting the benefit of their expertise, you’re also getting the benefit of their knowledge of who to call and their professional connections in the area.
A local real estate agent with experience in the area is going to be able to find the best properties and better understand the kinds of investment opportunities in their area. They’ll also be able to see trends in the market and potentially help steer your decisions more accurately based on local real estate trends.
Are you ready to start your real estate investment journey? If your answer was yes, contact Teifke Real Estate. Our team has the local knowledge, experience, and expertise you need to help you find the perfect investment property or properties.