Residential rental properties: As a new real estate investor, residential rental properties are the best way to get started. Begin with single-family homes, duplexes, and triplexes. If you have a more significant investment appetite, you can look for small multifamily buildings with 5 to 50 units.
Pro Tip: When investing in residential real estate, only buy Class A properties. These properties are newer (less than 15 years old), command higher rents, and attract tenants with high incomes.
Commercial rental properties: Commercial real estate investing is suitable for investors with real estate experience and financial reserves. Office complexes, skyscrapers, warehouses, storage units, car washes, strip malls, and even small storefronts are all included. You can even build a small office building and lease offices to small business owners to diversify your real estate investments. However, remember that commercial buildings have unique safety and management requirements.
Pro Tip: For commercial buildings, it may be worthwhile to sign multi-year leases to ensure consistent cash flow and to outlast any rent decreases. However, if you live in a competitive market with rising rents, your returns may be constrained by the old leasing agreements.
Mortgage notes: Every real estate investor would agree that managing rental properties takes time and effort. Investing in functioning mortgage notes is a good option if you have limited time or experience in real estate. Mortgage notes, like rental properties, provide a consistent cash flow without the hassle of property management. Mortgage notes can be obtained from banks, loan platforms, and brokers.
- Consider the risk profile of the note, the assets backing the note, and the borrower’s profile.
- Determine the note’s underlying assets and ensure they are maintained or have resale value.
- When reviewing their profile, focus on the borrower’s FICO score and debt-to-income ratio.
Tax liens/tax deeds: Tax liens/tax deeds are another lucrative option for real estate investors looking for passive income. However, investing in tax liens necessitates some caution, so begin by conducting due diligence on the property and being aware of the potential returns on your investment. However, when a property owner fails to pay property taxes, the local county or city places a lien on the property. A tax lien or deed issued against a property cannot be refinanced or sold until the lien is cleared. According to a CNBC article, more than $14 billion in property taxes go unpaid each year, with at least one-third of these taxes sold to private investors.
Real estate investment trusts/mutual funds/ETFs: If you have limited resources or time but want to include real estate in your portfolio, passive real estate investments may be the way to go. Some of the best indirect real estate investments are real estate mutual funds, real estate investment trusts (REITs), and exchange-traded funds focused on real estate. Again, the key is to consider the long-term profitability offered by these investments and their historical performance.
Pro Tip: You can choose passive real estate investments that are backed by a variety of assets. Retail REITs, healthcare REITs, mortgage REITs, residential REITs, and office REITs are just a few examples.