5 Most Common Types of Real Estate Investments

Real estate is commonly divided into two main types: residential and commercial. Residential real estate includes single-family homes, condominiums, and apartments; commercial properties cover many types used for business and investment purposes, including office space, a factory, and a ranch.

When investing, consider your experience, desired returns, initial capital, and risk tolerance. Consulting with real estate professionals, including realtors and attorneys, can also help you navigate the investment process.

» LEARN: How to find an investment real estate agent

Examples of types of real estate investments

1. Residential real estate

⭐️ Best for: First-time investors and homeowners

Renting out residential units to tenants is the most popular form of real estate investing. In fact, individual investors owned approximately 70% of all rental properties.[1]

Residential real estate refers to:

• Single-family homes, including condos and townhouses
• Multi-unit homes up to 4 units (duplexes, triplexes, quadriplexes)

Your residential real estate investment options include:

House flipping

Flipping a house usually involves buying a distressed or unwanted house, rehabbing it, and selling it for a profit. The trick is to not pay more than 70% of what it costs to buy and repair a house — this is known as the after-repair value (ARV).

Our own survey of over 700 real estate investors nationwide found that they typically aim to offer 65% to 70%, with a median offer of 67.5% of a home's ARV. So a property with an ARV of $200,000, would have an offer no higher than $135,000.

When done right, house flipping offers the highest returns. However, you may need to sink tens of thousands of dollars into renovations, and remember that there are never any guarantees. You may also face high short-term capital gains tax rates if you buy and sell in less than one year.

» LEARN: How to Flip Houses for Beginners

House hacking

House hacking means you’re a live-in landlord of a 2- to 4-unit house. This form of real estate investing lets you earn passive income on your home while paying off your mortgage faster.

House hacking is great for casual first-time investors — and it’s how many investors get their start. You’ll need to make sure you have the bandwidth to be a landlord, though, and you risk having higher costs than you can afford if you can’t find a tenant.

Long-term rentals

The next step after house hacking — in terms of both income and responsibilities — is leasing a building or house to long-term tenants. Note: An apartment building (i.e., more than 4 units) is actually a commercial property.

Renting an entire house is especially attractive to families who don’t have enough space in a standard apartment but can’t yet afford their own mortgage.

Many people hire management companies to handle day-to-day admin, subcontract out for maintenance, and find tenants. Others like to take on the full-time responsibility themselves — the choice is completely yours.

Short-term and vacation rentals

If you have a private space, such as an entire unit or house, you can earn quite a bit of additional income from short-term rentals, usually hosted through a platform like Airbnb.

These properties may not require as much involvement as a house hacking or a long-term rental, but you will likely pay significant fees to the hosting platform and for cleaning.

» FIND: The Best Short-Term Rental Markets (and Where to Avoid)

2. Commercial real estate

⭐️ Best for:  Experienced investors looking to diversify

Commercial real estate is property used for business purposes. This is pretty broad, as these properties could be for niche businesses, such as hospitals or gas stations, or they could be as generic as storefronts and office spaces.

If you have some experience investing in real estate, such as house-flipping or renting to tenants, buying a commercial space can expand your portfolio — but you’ll need a higher risk tolerance.

Commercial properties have similar price points to residential ones, depending on your market and property type.

Compared with residential properties, commercial investments are much more complex and less accessible for first-time investors. Up front, you’ll typically need a large cash buy-in; long term, you’ll have to deal with different scales of market rates, local municipal ordinances and zoning laws, special assessments, and tax bills.

You may also have to deal with higher vacancy rates (office buildings, for example, have a vacancy rate of 17.8%).[2]

How to get started in commercial real estate

If you’re a first-time investor with your heart set on a commercial space, consider partnering with a real estate investment group (REIG). In an REIG, you join other investors to collectively own a property, sharing costs and decision-making. This collaborative investment model offers increased security initially, but be prepared for potentially slower returns on your investment.

You can also invest in real estate investing trusts (REITs), which work similarly to stocks. REITs are typically for larger, more expensive properties and, therefore, have more legal complexities to protect the stakeholders.

However, investing in REITs doesn't equate to direct ownership of commercial properties. Instead, it's a more indirect, hands-off method, akin to investing in a company that owns and manages a portfolio of real estate assets.

3. Industrial real estate

⭐️ Best for: Small business owners that ship their goods

Industrial real estate is commercial property that’s used for niche purposes. The most common example is a manufacturing space, like a factory. While they can be harder to find or zone, industrial properties are some of the most stable long-term investments.

Be strategic about industrial properties by choosing the right commercial lease to balance what you pay as a landlord and what tenants pay. For example, you might pay for repairs and property taxes, but the tenant pays utilities. Learn more about commercial lease types.

If you manufacture any products, owning a specialized space to make them can cut out the step of leasing a space. Even if you don’t produce anything yourself, providing other businesses with a fully equipped workspace can lower their overhead costs while giving you steady income from rent — win-win!

Warehouses are also industrial properties, including self-storage, fulfillment centers, and transportation terminals. These are pretty expensive to buy up front and maintain — you’ll need large lots, climate control machinery, and high insurance premiums — so you may not see any profits for a few years. But once you have consistent tenants, the space will start to pay for itself year over year.

Data and research centers are similar to commercial office spaces, usually with major distinguishing features. Laboratories, for instance, require climate control, security, and biohazard controls. Server rooms, meanwhile, need a lot of fiberoptic infrastructure and use a lot of electricity.

4. Mixed-use real estate

⭐️ Best for: Small business owners, or investors in a high-turnover economy

Mixed-use real estate typically meets more than one zoning requirement. This could mean attached residential and commercial spaces, or flex commercial spaces.

Types of mixed-use real estate include:

• Homes above storefronts. Living spaces located directly above retail shops. 
• Workshops with showrooms.  Areas that combine production spaces, like workshops, with consumer-facing showrooms.
• Educational facilities. Buildings that house educational institutions with dedicated classroom spaces and specialized laboratories. 

Most business owners lease the properties they work in rather than own them. While leasing allows them to scale their businesses and try out different locations, commercial landlords have the leverage to charge high rents. Unfortunately, this can lead to a cycle of high turnover, so buying the property outright can offer business owners security.

If you’re a brick-and-mortar business owner, opting for a mixed-use property may offer you the flexibility to:

• Live in the same building as your business.
• Rent out the commercial space when it doesn’t suit your needs anymore.

If you’re already an investor, a mixed-use property in a desirable area can be a stable investment since you’ll have income from at least one part of the property (e.g., either the coffee shop or the apartment above it). Just know that the rent you charge will determine how successful a business is.

5. Land

⭐️ Best for: Small farm owners, rural homeowners, and speculators

Types of land real estate include empty or subdivided plots, new construction, and agricultural land (e.g., farms, ranches).

When you purchase land, your investment options are to:

Buy to build property

Building a new property on undeveloped land can definitely be a good investment — but it’s best suited for your own use. You can build your dream custom home, start a new farm operation, and have a stable wealth-generating asset.

Although you can resell the house, you’ll have to be careful not to personalize it too much during construction and appeal to the most buyers. The risk here is that residential buyers may not want to buy a highly customized home just to renovate, and institutional investors may want to demolish the property altogether.

That said, you may also be able to sell a turnkey home, which has an added incentive of being new enough to sell as-is.

How it works: After evaluating the zoning, utilities, and contractor quotes, it takes an average of 15 weeks to build a new house. During this time, the land will be developed, foundation poured, framing and major systems set up, insulation and flooring installed, and appliances added. Learn how to buy land and build a house.

If you plan on starting an agricultural operation, register your farm business, obtain the permits you need, and buy insurance before building. Once the construction is ready, you can use it to operate your farm or ranch. Learn how to start a farm.

Subdivide land and resell

Subdividing land can yield the highest returns, similar to flipping a house, but the up-front investment and effort may not be affordable for the average investor.

How it works: You buy a plot of land and separate it into smaller lots you resell. Minimum lot sizes vary, so you may also need to file with your local municipal office to rezone the land before subdividing it.

Besides buying a plot of land that’s big enough to subdivide — which can be very expensive — the process of subdividing land also requires architects, engineers, and surveyors to get involved.

Buy and hold

Buying and holding is the most speculative investment option.

How it works: You buy a plot of land assuming that the area will be highly desirable in a certain amount of years. For example, if you live in a less-populated market but you see signs of it emerging in the next few years, you may want to:

1. Buy land at a relatively low price
2. Hold it while it acquires equity and value
3. Sell at a high price when the area explodes in a few years

However, there’s never a guarantee of how an area will develop, so you risk buying land that stays at a low value. And if you don’t develop the land — e.g., with new or rehabbed construction or with agricultural plot — you’ve passed up on potential usable equity and additional income.

A good alternative may be to invest in a farmland REIT instead.

Finding and financing a land purchase

You can search for land to buy as you would for a house: through a real estate agent for new construction, a realtor with an Accredited Land Consultant (ALC) designation, or specialized real estate websites.

Our top picks:

• LandWatch
• LandFlip
• Land And Farm
• US Department of Agriculture resale website
• USAGov federal lands for sale

Some financing options include:

• New construction, lot land, and raw land loans
• Seller financing
• Grants for building, buying, or repairing a home

What type of real estate investment is right for you?

As you decide between all your investing options, consider these factors:

• Is this your first time investing, or are you diversifying your portfolio?
• Are you targeting quick returns (e.g., within a year) or steady long-term income?
• How much do you have to invest up front, and what’s your risk tolerance?
• How involved do you want to be in maintaining your property?

For most casual and first-time investors, residential properties and REIGs are the most accessible options — they offer low to medium deposits and predictable returns.

On the other hand, private business owners may want to lean into their sectors and buy the buildings out of which they operate: mixed-use for store owners, industrial for manufacturers, and land for farmers.

Finally, more experienced investors looking to expand their portfolios have many more choices of commercial properties.

But whether you’re just starting or looking for a sounding board, a professional’s guidance is invaluable. Real estate agents can, of course, help you find the right property for your strategy. But they can also connect you to attorneys, tax advisers, investment brokers, and other pros who can get you the best deals and ensure you meet all legal requirements.

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