Now that you’re ready to invest…
In Chapter Two, we talked about reducing your expenses so you’d have more money to invest. Now that you’re ready to invest, Chapter Three talks about the different types of real estate that you may want to purchase. There’s a lot to cover so I’ve broken it into two blog posts 3A & 3B
Types of Real Property
In general, there are three categories of real property, Residential, Commercial and let’s call it ‘Other’. With all three options, you can use a portion of the asset yourself. For example, you can live in one of the units or have your office there. In the case of a second home, you can rent it when you’re not using it and get many of the same benefits as a pure investment property.
It’s important to note that the various types of real estate do not share a single market cycle. In general, residential property starts the cycle, commercial next and finally industrial. This makes sense if you think about it. First, an area of town becomes trendy and residential property values start to rise. Next, funky restaurants come into the area followed by some retail boutiques and other types of commercial property to support the influx of more affluent residents. Any industrial buildings that may be nearby benefit both from having competition for space and, sometimes, the option to convert the industrial space into residential and/or commercial. If you believe that a residential area is rebounding, that may be the perfect time to scout neglected commercial space.
RESIDENTIAL REAL ESTATE
Normally considered to be any rental property with 4 or less units, residential real estate includes individual condos, single-family or multi-family homes that you buy to rent, included in this category are things like second homes. Multi-family homes can be a great place to start your investing because you can use one unit for your own home. This helps in several ways including lower interest rates, lower required credit score and easier property management. Even if you don’t live in the building, it’s usually easier to start small.
Along with rental properties of five or more units, commercial property includes property where people don’t live like stores and office buildings as well as mixed-use buildings that might have a combination of retail, office and apartments.
Commercial property is sometimes overlooked by new investors, but it can be an excellent option if you’re planning to manage it yourself and don’t want any late-night phone calls. It’s also a bit easier in some ways dealing with people in their place of work rather than their home.
This category includes industrial real estate, business opportunities and land. These can be more complex so if you decide to go one of these routes, be sure to consult your trusted advisors to make sure you’re considering all facets of the opportunity.
“Buy land. They ain’t making any more of the stuff.” – Will Rogers
Even though the supply of land is limited, there’s no limit to the ways that you could use it as long as you comply with local zoning ordinances. You can do anything from building a mountain and starting your own ski area to digging out a lake and selling fishing lessons.
Now you’re probably not going to actually build your own mountain, but you can and should think three dimensionally. When you buy land, you’re also buying what’s under and over the land–the mineral and air rights. Those can be sold or leased. You can build sky scrapers or underground bunkers. Are you in an area where there could be mineral deposits? Is there a company that might want to pass wires or pipes underground through your land? What about on the land–is your property in a very visible location? Would a billboard be easily seen? Would a cell company like to put a tower there? Is it an open space in an area with very little space available? That could make it ideal for farming or gardening. Many city dwellers are willing to pay rent to be part of a community garden. This could also qualify for grants or tax savings. In an urban area, companies will often pay you to park vehicles on your land.
In real estate, we talk about the concept of highest and best use. Highest and Best Use looks at the property as it is now and asks what it could be when it grows up. Maybe right now it’s a single-story convenience store but because of the location, changes in the community and zoning, its highest and best use is as a multi-story mixed-use building. Five stories with retail on the bottom, offices on the next floor and then three levels of residential. If you bought that property for the price of a convenience store and then maximized its possible usage, you could have huge gains.
Once you’ve explored and discovered the highest and best use, you don’t even have to be the one to develop the property. If you design the plans and get the local approvals and permits, you can sell that as a package to a developer who can make it a reality. You may even be able to negotiate staying in as a partner and getting a couple of the completed units.
Another way to add value is to subdivide the property, turning one lot into two or more buildable lots. You can find homes that are built on two lots or where one owner owns multiple lots. Sometimes zoning has changed and you’re able to buy one lot that is now large enough to support several home sites. You can then build multiple properties where there was only one before, usually by right. By right means that the current zoning regulations support the use. If they don’t, for example, if you want to put a two-family in an area zoned for single families, it may still be possible but you have to go before a board that will evaluate whether your proposal is in keeping with the goals that they have for the city or town. Subdividing is a great strategy for a rising market.
With all of these options for real estate investing–not to mention real estate investment trusts (REITs), stocks, bonds and this great new restaurant that your brother-in-law is starting–how can you make the right decision as to where to invest your money? Chapter 3B will help you evaluate your investment options.
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