Common Types of Real Estate Investments
We find that investing in real estate with a Self-Directed IRA is a very popular topic with our clients here at iPlanGroup.
It’s an attractive investment for a number of reasons.
- It gives you diversification to a portfolio chock-full of stocks, bonds, and mutual funds
- It can potentially protect you against market volatility and inflation.
- It can offer added return potential when investing in real estate, depending on the level of risk you’re willing to take.
You’re probably wondering at this point, what types of real estate can I invest in?
Let’s start with the 5 most common types of real estate investments so you have an idea of what you can do:
Fix n Flip:
This is where you purchase a property, renovate it, and then sell at a profit. You look for and invest in a property that is discounted because of it’s less than ideal condition.
If you’re lucky, the property may need only aesthetic updating but most often this type of investment requires major renovations. Once you complete the renovations, ideally you sell it quickly and for a profit.
When considering this type of investment you want to have a good idea of the real estate market in the area you are considering. Most importantly, you need to know how the cost of the house plus the repairs fit into the “After Market Value” which is the approximate market value of the property once the repairs are complete.
This will determine if you are able to make a profit or not on your investment.
Acting as the wholesaler, you profit by finding a property that is under market value. Once you find that property, you then make an agreement with the seller of the property, and assign the purchase contract to another buyer.
Many people find this type of investing attractive because it doesn’t require a big amount of capital to get started. It’s a great way for beginners, to learn quickly about the real estate market in their area and learn how to negotiate, (knowing the rules in the county and state where the offers are being made).
As the wholesaler, you make money on the transaction via a wholesaling fee which most often is a percentage of the sale price.
In this type of investment, you act as the middleman, helping sellers and investors find and close on properties. The investors you sell the contract to are typically real estate rehabbers or other types of investors who prefer not to spend time identifying discounted properties or negotiating with sellers.
This is one of the most common investment properties. Currently these rentals make up more than one-third of all U.S. rental properties and that number is expected to almost double in the next 10 years.
You, as the investor, purchase a single-family home and rent it out. You build wealth in your portfolio as your tenant pays down your mortgage for you while the property ideally continues to increase in value.
Self-Directed IRA Investors who purchase this type of property have found that it’s possible to get a good returns on their investments over an extended period.
Small Multi-Family Rentals:
A multi-family rental is when you invest in a property that has more than one unit. It’s a great way for investors to accumulate multiple streams of income from a single property.
Many first time investors start out by occupying one of the units while renting out the other(s), however, this would not be a strategy to use with a Self-Directed IRA. An unrelated 3rd party however, could be that tenant.
If you want to build a large portfolio of rental properties then multi-family properties will save you time. It is easier to faster to acquire and manage a 5 triplexes than it would be to acquire and manage 15 single-family homes
This type of real estate investing is popular for those who wish to build a relatively large portfolio of rental units.
Think about it this way…purchasing a 20 unit apartment building is much easier and time efficient than going the route of purchasing 20 single family homes.
In general, apartment buildings have on the average 15, 20 units, or sometimes more.
These can be great investments, however when you move into investing in bigger properties, they present different challenges for the investor. Make sure you do your research.
What investment type is best for you?
You need to understand your investment goals, and have an exit strategy for each investment. Wholesaling and Fix n Flip are more “quick cash” and short term investment strategies where once you have your money you need to do it again.
Single-family, multi-family and apartment investments are longer term and give you recurring monthly income.
Want to learn more about investing in real estate with your Self-Directed IRA?
Investing in Real Estate: A Self-Directed Investor’s Guide will help you understand the benefits and drawbacks of investing in real estate with your self-directed IRA and will offer you the opportunity to effectively build wealth through diversification.