Property values have skyrocketed across the country in recent years, prompting many individuals to consider how to invest in various types of real estate. For residential homes, for instance, sales prices have increased nearly 55% between early 2020 and 2025.
We’re here to help you learn more about real estate investing for beginners, including the pros and cons of each option.
Key Takeaways:
- There are real estate opportunities available for investors at all levels.
- Your investment choice may largely depend on the amount of capital you have available and the degree of risk you want to take.
- Residential, commercial and raw land real estate are common options if you can make a substantial down payment.
7 Types Of Real Estate Investing
Not all real estate investments require you to own and manage physical property. You can also invest in real estate investment trusts (REITs) and crowdfunding platforms, which may be available at a much lower entry point.
Explore these seven different types of real estate investments to see if any fit into your overall financial goals.
Real Estate Investment Trusts
When investing in a REIT, you don’t own a physical property. Instead, you purchase shares in a company that operates many properties. As the REIT collects rent from tenants, it distributes a portion of the earnings to investors in the form of dividends.
REITs are an easy form of real estate investing for beginners because there are many options that don’t require a minimum buy-in. REITs can either be publicly traded, public nontraded or private, each of which impacts how you can buy and sell. When looking at your options, you can choose from different types of portfolios, such as mortgage, commercial or health care REITs.
REIT Pros:
- Potential to make extra income while not managing or maintaining the property
- Less cash required to invest
- Ability to sell publicly traded shares at any time during market hours to cash out
REIT Cons:
- REIT performance can be influenced by interest rates. Rising rates may pressure REIT valuations because borrowing costs increase and income-focused investors may shift toward bonds.
- REIT dividends are generally taxed as ordinary income rather than as qualified dividends that receive lower tax rates. However, some investors may be eligible for a 20% pass-through deduction on REIT income under current tax law. Fees can also vary depending on the type of REIT. Publicly traded REITs typically have lower costs, while non-traded REITs may charge higher upfront and management fees.
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Real Estate Crowdfunding
Real estate crowdfunding refers to multiple individual investors coming together to pool their funds and invest in real estate. You can find real estate crowdfunding platforms online. Alternatively, if you know of investors, it may be useful to reach out to them about any investment opportunities on the horizon.
This type of investment strategy is similar to a REIT because you don’t have to invest as much money up front compared to purchasing a physical property, but you’re still able to generate passive income.
Crowdfunding Pros:
- Diversify your real estate portfolio without buying a property on your own with a large down payment
- Simple process to start investing compared to other investment types
- May offer diversification compared to owning a single property.
Crowdfunding Cons:
- Not a liquid investment; funds may be committed to an investment for several years
- Online platforms may charge fees for their services.
- Investors have no control over how the properties are managed.
- Some platforms have accredited investor requirements. These are wealth, income, or financial sophistication criteria for individuals.
Personal Real Estate
Buying your own home is another way to gain entry into the real estate market. It makes sense; home values have grown more than 50% over the last 5 years, and even though the market has begun to slow in some parts of the country, you may build equity through mortgage payments and potential home value appreciation over time.
It does take time to save up for a down payment, and if you live in a competitive market, you may need to make multiple offers before one is accepted to buy a home. But there are perks to owning a home. You may later qualify for a home equity loan or line of credit for large expenses, and you could avoid capital gains tax when you sell. Eligible individual taxpayers may exclude up to $250,000 in gains, while those who are married and file jointly may exclude up to $500,000. To qualify, you need to have owned and lived in the home as your primary residence for at least 2 of the last 5 years.
Personal Real Estate Pros:
- Continue to build equity in your home as you make payments
- Potential to use your home equity as secured financing
- Capital gains tax exclusion on your primary home is available when you sell.
Personal Real Estate Cons:
- Some conventional loans allow down payments as low as 3%, although many borrowers put down 5%–20% depending on lender requirements and borrower qualifications. A couple exceptions: Department of Veterans Affairs (VA)/United States Department of Agriculture (USDA) programs may allow zero down payments for eligible borrowers.
- Property value depends on market conditions.
- Additional expenses like taxes, insurance and maintenance can diminish overall gains.
Residential Rental Properties
You can buy a rental property that is a single-family home, a townhouse, a condo or a vacation home. Then you can either act directly as the landlord yourself or hire a property management company to collect rent and manage tenants.
A landlord or property manager will need to handle background and credit checks, rental applications and the lease agreement. It’s also smart to make a condition report to track the property’s condition before and after a tenant moves out.
Estimates suggest that roughly 10%–15% of U.S. home purchases in recent years have been made by investors, with most buyers categorized as small or individual investors.
Residential Rental Property Pros:
- You may be able to deduct a portion of what you spend maintaining and operating the rental, helping you save on taxes.
- Many residential real estate properties appreciate in value over time, which could lead to a good return on investment (ROI).
- You have the opportunity to earn a somewhat passive income each month through renters.
Residential Rental Property Cons:
- You have to invest a significant amount of money up front for a property, which can be challenging if you don’t have the financial capacity to get started.
- You could be managing the property yourself (dealing with tenants and any needed repairs), which can be time-consuming.
- Missed rental payments and vacancies can hurt your cash flow.
- A potential eviction process could result in lost income and expensive legal fees.
House Flipping
Some home buyers invest in real estate to resell quickly. This investment option for residential property is called house flipping. This involves buying a home, making repairs or renovations, and then selling the property at a higher price.
Buyers who intend to flip a house typically do not finance the home with a traditional mortgage, as homes for flipping might not be in livable condition. Flippers often finance purchases using cash, hard-money loans, private lenders or other short-term financing.
Buyers need to understand the total cost of the investment, meaning the price paid for the home plus any repairs and renovations required to flip the home for a sale. In addition, the investor also needs to pay the cost of utilities, insurance and any homeowners association (HOA) fees while they own the home.
Researching home options is a crucial step when considering this type of real estate investing. Buyers may tour a home and believe that repairs only amount to the physical issues they see, which is why a home inspection is crucial to catch other potential (and costly) concerns.
Home inspectors help identify issues with plumbing, electrical systems/wiring, roofs, foundation and other structural issues. These issues can lead to big costs for prospective investors.
House Flipping Pros:
- As more buyers favor turnkey homes – those that require no updates and are move-in ready – a flipped home may command a higher price compared to homes that are in need of updates.
- Flippers do not have to manage the home’s maintenance needs after the sale (unlike landlords).
- Potential profits from the sale of a flipped home can be used as the down payment for the next investment.
House Flipping Cons:
- A home may take longer than anticipated to sell, leading to the investor carrying the costs longer for utilities, insurance, HOA fees and any monthly payments for loans for the property.
- Profits for the home may be subject to capital gains taxes.
- Costs for renovations might be higher than anticipated, leading to lower ROI (or perhaps no ROI).
Commercial Real Estate
Commercial real estate refers to properties used for business purposes, such as a mall, hotel or office building. When you buy a commercial property, you allow another business to occupy and lease that space from you. Similar to residential real estate, you receive cash flow through rent payments and selling the building in the future.
Commercial leases are usually longer than residential leases, often lasting several years. Many portions of the lease are negotiable, including who is responsible for maintenance and upkeep of the property, as well as costs such as insurance and property taxes.
You will need to research your jurisdiction’s zoning ordinances. These impact many details of a commercial space, including the types of businesses that are allowed, parking requirements and more. Many municipalities have subcategories within commercial zoning that dictate the size and purpose of the building’s tenants. Zoning codes vary by municipality, but many cities use categories such as “neighborhood commercial” or “heavy commercial” to regulate the types of businesses allowed.
Commercial Real Estate Pros:
- The opportunity to rent out many spaces in one building can create a high ROI.
- Leasing to successful businesses could increase the property’s value over time.
- Depending on the type of business you lease to, you may be much more likely to hear from your tenant during business hours than on nights and weekends.
Commercial Real Estate Cons:
- A bigger property and space could mean more upkeep.
- Many commercial properties (like malls and hotels) are open to the public, and any property damage resulting from public use could be your responsibility to fix.
- Commercial real estate may require a larger initial investment, in the form of a down payment, than other investment types.
Raw Land Real Estate
Raw land real estate refers to a location with no physical property on it. When you invest in land real estate or new construction, you’re investing in undeveloped land with the potential to either sell it for a higher return or develop a business or property.
Investing in undeveloped land tends to be a bit cheaper for real estate investors in the near term because there’s not yet a structure in place. But you’ll need additional funding if you want to build on the land before you resell it. This can be costly, especially if you need to prepare the site with utilities, sewer access and roads. You’ll also need to get zoning approval for whatever type of real estate you plan to build, multiple permits such as department of transportation approvals, environmental, site preparation and construction permits.
Raw Land Pros:
- Maintaining raw land requires much less upkeep and maintenance due to the absence of buildings on the property.
- You generate income through the land in various ways, like building residential or commercial space and renting it out.
- In some markets, undeveloped land may cost less than developed properties.
Raw Land Cons:
- You may not see an ROI as quickly.
- You may have to deal with zoning laws and regulations with raw land real estate.
- Acquiring raw land will require more extensive research.
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How Do You Pick The Right Investment Strategy In Real Estate?
With so many different types of real estate to choose from, the right investment strategy for you ultimately depends on your finances and individual needs. Can you afford a down payment on a home, or are you just getting started and finding that a REIT may be a better choice? Either way, we gathered a few tips to help you decide on what type of real estate investment is best for you.
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Real Estate Investing Tips
First, figure out how much money you can (and want to) invest in real estate. After you know where you are financially, consider the following tips:
- Do your research. Investing in real estate requires doing your research. You’ll need to find the right neighborhood and investment type to set yourself up for success.
- Know the risks and returns. Investing requires money, so make sure you understand all the associated risks compared to the potential return.
- Decide on your involvement level. Real estate investing means you need to decide how involved you want to be. If actively managing a property seems like too much work, a REIT or crowdfunding platform may be a better fit.
- Work with a real estate professional. If you’re purchasing a physical property, a professional real estate agent is important to have by your side throughout the buying process.
- Keep an eye on the market. The real estate market is prone to fluctuation, so the timing of when to invest in a property or land is important to keep in the back of your mind.
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FAQ
The Bottom Line: Invest In Different Types Of Real Estate At Your Own Pace
Investing in real estate comes with both risks and rewards. So, no matter what type of real estate investment you choose, make sure you’re doing the necessary research before jumping in.
Curious how today’s mortgage rates could impact your purchasing power? Explore the latest APRs.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
