Real estate has long been America’s favorite investment. With appreciation, a physical asset, and countless ways to beat the stock market, what’s not to love?
According to Gallup, real estate remains Americans’ favorite investment over stocks and gold. So, how do you get involved in the many types of real estate investments?
Various options are available, which is why it is so popular. Let’s explore how to take your first steps into real estate investing.
Why is Choosing the Right Type of Real Estate Investment So Essential?
Newer investors might look at real estate’s 3.7% average national appreciation rate and assume it’s a license to print money. Sadly, this isn’t the case with real estate or any investment for that matter.
Selecting the right investing path is vital for newbies because it sets the tone for your investment career. Not all types of investments are guaranteed wins. Likewise, a residential landlord’s life differs from a commercial landlord’s.
How you manage your investments and the path you take to turn a profit depends on you and your circumstances. If you make the wrong decision, you can lose money as quickly as you can gain it.
With that out of the way, Let’s discuss how real estate investors generate income.
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Two Ways to Generate Income From Real Estate Investments
There are only two ways to make money from property. You can generate income directly from your properties, such as rent, or hold the asset until it gains value. Focus on one, but know that it’s possible to do both.
1. Cash Flow
The cash flow route involves generating an income through your properties. Typically, this comes from rent payments, but it doesn’t need to.
For example, an investor may get paid for a company to place a billboard on their land. Alternatively, a power company may want to install infrastructure on that land. In either case, you’ll receive an income.
Rental Income
Rental income is where most of your cash flow arises. Residential landlords receive payments from people using their property as a home, and commercial landlords can rent out space to businesses.
Beware that income-producing real estate will raise your taxable income. This is why it is strongly recommended that you hire an accountant specializing in real estate investment.
2. Appreciation
Appreciation is the other way to turn a profit. In short, appreciation is earning a profit by selling a property for more than you spent.
This could involve selling a vacation home you’ve held for 20 years. It could also include fixing dilapidated homes and selling them quickly for a profit.
Active vs. Passive Real Estate Investors
Not everyone wants the hassle and responsibility of managing tenants and renovating properties in disrepair. Thankfully, you can also invest passively.
Active Real Estate Investing
Active real estate investors accept managerial responsibilities. Although this means more time and effort, it also means more control and, potentially, larger profits.
For example, a landlord renting out condos would be classified as an active real estate investor. Flippers attending house auctions would also count as active real estate investors.
Passive Real Estate Investing
In contrast, passive real estate investors don’t become actively involved in the day-to-day operations of their portfolio.
The most common type of passive investor would hold Real Estate Investment Trust (REIT) shares in their portfolio. They may also choose to invest through crowdfunding platforms.
Note that there’s also some cross-over. For example, a landlord with a large investment portfolio may outsource all responsibilities to a real estate management company. So, even though they’re investing actively, they’re trading a portion of the profits to turn their properties into passive real estate investments.
7 Real Estate Investment Strategies to Diversify Your Portfolio
What types of real estate investments should you put your money into in 2026?
Volatile interest rates and a fluid real estate market make this an interesting time to enter the market. We’ll discuss the top seven strategies you can adopt and some of the sub-niches within each one.
1. Residential Real Estate Investments
Residential real estate is the most common type of investment – and the most well-known. According to the World Property Journal, 27% of single-family homes are owned by investors.
But that doesn’t mean it’s an overcrowded market. There’s plenty of room for everybody. But other than renting out to tenants long-term, let’s look at what other residential real estate investments are available.
Accessory Dwelling Units (ADU)
ADUs are a means to boost your income from your current property. They can be converted basements, tiny homes, granny flats, or even sheds. Most ADUs are rented to family members or friends, but you can also list them on the rental market.
Instead of renting out a room and giving up your privacy, ADUs typically have separate entrances. Plus, they’re less time and cost-intensive. However, note that municipalities often have strict rules on ADUs.
Short-Term and Vacation Rentals
Short-term rentals are another option. If you live in a tourist area, renting a home on Airbnb can yield significantly more income than renting to long-term tenants. Likewise, if you live in a college town, you could rent to off-campus students during the semester.
The nature of short-term and vacation rentals means there’s a high tenant turnover, which leads to more work and management responsibilities. But it’s balanced by higher incomes.
Flipping of Residential Properties
Flipping homes is another type of active investment but one with significant challenges. It works like this: purchase a fixer-upper, fix it up, and sell it for more than you paid.
It’s more time-intensive and comes with considerable risks. For example, if you discover a problem with the foundation, you could spend thousands more than you expected, and in some cases, you may be selling at a loss.
Generally, you can make this more cost-effective if you already possess trade skills or know people who do.
Micro-Flipping
Investors who don’t want the stress of fixing up a home can search for homes available for less than their potential market value. Typically, you’ll spend time at real estate auctions and browsing listings. Identify a target and relist the home or perform some minor upgrades.
It’s less profitable but also a lower-risk real estate investment.
2. Commercial Real Estate Investments
Commercial properties focus on selling to business owners instead of individual tenants. According to Statista, the industry is worth $34 trillion globally.
Typically, this is a harder niche to break into due to the higher entry costs and associated risks.
However, commercial properties also come with greater rewards. Higher commercial property values are capital intensive but come with longer average vacancies and larger profits.
Long-Term Leasing (Buy-and-Hold)
Buy-and-hold is precisely what it sounds like.
Acquire and retain a property over an extended period. Most investors rent out properties, but some hold them vacant and then sell them years later. This can also apply to residential real estate.
Office Space Rental Income
Most people think of renting out office spaces when they consider commercial real estate. Generating office space rental income could involve a single-tenant building or a skyscraper in a major metropolis.
Succeeding with this path typically means appealing to businesses, such as choosing a location near public transport, providing adequate parking, and having local entertainment and eateries nearby.
Remember that success in this space means staying competitive. With 27% of the U.S. workforce working from home at least some of the time, the competition has only grown.
Industrial Real Estate Rentals
On the other side of the commercial property coin is targeting blue-collar America. Industrial real estate investments may include manufacturing plants, storage facilities, distribution centers, or specialized production companies.
Competitive investments in the industrial property sector usually have access to major highways, airports, ports, and railways.
3. Mixed-Use Real Estate Investments
Mixed-use properties combine residential, commercial, and industrial units. Combinations of units provide more convenience for tenants and appeal to urbanizing suburbs.
For example, a type of mixed-use development could be a hotel with a retail strip and a gym. Let’s examine some other types of mixed-use properties:
- Main Street – Traditional main streets are mixed-use properties. Older buildings may have stores on the first floor and apartments on the upper floors.
- Live/Work – Coliving spaces bring tenants together to live and work in the same space. This is becoming increasingly popular as remote working takes hold. Rentals could be short or long-term.
- Residential/Office – These properties combine traditional office blocks with apartment buildings.
- Mixed-Use Hotels—Mixed-use hotels contain accommodation, retail areas, entertainment spaces, fitness centers, and more. Las Vegas’ iconic strip is all classified as a mixed-use hotel area.
Investing in an existing mixed-use property is the best way forward. Complex zoning restrictions can make developing one from the ground up difficult.
4. Short-Term (Private) Notes
Short-term notes are debt securities that mature within a year. They’re issued to developers who require short-term financing for inventory, cash flow, or working capital. These are a low-risk investment option designed for investors looking for fixed-income opportunities.
Essentially, you’re lending money to a project for a short period. They offer higher returns than traditional fixed-income investments, like treasury funds, and enable you to maintain liquidity.
Of course, there can be challenges, but these are known as some of the safest real estate investments available. Plus, the financial barrier to entry is low.
5. Raw Land
Raw land is land containing no structures, crops, or other improvements. It’s undeveloped land that’s waiting to be used.
Typically, this is a longer-term real estate strategy requiring patience. However, raw land has made millionaires out of investments in the past. So, how do you make money from raw land?
- Appreciation – General appreciation applies here. For example, purchasing land on the edge of a growing city could make that land extremely valuable as the suburbs continue to expand.
- Commercial/Industrial – Countless examples exist of investors making it big on raw land due to undiscovered commercial or industrial purposes. For example, oil may be discovered, utilities may need the land for pylons, or the soil may be fertile for agriculture.
- Development – Investors with significant funds may even develop the land themselves.
Although raw land doesn’t generate income in the short term, it can appreciate quickly if the odds are in your favor. Buying the right land requires detailed research, so you must be sure before buying.
Plus, beware that the returns on raw land may take decades. In some cases, low-value raw land remains so for generations.
6. Real Estate Investment Trusts (REITs)
REIT investing is the best option for passively investing in real estate. These are companies operating trusts that oversee numerous real estate investments. Essentially, it’s the real estate equivalent of purchasing shares in the S&P500.
Investors don’t involve themselves in managing any of the properties within the trust. Plus, the biggest rights come with the security of being publicly listed on the New York Stock Exchange (NYSE). In many ways, REITs are closer to stock investments than real estate investments.
Remember, REITs nearly always focus on commercial real estate. Although a relatively new investment vehicle, REITs have given ordinary people the ability to invest in this sector without significant capital. The downside is that they’re taxed at the higher qualified dividend rate.
On a side note, they’re also excellent vehicles for diversifying traditional stock portfolios.
7. Real Estate Crowdfunding
Real estate crowdfunding is the newest way to invest online. Again, this is a passive investing strategy to skyrocket your net worth. Like business crowdfunding, smaller investors pool their resources to get large projects off the ground.
This is another way of investing in commercial projects, such as hotels, industrial real estate, shopping malls, and multifamily properties. Naturally, the risk is higher, but the returns are much bigger.
It’s important to note that many of today’s real estate crowdfunding platforms are only available to accredited investors due to current Securities and Exchange Commission (SEC) regulations. Until this changes, many platforms will remain off-limits.
Real Estate Crowdfunding Structures
Not every crowdfunding platform operates the same way. It’s vital to know each structure so that you can make the investment that’s suitable for you.
Here are the three most common property crowdfunding structures.
1. Equity-Based Crowdfunding
Under an equity-based crowdfunding structure, every investor receives a share of ownership in the project. This fractional ownership arrangement means your profits are tied to the deal’s financial performance.
Like any real estate owner, your share will be defined by operating profits and potential real estate appreciation. Naturally, this is a higher-risk model and shouldn’t be invested in without first understanding the project’s details.
2. Debt-Based Crowdfunding
Debt-based crowdfunding is most similar to bank financing. Investors lend capital to purchase an investment project and receive a fixed income over time. The returns depend on the interest rates, but it’s largely a lower risk than taking direct ownership of an investment property.
The downside of debt-based crowdfunding in real estate is that there is limited upside potential. If a project experiences massive appreciation, you won’t see any of that.
3. Managed funds
Managed funds work similarly to REITs or mutual funds. These platforms sell shares in specific portfolios containing various types of real estate. For example, you could invest in a single or multifamily rental fund.
It’s an excellent alternative to sifting through crowdfunding platforms inspecting individual deals. Additionally, it offers the broad diversification many real estate investors seek.
Unlike REITs, managed funds don’t experience ongoing trading. They come with a defined lifespan and target hands-off investors searching for simple access to the real estate market.
Refine Your Real Estate Investing Strategy With The Abundant Wallet
Real estate investing is one of the most popular ways to boost income and achieve your financial goals. However, like any investment, it requires patience, research, and the right strategy.
At The Abundant Wallet, we specialize in helping you get out of debt quickly, grow your net worth, and achieve generational wealth. Read our blog for more investing guides and advice, like how much money you should be saving based on your age.
Are you ready to take the plunge? Then contact us for free, bespoke advice on managing your money effectively and growing your portfolio. We’re here to help.
Frequently Asked Questions (FAQs) About Types of Real Estate Investments
Which type of real estate investment is best?
All real estate investments have the potential to make money. What matters is knowing your market, defining your goals, and knowing when to get in and out. After all, a hot real estate niche today may not retain that position ten years from now.
What is the most profitable type of real estate investment?
Commercial real estate investments typically deliver the biggest upsides due to their tremendous cash flow potential. However, these investments come with larger risks and a bigger financial barrier to entry.
What is a popular form of real estate investment?
Long-term residential real estate investments tend to be the most popular. This is as simple as purchasing a rental property and renting a home to tenants for years. However, other popular investing options are gaining traction fast. For example, Airbnb vacation rentals continue to boom in major American cities.
Smaller investors are even investing in parking spaces in locations like New York City, San Francisco, and Los Angeles, where parking comes at a premium.
Does real estate provide the best ROI for investors?
No, investing in stock funds, such as the S&P 500, historically outperforms real estate by a couple of percentage points. Yet Americans still prefer real estate because you always have physical real estate assets, whereas a company can go bankrupt and make your stock worthless.
