In real estate investments, money is used to purchase property for the purpose of holding or leasing for income and which carries an element of capital risk.
Residential Real Estate
The most common form of real estate investment is property purchased as a primary residence or rental property. In many cases the buyer does not have the full purchase price for a property and must engage a lender such as a bank, finance company or private lender. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky. Refer to the Real Estate section for more information on financing and residential real estate.
Commercial Real Estate
Commercial real estate consists of multifamily apartments, office buildings, retail space, hotels and motels, warehouses, and other commercial properties. Due to the higher risk of commercial real estate, loan-to-value ratios allowed by banks and other lenders are lower and often fall in the range of 50-70%. Refer to the Real Estate section for more information on commercial real estate and its financing.
A real estate investment trust (REIT), is a company that owns and operates income-producing real estate. An investor can limit the risk exposure to inflation and benefit from presence in multiple markets and sectors by investing in shares of a REIT company. For example, an individual investor with $100,000 would have a hard time investing in commercial properties (office buildings, shopping centers, apartment buildings, etc.) in New York, Miami and Los Angeles. By purchasing shares of REIT companies, the investor becomes invested in multiple markets and sectors across the country and is less susceptible to a specific market or sector.
REIT stock is similar to any other stock that represents ownership in an operating business, except it must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.