Land vs Rental Property: Real Estate Investing ROI

If you have decided to invest in real estate, you are not alone. A property investment often provides an incredible return on investment that far exceeds what you can generate through the stock market and other investment options. However, before you can make your investment, you must decide what type of property to purchase. The two main types of real estate options available include land and developed rental properties. With a closer look at how each can produce a profit for you, you may be able to more easily determine how to allocate your funds.

The Return on Rental Properties

Rental properties generally have more financial benefits than raw land. They often appreciate in value, and you may benefit from a sizable return when you sell the property. With a rental property, your tenants will make regular monthly payments to you, and this money is typically used to cover the mortgage payments and other related property expenses. With this in mind, your tenants will pay down your mortgage and increase your equity in the property. You also often enjoy a rather stable income stream from monthly tenant payments. This regular cash flow adds to the return on your investment.

What You Need to Know About Land Investments

Land is unique from developed rental properties. Generally, it is far more affordable to purchase, and it may be more well-suited for investors with limited capital. Land value appreciates at different rates based on the area. Some suburban areas in a quickly growing city may have high land appreciation rates. In rural areas, however, the land may appreciate at a nominal rate. You will not benefit from the cash flow associated with developed rental properties. This means that you are directly responsible for making the monthly mortgage payment out of your own pocket. Property tax is the primary expense that you will also be responsible for. Generally, land will take money out of your pocket each month, and it may have minimal appreciation in many cases.

As you can see, there are clear differences between these two types of real estate investments. A developed rental property may have headaches related to property management as well as risks related to tenant’s using the property. However, it also has more significant opportunities for growth. Because the actual property that you select will play a key role in your return on investment, it is important to carefully explore the real estate opportunities available before deciding how to proceed.