Real Estate Investing 101: Types of Properties
05 17 2017
Real estate is an attractive alternative investment in the eyes of many savers. However, just like many more traditional financial opportunities out there, it isn't a one-size-fits-all alternative. For those even curious about investing in real estate opportunities, the available options may not always fit the situation. Of course, you should always discuss your personal financial goals and decisions with your financial advisor. You should also thoroughly research the opportunities available to you.
When it comes to commercial real estate investing, there are a lot more options out there than many people realize. They each come with their own risks or potential benefits, but it’s best to first have a basic understanding of the various types of property types out there. While you can divide commercial real estate into many subcategories, and the list varies somewhat depending on who you ask, we think these 6 investment property types are a good start.
1. Single-Family Homes
While typically listed as residential properties, single-family homes can be considered commercial properties if they’re owned by a company or being used as a rental property. The length of residents’ stays depends on their rental agreements, and the landlord is responsible for paying the mortgage, taxes, and maintenance expenses on the property.
It’s crucial to understand what is expected as a property owner. If something goes wrong with the property, the property owner is responsible for making sure everything is fixed in a timely manner (and in accordance with the rental agreement). While this property type can provide monthly income from tenants’ monthly rent, this property type is sometimes more high maintenance than some prefer.
Similar to single-family homes, multi-family residences have several to many tenants whose time residing at the property varies based on the details laid out in their rental agreement. The landlord must pay the mortgage, taxes, and a majority of the maintenances expenses which may arise.
While understandably a more costly endeavor than single-family homes, this property type can provide a higher monthly income from tenants. It’s important to note that with greater numbers of residents comes greater potential risk, as well.
Nearly everyone has first-hand experience with a hotel property at some point, on a vacation or otherwise. Sometimes referred to as a part of a larger swath of “Leisure” properties, hotels have experienced many changes in the past couple of years, as younger consumers push for greater personalization and choice from their short-term lodging selections.
Hotel owners experience much greater fluctuation than landlords of apartments or single-family homes, as they typically can only count on a “tenant” staying up to a few days. With high turnover, however, comes more efficient turnovers between travelers’ stays.
Retail real estate investment properties consist of shopping malls, lifestyle centers, factory outlets, power centers, community centers, strip malls, and other retail storefronts which range widely in size. According to eMarketer, the U.S. is the world’s second largest retail market, accounting for over $4.8 trillion in sales in 2016. This rapidly changing landscape is currently in flux, driven by changing patterns in how consumers seek out goods and services.
While the primary income provided by retail is historically from tenant stores, in some cases the landlord also receives a percentage of sales generated by the tenant stores in addition to a base rent to incentivize them to keep the property in top-notch condition.
Properties within the Office category are used for business purposes and are leased out to provide workspaces for businesses who pay rent to use the property. While many central city office spaces are growing in popularity, the growing trend by young companies of modern, multi-functional work spaces has impacted popularity of older office properties.
The agreements are typically multi-year. This can lead to greater stability in cash flow, and even protect the owner when rental rates decline, but if the market heats up and rental rates increase substantially over a short period of time, it may not be possible to participate as the office building is locked into the old agreements.
Industrial real estate properties comprise warehouses, factories, assembly plants, manufacturing facilities, R&D centers, and storage or distribution centers. Industrial real estate is intended to provide practical and efficient space to users that prioritize function over form for a short or long period.
Industrial properties generate sales from customers who temporarily use the facility. For investors, they often have significant fee and service revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the yield for the owner.
So Which Real Estate Property Type is Right For You?
You really don’t need to be interested in how to invest in real estate to benefit from learning about the different real estate property types out there. While your financial decisions are best discussed with your financial advisor, we hope you’ll take this as a spark to continue researching as you see appropriate for your own situation.
Simply put, no property type is “right” – they all carry a unique set of benefits and risks. At very least, the next time you’re visiting a friend’s apartment complex or out shopping with the family, you may just view the property itself a little bit differently.
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