Real Estate Asset Types 101
Hey, welcome back!
As a broad starting point, we can divide real estate assets into residential and commercial.
Generally, private investors tend to focus on investing in residential, as commercial tends to be price prohibitive and more complicated to deal with.
Residential is anything that is used for residential dwellings with four or fewer units. So, we’re talking houses, townhouses, vacation homes, and small apartments. Once you get past four units, it’s considered multifamily commercial.
Most common residential real estate types:
• Single-family residences: These are the most common property type designed to support one dwelling without shared walls. There are typically no common areas like what you’d find in condominium complexes and similar developments.
• Townhouses: These are single-family dwellings, but usually with two floors and sharing at least one wall with another, often identical, unit, but without units above or below it. It typically features a smaller outdoor space in front of and behind the property and will be part of a community with shared amenities like a pool, spa, tennis courts, etc.
• Condominiums: These are similar to townhouses but on multiple floors. These units will share walls with identical units, as well as have units above and/or below them. These will almost always include homeowners’ association (HOA) fees to main or repair shared areas.
• Multi-unit properties: These are duplexes, triplexes, and four-plexes. The units may or may not share walls. Some investors will reside in one unit while renting the rest to tenants.
• Other residential: These less common residential investment real estate types include mobile homes, vacation rentals (for example, a cabin near a popular lake destination), and more recently, condotels, a cross between a condo and a hotel, where there is an on-site concierge and units are often allowed to rent on a short-term basis on sites like Airbnb.
Most common commercial real estate types:
• Office: They range in size from small neighborhood offices with a handful of tenants to large downtown high-rises with hundreds of tenants, often with longer term lease agreements (ten to 20 years). With business tenants, office performance can be highly sensitive to the prevailing market conditions, doing poorly when businesses are failing and downsizing and doing very well when businesses are expanding.
• Industrial: Think manufacturing, distribution, R&D, warehouses, etc. These types of spaces are less management intensive with lower operating costs than office and retail. These tend to be located near major transportation arteries (e.g., highways, rail, and ports). The specific form can be quite different depending on the specific use. For example, for warehouses, ceiling height is important, as that allows for more volume for storage.
• Retail: There is a wide variety of retail properties, ranging from large enclosed shopping malls to small outdoor neighborhood shopping centers. Many will have an anchor tenant, which is a large, well-known retailer that acts as a draw to the property (e.g., Walmart), along with many smaller tenants. Success of retail is driven by location, visibility, and local population demographics such as age and income.
• Multi-family: These are apartment complexes or communities that vary greatly by location and size. Leases are short term (often one or two years), and unlike other commercial leases, owners of multi-family apartments bare the full brunt of any costs increases in operations. These tend to deliver the most stable returns due to consistent demand because no matter what the economic cycle, people always need a place to live.
• Mixed-Use: There is some confusion among beginning commercial real estate investors as to what a mixed use property is and how to evaluate the relative drawbacks and advantages of investing in mixed use properties. Very simply, a mixed use property is any real estate that has a combination of both residential and commercial units. Most common are apartments or condos mixed with retail spaces, often on the ground floor of a property.
Another category, which can be residential or commercial, is land itself. Investors can lease the land to a tenant or hold onto it, hoping it’ll appreciate in the future when someone else wants to build on it.
Whew! As you can see, there are more options available to an investor than they could actually invest in, especially when just starting out. For most investors, their best bet is to start with residential properties with single family homes or small multi-units.
Tomorrow, we will explore the three main investment strategies: core, opportunistic, and value-added.
Have a great day!