There are lots of different property types. When you drive around your city, what do you see? My neighborhood alone has residential houses, retail, an old office building being used as a school, a residential property now being used as an office building, an industrial warehouse, and a church that has been converted into apartments.
I had a mentor that always asked me to think about two positives and one area of improvement for no matter what you are evaluating. In this article, I am going to utilize the concept to talk about various property types and then provide two things I like about each property type and one thing that I wish was better.
Single Family Residential
A type of real estate asset that provides housing and can either be a detached or townhouse style dwelling.
Positives of Single Family Residential
- I like how single family residential can increase in value when a given market area has good population growth and good job growth.
- I like how readily available financing is for single family residential properties.
Improvement Area
- My mind works in numbers. I wish that single family residential followed a financial valuation model closer to that of commercial properties and less based on emotional purchases.
Multifamily
A type of real estate asset that provides residential rental housing in one or more buildings within a particular land area. This type of property can also be called an apartment complex.
Positives of Multifamily Apartments
- I like how you can get to scale quickly in multifamily apartments and grow your cash flow quickly due to the scale.
- I like how making little improvements to a unit and/or property can enable you to realize significant rent premiums.
Improvement Area
- The sad thing is that the Government is the area that needs most improvement. In some markets in the US, the Government protects dead beat tenants more so than the property owner. Tenants should have rights, but they should not be able to manufacture lies, avoid paying rent, and be able to file frivolous lawsuits through ambulance chasing attorneys.
Office
A type of real estate asset that provides workspace for business employees.
Positives for Office
- I like how you can add significant value by re-purposing existing buildings in markets experiencing both population and job growth.
- I like how significant the cash flow can be with an optimal debt structure that also allows you to reserve for tenant improvements and leasing commissions, which can be expensive.
Improvement Area
- I joke with my clients that Office is a wealthy man’s game. While that is not necessarily true, you do need deep pockets to be able to complete tenant improvements and pay for leasing commissions since tenant lifespans in an office property can be shorter (1- to 5-years) and since most tenants do not want the same tenant improvement package as the last tenant.
Retail
A type of real estate asset that provides business space for businesses that are typically selling products to consumers.
Positives for Retail
- I like how retail tenants generally pay for rent and all of the expenses related to the operations at the property.
- Cash flow can be quite high and robust in well-located, well-tenanted properties in good locations, which is attractive as an investment.
Improvement Area
- Retail can get hit hard by economic downturns. If you lose a tenant, it can take a long time and cost a lot to re-tenant the vacant space.
Industrial
A type of real estate asset that provides warehousing, logistics, manufacturing, and dry and/or cold storage space for businesses.
Positives for Industrial
- I like how easy industrial is to own and manage.
- I like how industrial properties can be used by a wide variety of tenants that have a need to service the given market.
Improvement Area
- I do not like how many companies – both large and small – are chasing industrial deals at present because it makes it harder to find and buy these properties and get a good return.
Hotels
A type of real estate asset that provides temporary accommodations, food and beverage, and other services or amenities typically for travelers or tourists.
Positives of Hotels
- I like how demand can be readily gauged through industry organizations and research firms.
- I like how revenue can be diversified within hotel operations from guests, events, food, beverage, and services such as tour operators.
Improvement Area
- Hotels have a high fixed cost since it is more like operating a business than a real estate investment. You need to closely monitor your breakeven occupancy to ensure that you make money. Scale is important with hotels.
Self-Storage
A type of real estate asset that provides storage space for rent to consumers and/or businesses on a short-term basis.
Positives for Self-Storage
- I like how you can get to scale quickly while the property expenses do not go up proportionally.
- I like how you can use in-migration and job growth date to predict where demand will likely be for further self-storage properties.
Improvement Area
- Self-storage properties are easy to build. It is easy for self-storage properties to get overbuilt in markets. When these properties get overbuilt, you often times see high vacancy and leasing specials to try to attract price sensitive tenants.
Triple Net (NNN)
A type of real estate asset that businesses lease and where businesses generally pay both the rent and the operating expenses of the property.
Positives for NNN
- I like how tenants pay for the rent and the expenses related to the property.
- I like how the investment provides predictable cash flow during the tenant lease term at the property creating an investment that is more like a higher yielding forced savings account.
Improvement Area
- I do not like when a NNN property goes vacant because demand for the space is determined by then market rents and market depth. The cost to re-tenant can also be high if the tenant cannot use the space as is.
Land
A type of real estate asset that is the typically the unimproved dirt in a particular piece of property.
Positives for Land
- I like how you can start with a clean slate and create something that adds value to the market.
- Even though I do not concur because there is no cash flow, I like how investors think longer term and view land investment as a forced savings account.
Improvement Area
- I do not like how there is no cash flow and that what you can develop is ultimately up to the governmental authorities.
These are only a handful of property types that can be invested in. We did not even cover student housing, seniors housing, nursing homes, or mobile home parks to name a few. The question for is to determine which property types fit your investment goals, which property types you want to develop expertise in, which property types you like, but may invest passively in, and what strengths or new ideas you offer that can enable a property to operate at its highest and best use.
Until next time, happy investing!
Robert