If you’re intent on developing, acquiring, or owning, or flipping real estate, one of the most important criteria of selection (aside from location, location, location!) is the different types of real estate investments you can make for your portfolio. Each type of real estate investment has its own unique benefits and drawbacks, economic characteristics and rent cycles, customary lease terms, brokerage practicesand standards of what is considered appropriate or normal so it isn’t unusual to see someone build a fortune by learning to specialize in a particular niche.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation.
There are four broad types of income-producing real estate:
1. Residential real estate investments: Properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property.
1.These investments, generally deliver the most stable returns, because irrespective of state of the economic cycle, people always need a place to live.
2.Insured financing lowers the interest rate on mortgages (a small premium may be needed to be paid), thereby enhancing potential returns from the investment.
1.Generally, the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
2.Possibility of deadbeat tenants
2. Commercial real estate investments: Offices are the “flagship” investment for many real estate owners.
1.They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.
2.In times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents.
3.Easier than mixed-use to finance
1.Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. However, often commercial real estate tends to involve multi-year leases resulting in greater stability in cash flow, and protection from variable rental rates.
2.Office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property.
3. Industrial real estate investments: Industrials are often considered the “staple” of the average real estate investor.
1.Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts.
2.Can have long and more lucrative leases
1.Properties can be highly specialized and thus harder to rent
2.Costly to convert from one use to another
3.May be only a single tenant – rental income is all or none
Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important
4. Retail real estate investments: There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones.
1.Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
2.Can select from a wide variety of investments and store sizes
3.Can have multiple tenants
4.From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.
1.Tied directly to economy, vulnerable to downturns
2.Bankrupt retailers may never pay past-due rent
You can’t simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can’t assume one type of property will continue to be a good investment simply because it has performed well in the past. Hence, investment in real estate can be tricky business taking into account the economic conditions prevalent in the market.