Investing in real estate has long been seen as one of the most reliable ways to build wealth. From residential real estate assets, like single-family homes, condominiums, and multi-family buildings, to commercial real estate assets, such as office buildings, retail stores, factories, distribution centers, warehouses, and mixed-use developments, real estate investing can offer significant income potential and capital appreciation for investors.
All real estate asset classes have their own set of risks and rewards associated with them that should be considered before investing.
Let's dive into the different real estate asset classes available for investors. With a better understanding of real estate assets and asset classes, as well as understanding current economic trends, you can make more educated decisions about real estate investments in 2023, and potentially maximize your returns.
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What Is Asset Management in Real Estate?
Asset Management in real estate is the process of managing and maintaining a portfolio of real estate investments. This includes understanding real estate market trends and regulations, evaluating opportunities for acquisition or sale, ensuring tenants comply with leases, understanding prevailing rent levels and security of income streams, and how to maximize returns from investments.
It also involves analyzing the performance of different asset classes (such as residential property, commercial property, and industrial property), and combining these data points to make informed decisions on how to approach day-to-day operations management, as well as long-term planning.
Depending on the size and nature of your real estate investment portfolio, you or a financial professional may need to actively monitor your portfolio to obtain the types of returns you hope for by:
Financially analyzing your assets and performing a stress test, if necessary.
Advising you regarding capital improvements that could boost the property's value or otherwise improve cash flow and increase rent amounts.
Changing investment strategies, if necessary, depending on the market.
Property Types Within Real Estate
Real estate encompasses various types and classes of property. It's important to recognize that property types and property classes aren't the same and the two terms shouldn't be used interchangeably.
There are two main real estate property types: residential and commercial. Property types tend to be pretty binary and straightforward.
Property classes, on the other hand, (A, B, and C), are somewhat more subjective and rely on various qualities of an individual property.
Residential Real Estate
Residential properties are any properties on which people commonly live. This property type can include condominiums, single-family homes, small multi-family homes, vacation homes, and co-ops.
Multi-family properties can be either residential or commercial. The key difference between a residential multi-family and a commercial multi-family is the number of units—any property with four or fewer units is residential, whereas five or more units constitute commercial property.
A residential property that's rented out is an investment, due to the monthly rental payments from the tenant, as well as the equity that builds over time through appreciation. Read on to see the different types of residential real estate assets:
Single-Family Homes
A single-family home is any property with just one single living unit meant to be occupied by one family.
Vacation Homes
Thanks to web services like Airbnb, a vacation home is now more than just a place to stay for a couple of weeks out of the year. When you're not occupying this home, it can be rented out, thereby becoming an investment property that adds to your cash flow while also building equity.
Multi-Family Properties
These are perhaps the most widespread of all real estate properties because they fulfill a basic human need—the need for shelter. Because of the ability to earn attractive returns, these are some of the most popular real estate investments. Types of multi-family properties include:
Co-Ops
A co-op isn't technically real property. Owners instead purchase shares in the company that owns the property. Instead of paying a mortgage, people secure a share loan that entitles them to lease a specific unit within the co-op.
Co-ops are somewhat similar to a condominium in that there are typically fees assessed for maintenance.
Condominiums
The difference between co-ops and condos lies in ownership. A condo unit is owned by an individual who is a resident of the association. Condo owners have access to all the common areas along with other owners in the association. Fees or dues are assessed to keep the grounds maintained and apply any improvements as necessary. Some of the most common shared areas in a condo association include a pool, storage areas, a fitness center, and tennis or basketball courts.
Townhouses
Townhomes are single-family properties that share a wall with a neighboring townhome. These aren't the same as a condominium, as there are no homes above or below the unit. A townhome usually has its own outdoor area but, as most townhomes are located on the outer edges of an existing complex, residents enjoy other shared common areas, much like condo owners.
Commercial Real Estate
Investing in commercial real estate has always been a favorite among savvy investors. Commercial property is built to generate a profit, such as a mall, restaurant, or movie theater. Some of the most common commercial real estate assets include:
Multi-Family Real Estate Assets
Properties intended for residential living and that have five or more units.
Retail Real Estate Assets
Retail commercial properties can be single-business properties, such as a restaurant or fuel station, or multi-business properties, like interior malls and strip malls.
Office Space Real Estate Assets
Office space can be single-tenant or multi-tenant properties not meant for residential living.
Self-Storage Real Estate Assets
Self-storage properties offer space for their tenants to store belongings. Individual units can be as small as lockers or large enough to accommodate boats and other large items. Rental periods can be month-to-month or arranged with other terms.
Hotels Real Estate Assets
Motels and hotels are commercial properties for which the nightly rental rates fluctuate depending on the current market, time of year, area, and other criteria. In times like a global pandemic, the hotel industry is one of the hardest hit, which can impact ROI.
Mobile Homes Real Estate Assets
Mobile home communities are one of the most underappreciated commercial real estate properties. Once you've purchased the land, you can rent out parcels for residents to park their mobile or manufactured home. Since you only rent the parcel and not the actual dwelling, maintenance costs tend to be on the lower end. Also, since residents typically own the home they're placing on the parcel, you'll usually see less turnover in tenants, as well.
Land Assets
Commercial land encompasses two types: brownfield or greenfield. Brownfield land has been developed in the past and must be cleared before redevelopment. Greenfield land has never been developed and is typically the most sought-after land type, especially for farming.
Either type may be considered vacant land, which can be used for residential or commercial development. Vacant land can also be developed as farmland or purchased for its air, mineral, or water rights.
Industrial Real Estate Assets
Industrial properties, such as factories, distribution centers, warehouses, typically follow manufacturing industry trends. Growth in the manufacturing industry tends to signal the growth of the industrial sector. Industrial properties closest to cities or areas with dense population (or projected population growth) tend to be the greatest investments.
What Are Property Classes?
As mentioned above, the property is divided into three real estate asset classes: A, B, and C.
These real estate property classes help agents, investors, and others involved create assessments and properly communicate the real and/or perceived value of a property. These classes also help investors determine the risk level of a property and its potential ROI.
Class A
Class A properties are located in typically affluent areas, are built with high-quality materials, offer high-quality amenities, and have professional management. Building tenants have high incomes and tenant turnover is minimal and sometimes even negligible. Maintenance is rarely an issue.
Class B
Just one step lower, these properties might be a little older than a Class A property. Property tenants have slightly lower incomes, and these buildings may or may not have a professional management team. Rental income isn't as high, and maintenance problems may be more rampant. Overall, however, these buildings are considered good investments.
Class C
A Class C property is generally older than 20 years and isn't necessarily located in a prime area. To bring them back to life, renovations are generally needed. Rental rates are much lower than the other property classes—in fact, a Class C building may not have any current tenants.
Conclusion
Real estate asset classes provide a wide range of potential opportunities for investors. Whether you want to invest in specific geographical areas, developmental stages, property types, or property classes, in the end, your real estate investment strategy should be directed by what makes the most sense for your wallet, your specific financial situation and key economic factors..
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*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
FAQs
What are alternative assets?
Alternative assets are investments that fall outside the more traditional asset classes of stocks, bonds, and cash. They are generally considered a higher-risk alternative to these vanilla investments and include things like real estate, private equity, commodities, hedge funds, and derivatives.
Investing in alternative asset classes can offer investors potential benefits such as increased diversification, greater returns than traditional asset classes over the long run, and access to unique opportunities that may not be available elsewhere. However, alternative asset classes come with their own risks — illiquidity and lack of transparency are two examples. So, investors must do their due diligence before investing in alternative assets.
How do you value real estate investment property?
Valuing a real estate investment property requires both an understanding of the current market and an accurate appraisal. The first step is to research comparable properties in the area and compare the features, such as square footage, lot size, number of bedrooms and bathrooms, age of the structure, amenities included, location, and any special features. You should also consider factors that could affect its future value, such as trends in local population growth or economic development.
A professional appraiser can provide you with an accurate estimate of the property's current market value based on this data. Additionally, you should look at what similar properties have sold for recently; this will give you a better idea of how much your potential investment might be worth.
