6. The Different Asset Classes of Real Estate
We'll give a brief overview of the major asset classes in the real estate world.
Let’s go over all the major asset classes in the real estate spectrum and talk about how you make money off of them and a few other key points.
SFH
-Where a lot of people begin. Buy and hold, collect the rent or flip and resell for a profit like you’ve seen on your favorite HGTV show. SFHs and land are more common than any other type of property. YOu can buy these one at a time or even grouped into a portfolio, which is a collection of properties grouped together into a single transaction or loan. But if you want to retire off of rental cashflow, You’ll need to buy a whole load of homes to retire. If you want an easy start there are tons of companies who offer so-called “turn-key” properties.
Multifamily (2-4, or 5+)
-Duplexes, Triplexes, and Quadraplexes are all considered residential real estate.There are lots of options here. Duplexes are usually really easy to find; however, some markets will have very few tri and fourplexes. Some will have a lot. If you’re buying these, you’re probably going in with a cash flow mindset. You can flip these as well, or, do like I have, and fix them up and hold for the long term enjoying a nice equity gain and cashflow. You can get a residential loan for these as long as you buy in your own name.
-ANything above 4 units is considered commercial and will need a commercial loan. We are talking apartment complexes in this range. The higher the unit # per building, the cheaper your expenses are per unit as you scale up. For example, property management fees decrease as the number of units increase. Plenty of people are investing in this asset class right now. There’s lot of free information out there on how to buy and sell these. You’re buying this asset class if you’re moving up in scale or have more resources at your disposal. Also, banks LOVE lending on multifamily. THis is our preferred asset class right now
Land
-Buy a strategic plot of land in the path of progress and hope a developer comes calling with a plan to put a strip center on it or the county calls wanting to put a local highway through there. The hold period on this can be years or even decades.
-You can also find people with land they don’t want and engage in arbitrage. If you can find people who don’t want their land and will sell at a discount, then turn around and find someone who does want the land and will pay retail, you’ll realize a very healthy gain. There are people with learning academies online that focus on this. Overall, this is one of the simpler strategies to implement that I’ve come across.
Commercial Retail
-These are businesses. In residential we were concerned with the property itself as the asset, things change in the commercial-retail spectrum. The leases are the asset here. A lease with 20 years left on it is way more valuable that one with 3 left. This class is really scalable since we can have a small neighborhood shopping center, all the way up to projects in the hundreds of millions of dollars. There’s lots of institutional investors in the space. These properties are less management intensive and tenants stay longer but vacancies can last a really long time. You may have heard of the Triple-Net-Lease and you’ll see those used often in this category of real estate. In general, with a triple-net lease the tenant is responsible for all repairs except maybe the roof and outer walls. The due-diligence of the acquisition phase is really intensive here. Details like daily car counts and whether the property is on a signalized corner do matter here.
Office buildings
-You might work in one of these. There are classes A through C of these buildings just like in residential properties. The leases and credit strength of the tenants are key items here. Office buildings go through market phases too. Generally, you’re only buying these if you specialize in the asset class. Economic downturns can sink you since your tenants will go out of business or downsize to smaller spaces.
Hotel
-Again, there are companies who specialize in this asset class. If you own the real estate you probably want to operate the business side of this as well. So I wouldn’t expect to be a passive operator if I wanted to own a hotel.
Mobile Home Parks
-There’s plenty of these out there and a vast majority are owned by mom n pop investors here rather than institutions. The main idea is that you lease the land to tenants who own their own mobile home. Although, most parks have some mobile homes that are leased as well. You’ll need someone onsite to manage the park. There’s great opportunity for high cash on cash returns here since your tenants are responsible for their own maintenance of their home. There are books and online learning academies here for those wanting to know more about this asset class.
Self Storage
-This asset class has been popular recently. You own the property and will probably be responsible for running the business as well. Luckily, there are management firms that specialize in this asset class you can hire.
Industrial
-Tenants may need a very specialized building but will have very long leases. If your tenant moves out, expect a very long vacancy period especially if your property is highly specialized. Generally there’s some kind of light or heavy manufacturing going on here.
Specialty
Car Washes, Churches, Sport Stadiums, Parking lots,Golf Courses, and retirement homes. If it doesn’t fit in any of the previously mentioned models it’s probably a specialty property.
That wraps it up for this episode. Next up we’ll talk about the math you need to do to evaluate a property's price and performance.