The 9 Most Common Real Estate Asset Classes
- Residential real estate
- Commercial real estate
- Mixed-use real estate
- Real estate investment trusts (REITs)
- Real estate crowdfunding
- Land investments
- Self-storage parks
- Mobile home parks
- Industrial real estate
If you've been thinking about diversifying your investing portfolio, you've most likely heard about different real estate asset classes. But what exactly does this mean, and how can you capitalize on these opportunities to maximize your returns?
In this post, we'll look at the many sorts of real estate asset classes and how they might fit into a well-rounded investment strategy (for more on well-rounded strategies, check out our guide on investing for beginners). So grab a cup of coffee and prepare to dive into the world of real estate investing!
1. Residential Real Estate: The Home Sweet Home of Asset Classes
One of the most frequent and relatable sorts of real estate asset classes is residential real estate. Single-family residences, multi-family homes, condominiums, townhouses, and apartment buildings all fall within the “residential” asset class.
Residential real estate investments are a great way for first-time homebuyers to get their feet wet in the real estate market, as there is far less capital (i.e. risk) involved.
Residential property returns are typically derived from rental income or the appreciation of the property's value over time. But residential investments aren’t all sunshine and daisies.
You must consider maintenance expenditures, property taxes, and the possibility of tenant-related concerns. Despite these obstacles, many investors find residential real estate to be a profitable and steady addition to their investment portfolio.
2. Commercial Real Estate: When Business Gets Personal
Another common sort of real estate asset class is commercial real estate. Office buildings, retail spaces, warehouses, and industrial sites are all included in this category. Commercial real estate investments often yield larger returns than residential properties, but they also carry greater risk and require more extensive management.
The length of lease agreements is one of the primary differences between commercial and residential properties. Commercial leases are often longer in duration, giving investors with a more consistent income stream. Furthermore, commercial tenants are normally responsible for maintenance and property taxes, which relieves the property owner of this load.
Commercial real estate investments, on the other hand, may be more subject to economic volatility than residential properties. During a recession, for example, businesses may downsize or close, resulting in greater vacancy rates and lower rental income. As a result, while considering commercial real estate investments, investors must carefully weigh the risks and potential profits.
3. Mixed-Use Real Estate: The Best of Both Worlds
The benefits of both asset types are combined in mixed-use real estate, which is a mix of residential and commercial assets. These assets often include a mix of residential and commercial sectors, such as apartment complexes with ground-floor retail stores or office spaces with residential units above.
Investing in mixed-use properties provides a distinct advantage: revenue diversification. If one sort of tenant struggles (for example, retail during a downturn), the other type (for example, residential) can help to balance the losses. As a result, mixed-use real estate may be a more solid investment alternative than just commercial or residential properties.
4. Real Estate Investment Trusts (REITs): A Hands-Off Approach
Real Estate Investment Trusts (REITs) can be an appealing choice for those who want to invest in real estate without the inconvenience of managing properties directly. REITs are corporations that own, operate, or finance income-producing real estate. You can indirectly invest in a varied range of properties, frequently across several asset classes, by purchasing shares in a REIT.
REITs are required to pay out at least 90% of their taxable profits as dividends to shareholders, making them an appealing alternative for income-seeking investors. Furthermore, because REIT shares are traded on major stock markets, they provide better liquidity than direct real estate investments. This implies you can acquire and sell shares more easily without having to go through the time-consuming process of selling a physical property.
It is crucial to note, however, that investing in REITs does not provide the same amount of control as directly owning a property. You'll rely on the management team to make property purchase, disposition, and management choices. As a result, it is critical to conduct research and select a well-performing REIT with a competent management team.
5. Real Estate Crowdfunding: Pooling Resources for Bigger Opportunities
Real estate crowdfunding platforms enable investors to pool their resources and invest in larger, perhaps more lucrative projects that they might not otherwise afford. These platforms make it possible to invest in a wide range of real estate asset classes, from residential to commercial to development projects.
Crowdfunding platforms typically provide two sorts of investments: stock and debt. You become a shareholder in the property when you invest in equity, and you benefit from rental income and future property appreciation. Debt investing entails lending money to property owners or developers, who then repay you with interest.
Real estate crowdfunding can give investors access to a wide variety of investment possibilities with various risk and return characteristics. However, because not all crowdfunding opportunities are created equal, it's critical to undertake extensive due research on the platform and the specific projects you're contemplating investing in.
6. Land Investments: A Blank Canvas for Your Real Estate Dreams
Property investments entail the purchase of undeveloped property that can be used for a variety of reasons such as residential, commercial, or agricultural development. Investing in land is oftentimes considered a high-risk, high-reward investment. As an investor, you’re “betting” on the market to demand the land you’re investing in. But if the market shifts - or there’s simply no demand for your investment - you’re out of luck.
One of the primary advantages of land investments is the possibility for big appreciation if the area grows or develops. Land investments, on the other hand, have their own set of obstacles, such as the requirement for a long-term investment horizon, restricted income possibilities, and the responsibility to manage the land (e.g., paying property taxes and maintaining the land).
To make an informed selection when investing in land, it is critical to examine the local market, zoning rules, and future developments in the area.
7. Self-Storage Parks: Capitalizing on the Need for Space
Self-storage parks, often known as self-storage facilities or units, address the expanding need for personal and commercial storage. These properties often consist of many storage units in a same location, with varying sizes and amenities to meet the demands of varied customers.
Because of its low maintenance requirements and relatively constant revenue flow, investing in self-storage parks might be an appealing alternative. Self-storage facilities can modify rental rates more swiftly in reaction to market conditions since they frequently have month-to-month leasing agreements. Furthermore, self-storage properties have lower tenant turnover and fewer tenant-related difficulties than residential properties.
It is crucial to note, however, that the self-storage business may be extremely competitive, and success is frequently dependent on location, facility features, and good marketing. To make an informed decision about investing in self-storage parks, thoroughly investigate the local market and competition.
8. Mobile Home Parks: Affordable Housing Solutions with Investment Potential
Mobile home parks, also known as manufactured housing communities, are residential developments in which land is leased to owners of mobile homes or manufactured homes. These parks provide an affordable housing solution for many individuals and families, making them an intriguing real estate investment option.
Investing in mobile home parks can generate consistent cash flow from land lease income, and because tenants own their homes, they are responsible for their upkeep and maintenance. Furthermore, as compared to standard multifamily complexes, mobile home parks often have cheaper running costs and fewer vacancies.
However, investing in mobile home parks comes with significant hurdles and hazards. These include park infrastructure management, prospective regulatory changes, and the stigma attached to this sort of housing. When contemplating this investment choice, it is critical to thoroughly examine the unique mobile home park, its location, and the local market.
9. Industrial Real Estate: Supporting the Backbone of Commerce
Industrial real estate includes a wide range of property types designed to service diverse businesses such as manufacturing, warehousing, distribution, and R&D. Large warehouses, specialized manufacturing facilities, and even smaller flex spaces that incorporate office and industrial uses are examples of these buildings.
Long-term lease agreements, minimal tenant turnover, and comparatively cheap maintenance costs are some of the benefits of investing in industrial real estate. Furthermore, the rapid rise of e-commerce and the increasing demand for efficient supply chain solutions have resulted in an increased demand for strategically positioned industrial sites.
Industrial real estate investments, however, are not without risk. These properties may be more vulnerable to changes in economic cycles and industry trends. Furthermore, because of the specialized nature of some industrial properties, they may be more difficult to lease if a tenant vacates. Before making any real estate investment, it's critical to thoroughly research the exact property, its location, and the local market.
Finding the right asset classes to invest in takes time and experience. Luckily, Realeflow has tools to shorten that learning curve. Featuring next-generation marketing and analysis tools - Realeflow is there to help you find the investment opportunities where your competitors aren’t looking.
Ready to get started? Grab your 7-day free trial here!