Understanding Real Estate Asset Classes
Whether you are looking for suitable investment property or replacement property to complete a 1031 exchange, it is important to consider what type of real estate you want to own. There are many different types and qualities of real estate and understanding the different categories of real estate is a good place to start.
When looking at investment real estate there are two things to consider: property type and property quality. The type of a property is referred to as an “asset class” and the quality of the property is often given a rating. Asset classes are typically broken down into two main categories, residential or commercial with many subcategories. The quality of the property may be a bit more subjective and is typically given a rating of class A, B, or C. A being the highest quality and C being the lowest.
Real Estate Asset Classes
Residential real estate refers to properties that are used for people to live in. This type of real estate refers
to single family homes, condos, townhouses, and vacation properties. Residential real estate can be investment real estate if it is not owner occupied but is instead held for financial gain. Below is a description of different residential property types.
Single-family: Single-family properties are typically a free-standing building designed to be occupied entirely
by one family (or group of close individuals).
Townhomes: A townhome is a type of single-family residential property. Townhomes typically share
walls with neighboring residences, but do not typically have a unit above or below.
Multi-family: Multi-family properties are buildings that contain multiple housing units. These can include
a single-family style building with an apartment in the basement, side by side twin homes, or multi-unit apartment buildings. From a lender’s perspective, anything with more than 4 units is considered commercial real estate.
Condominium: “Condo” units of a complex that are owned by individuals but have shared access to common
areas that are co-owned by all of the residents in the complex. Technically, even a single family style
home can be a condo, but typically condos are constructed in a style that has multiple units per building.
Owners typically enter into a legal agreement that requires them to pay associate fees. Association fees are applied to maintain certain common areas such as outdoor recreation areas, building exteriors, and may also provide for services such as doormen or cleaning.
Vacation homes: A vacation home is any residential property that is not used as a primary residence. These residences can be a single-family home, condo, or townhouse, and can be rented out when not in use by the owner.
Commercial Real Estate
Commercial real estate refers to properties that are used for business-related purposes or to provide a workspace rather than a living space. Typically, commercial real estate is leased to tenants to conduct income-generating activities, however there are some types of residential real estate that could be considered commercial. Below
is a description of different residential property types.
Multi-family: Multi-family property is considered commercial real estate if it consists of a building considered commercial real estate if it consists of a building that has more than 4 rental units. This type of real estate can
be labor intensive when it comes to managing tenants and owners typically hire a property management company. Leases are usually signed between 1 and 12 months and landlords often have to pay for property maintenance.
Office: Commercial office properties range from one-tenant properties to multi-tenant professional buildings.
Office space can exist in cities, the suburbs, or even in more rural areas.
Industrial: Industrial properties include manufacturing facilities and storage or distribution centers. These buildings can be any size but often they are quite large and incorporate features like loading docks for large trucks or even large walk in freezer storage space. Short term and long term net-lease type leases are common with this type
Retail: There are 2 kinds of retail space, single tenant and multi-tenant. Single tenant buildings mean that 1 tenant occupies the entire freestanding property. Multi-tenant buildings have separate spaces that each have a different tenant, like a strip center or shopping mall. “Retail” can mean anything from traditional retailers such as Target, Home depot or Walgreens, but it can also refer to restaurants like Applebee’s or Buffalo Wild wings and gas stations or convenience stores like 7/11. Short term and long term net-lease type leases are common with this type of property.
Self-storage: Self-storage properties rent space to tenants for storage purposes. They usually do not require windows or bathroom facilities and include lockers, rooms, containers, and outdoor space for vehicles and boats. Month to month leases are common.
Student or Senior Housing: Student or senior housing properties typically look like a traditional multi-family housing unit, but often with more shared space such as an industrial kitchen and gathering spaces. Senior housing is particularly labor intensive and often regulated by a state agency. As a real estate investment, typically the landlord leases the property to the housing operator and often the lease payments are linked to the operators ability to keep the rooms rented.
Hotel: Hotels can include single room rentals as well as flats or apartment rentals and are typically leased
on a nightly basis. Because of the short term nature of the leases prices can be adjusted up or down frequently based on market needs. Running a hotel is a labor intensive business. Similar to student or senior housing,
as a real estate investment, typically the landlord leases the property to the hotel operator and often the lease payments are linked to the operators ability to keep the rooms rented.
Mobile Home Parks: Mobile home parks rent space and utility connections to owners of mobile homes. Sometimes the owner of the park also owns the home that is rented to the tenants. If the tenant owns the mobile home, the landlord does not pay maintenance costs of operating it. If the landlord owns the mobile home as well as the land the landlord typically pays for maintenance.
Land: Land can be undeveloped property held for future development or leased for recreation such as hunting, or it can be farmland leased for crop farming or grazing.