Real Estate Investing
Commercial Real Estate: Property Types And Classes
Before you start investing in commercial real estate, regardless if it’s via online crowdfunding or through a syndication, you want to know what sort of investment you are getting into.
In general, crowdfunding and syndications both invest in commercial real estate. Single-family properties are too cheap for developers to raise capital on. There is a fixed cost of raising capital. So, developers focus on $1m+ properties.
And usually those are commercial real estate projects.
Since commercial real estate is new to most investors, we’re going to cover the different property types within commercial real estate, as well as the different classes of property and neighborhoods.
Asset Class vs Property Type vs Property Class
An asset class is a group of investments that have similar characteristics and behave similarly in the marketplace.
Equities (stocks), fixed income (bonds), and cash equivalents (money market) are the 3 traditional asset classes. Additionally, there are 2 alternative asset classes that are extremely common as well – real estate and commodities.
There are a whole host of alternative asset classes which professionals may agree or disagree on them, such as valuable art, numismatics, or other collectibles. Increasingly many are looking at crytpo currencies as an alternative asset class.
Each asset class can further be broken down. For example, there are 11 sectors for stocks (healthcare, industrials, technology, etc).
A lot of people will ask about asset classes in real estate. What they actually mean to ask is about property types within the asset class of real estate. There are no asset classes within real estate because real estate is an asset class.
Property types are what the real estate asset class is broken down into. Just like stocks have 11 sectors, real estate has a variety of property types from office to multifamily.
Real estate does have a “class” rating system as well, which may be part of the reason why people confuse the terminology.
Property classes in real estate are referring to a rating system we use in the real estate industry to help us categorize neighborhoods and property types. This is generally on an A to D rating scale where A is the nicest properties and D is the oldest and most run down.
Real Estate Property Types
The asset class is an overarching and very broad type of investment. Within real estate, there are 4 primary types of property which include:
- Residential
- Commercial Real Estate (CRE)
- Industrial
- Land
Each one of these can be further broken down. For example, farming and resource extraction (mining and oil) are uses for raw land.
We’re going to focus on commercial real estate because that is what most investors are buying when they want to buy income producing property.
Types of Commercial Real Estate
There is almost an unlimited number of types of commercial real estate, but here are the most common ones you’ll see.
Multifamily
Multifamily is a type of commercial real estate because the owners buy it to produce income, not to live in.
Multifamily is anything that is 5 units and above (in the United States).
There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.
So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.
4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.
Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.
Retail
Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.
It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.
Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.
Regardless of how they are broken down, they are all considered retail.
Office
Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.
Self Storage
Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.
Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.
Hotel
These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.
Mobile Home Parks
Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.
Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.
On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.
Special Purpose
This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.
Classes of Property
In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.
Multifamily is anything that is 5 units and above (in the United States).
There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.
So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.
4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.
Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.
Retail
Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.
It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.
Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.
Regardless of how they are broken down, they are all considered retail.
Office
Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.
Self Storage
Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.
Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.
Hotel
These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.
Mobile Home Parks
Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.
Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.
On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.
Special Purpose
This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.
Classes of Property
In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.
This article originally appeared on IdealREI. Follow them on Facebook, Instagram and Twitter.
So you just sold one of your stock or bond investments and now you’re about to get crushed with capital gains taxes, right?
Not quite…
You see, you still have options to defer or even completely eliminate those taxes using a new loophole in the system.
Let me explain.
Opportunity Fund Investing is a newly-minted tax-advantaged method of investing in real estate that will accessible to individual investors, not just institutional capital.
What are opportunity funds?
Opportunity Funds are a new tax -advantaged investment vehicles created as part of the Tax Cuts & Jobs Act of 2017.
The concept was introduced as part of the Investing in Opportunity Act – a bipartisan bill that was included alongside the broader tax bill -but has received far less attention until now.
The goal is to help spur greater private-sector investment in targeted communities across the country called Opportunity Zones.
What are opportunity zones?
Opportunity Zones are designated census tracts selected by the state and federal governments for economic development.
Opportunity zones can be found in every state and in urban, suburban and rural areas. These are areas that have historically been passed over by investment capital, and meet certain qualifications with respect to poverty levels and/or sub-median income levels.
Qualifying census tracts must meet a minimum threshold of its population living below the poverty line, and/or a max average income of 80% area median income.
This hardly means, however, that these areas should be unappealing to investors.
Many of the opportunity zones already established are centrally-located infill neighborhoods in thriving metros that, while less affluent than their cities overall, already exhibit signs of economic vibrance and should continue to develop alongside the broader metro.
Market fundamentals already support investments in many of these census tracts. This new system of tax incentives should make such investments all the more compelling.
Why invest in opportunity funds?
Qualifying investments offer three unique and compelling tax advantages – investors can defer paying federal capital gains from recently sold investments until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on their Opportunity Fund investment if held for 10+ years.
Opportunity Fund investing also offers the chance to have material impact on the well-being of under-resourced communities.
This presents the opportunity for individual investors to include real estate in their portfolio of “triple-bottom-line” investments – those that not only yield compelling returns, but also yield positive social impact.
Even if you’re only concerned with net returns, however, the tax advantages alone should pique your interest.
What kind of gains are eligible for tax deferral?
Investors may defer capital gains tax on any recently sold investment – including the sale of stocks, bonds or real estate – so long as those gains are rolled over into an Opportunity Fund investment within 180 days of sale.
Simply put, this new program for tax-advantaged investing is a sea-change in how investors are able to reduce capital gains tax, and carries the potential of funneling huge volumes of capital to communities across the country that need more affordable housing and more efficient access to equity for small business.
If done well and with proper oversight and guidance from the Treasury Department, this may truly create win-win-win investments across the country.
Many markets in the U.S. are suffering from an acute affordable housing shortage.
This exciting new program affords individual investors the chance to invest in the revitalization of neighborhoods across the country, while potentially earning very compelling after-tax returns.
In the past, vacation rental owners had to perform the necessary maintenance tasks and market the properties to find guests or pay someone in the locality to do so on their behalf.
Bookings were low and the cost of maintaining the vacation homes was high. Thankfully, the firms that manage vacation rentals are using new technologies to eliminate these issues and deliver a comprehensive service on a high level that the vacation rental industry has not seen.
Many travelers are avoiding staying in hotels in favor of vacation rentals.
Why Vacation Rentals?
Some of the benefits of vacation rentals include:
- Variety – Vacation rentals offer different decor, amenities and views among other things. Travelers select their own vacation rentals and preferences based on their budget and how they want to define their vacation such as close to the beach or a golf course among other locations.
- Additional space – Vacation rentals are more spacious than hotels and are therefore popular with people traveling with their families.
- Comforts of home – Vacation rentals provide the comforts of home and some of the things that a typical home does not have. There are multiple bedrooms, comfortable living rooms and adequate space to sprawl out. Vacation rentals are more comfortable than staying in the bedroom of another person like with Airbnb.
- Privacy – Vacation rentals have private entrances and private balconies. Therefore, patrons do not have to walk through the lobby after returning to their unit.
- Cost effective – Since vacation rentals are spacious, families often rent them together. This makes the homes more cost effective than hotels.
- Easy booking and check out – Technology such as online payment platforms enable guests to save time. They do not have to wait in line to check in or out.
Improving Vacation Rental Technology
Technology has played a huge part in making the short-term rental market grow. Online listing firms such as Airbnb make it easier for guests to book the home they want to stay in.
With this software, you can manage rental channels. These include HomeAway, Expedia, and Airbnb using one app or platform to reduce management time and increase profits. This means that you can manage your property without having to enlist the services of a professional management firm.
Are Vacation Rentals Really Profitable?
Investing in vacation rentals is an excellent way to earn passive income.
A survey done by HomeAway, which is a short-term rental marketplace, found something interesting. People who rent out second homes earn more than 33,000 dollars annually in rental revenue. On the other hand, at Airbnb, the average vacation rental owner collects yearly rental revenue of about 11,000 dollars.
Most of the vacation rental owners using the Airbnb platform don’t perform as well. They may only rent out only a single bedroom or rent out their homes irregularly. They do not treat their homes as true vacation rentals.
Do the Math
It is not that straightforward to figure out the amount of money your vacation home can bring in. However, online tools can enable you to calculate the potential cash flow to your property.
You can use these tools to calculate the average daily rental rates, revenue, and occupancy rates. By using these projections, you can then subtract items such as interest, PITI, management fees and maintenance expenses. Then you’ll get a cash flow forecast.
Evaluate the Location
The other factor that will determine the amount you will earn as rental revenue is the location. If you buy a vacation home, which is close to a popular destination like a ski resort or beach community, then it is likely that it will bring in a higher rental income. An excellent location close to a major airport or a vacation spot that people visit year round will have the best impact.
Assess the Scene
Apart from the accessibility and popularity of a destination, you also need to consider the setting. For instance, it is more cost effective to invest in a vacation home located in the mountains compared to a beachfront vacation home. However, such a home is not likely to bring in as much income as a beachfront property can.
The peak season for vacation rentals lasts about 12 weeks.
The trick is trying to rent the vacation home during the off-peak periods or when you do not want to live in the house. Try your best to keep your vacation home occupied by advertising it on platforms like HomeAway and Airbnb. You can even seek advice on the best ways to keep a property occupied from a property management firm that manages vacation homes.
Set the Price Right
To maximize occupancy, you should price your vacation home well. You can price your propertyslightly lower than similar properties so that it will be occupied more frequently. Furthermore, you should keep an eye on events like festivals and conventions that occur close to the location of your vacation home. When the demand is high, take advantage of it and adjust your rental charges accordingly so that you will not miss out on revenue.
Vacation homes are unique in that they are both an investment and a lifestyle upgrade. While they perform equally as well as conventional rental properties, they offer the benefit of having a place to stay for your own vacations.
A vacation home can bring in a good return on investment if you can keep it rented out most of the year. If you hold the vacation rental for many years, then you will make a return, which is comparable to or greater than you would have made if you had invested in stocks.
This article originally appeared on IdealREI. Follow them on Facebook, Instagram and Twitter.
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