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.
