The real estate industry is divided into different asset classes. It’s hard to keep track of them all.
This post is going to help you understand what these groups are and how best to invest in them.
There are three main categories that all forms of real estate fall into.
Residential property usually consists of multi-family homes and single-family homes. Multi-family homes are developments that house more than one household; eg. apartment blocks, housing estates. Single-family homes are single units such as duplexes, bungalows. It is up to you to decide which category suits your needs and means best.
Residential real estate is one of the easiest niches to break into due to the low capital involved, the short lease terms and the high level of demand for housing. However, for these very same reasons, the market tends to be saturated with different options. The supply-demand imbalance can lead to low occupancy levels and low rents.
To avoid this problem, it is advisable to build for the right market segment. For instance, you can focus on developing studio apartments and single rooms to attract students and single adults. You must also keep location in mind when developing the residential property as this could be a deal maker or breaker.
Commercial property is easily the vastest asset class with so many subcategories. It covers a whole range of functions from shopping malls to retail outlets, parking spaces, office buildings, hotels, banks and so many other types of development.
As the name implies, commercial property is a structure that is designed to house an economic organization where financial transactions are made. It is not an easy choice to make, unlike residential real estate, because the capital requirement is way higher. The bright spot is there is less competition because of the high cost of market entrance, hence there is more money to be made when the cards are played right. The capital is usually recovered from sales made, and making the right choice of development can yield a high Return on Investment.
The most favored categories are retail and office developments. They are in high demand and you will never run out of tenants. However, you will need to closely monitor economic trends and market actors. Any change that can take out your tenant can take you out too.
The location of your property also plays a key role here. A centrally located retail space means more business for your tenants, and consequently more business for you.
Overall, the lease period is longer and more expensive compared to residential property, therefore it is a less volatile market segment.
Industrial development is a unique asset class. It is not very common and it is very specialized in function and purpose. The most common types are warehouses and manufacturing plants.
This kind of property is specially developed for businesses and organizations that require it. It requires a high level of expertise to execute, as well as huge capital investments. However, it can be produced in a variety of sizes and varying levels of technical details.
Investors in this niche must be very informed about their market and make calculated financial decisions.
Industrial property is not nearly as common as commercial or residential developments, but it is no less profitable. The long term lease helps to ensure customer retention and capital can come from a variety of sources, including the client. However, these structures are custom-made hence tenancy transition and transfer can be challenging.
These three asset classes are different and unique in how you should approach them. They also share relationships with each other wherein a rise in one could either fuel or retard the growth of another.
It is important to understand and appreciate these differences for good real estate investment planning.
Which asset class would you like to try first?
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