Do you want to invest in real estate? What type of real estate asset classes should you include in your portfolio? Let’s find out.
Real estate investing is quite popular among investors who want to grow a stable source of income and attain financial freedom. While initially, this was an investment type only for the wealthy and well-to-do in society, things have since changed a lot. Currently, anyone can invest in real estate despite their merger capital.
However, while investing in real estate, you must first understand the various real estate asset classes available. This helps you to diversify and create a portfolio that guarantees a high rate of returns on capital. But what exactly are real estate asset classes, and how can you take advantage of the concept?
This article explores the various types of real estate asset classes that you can invest in and make good money.
What is an Asset Class?
An asset class is a term used to define group investments that have similar characteristics, especially regarding risks, liquidity, and returns. Also, investment assets in the same asset class are mostly governed by the same laws and regulations, although not always. For instance, real estate asset classes include residential, commercial, vacation homes, townhouses, condos, and other related properties.
Grouping investments according to asset classes is necessary for investors because it helps in diversification. Financial advisors insist that investors should put their money in different classes to minimize risk.
For instance, it is advisable to spread out your investment in real estate, stock, bonds, and equities instead of focusing just on real estate.
Financial Asset Class List
These are financial instruments with similar financial characteristics and even behave in the same in the marketplace. Generally, there are no specific guidelines on the classification of asset classes. However, the main ones include:
- Cash – these are liquid funds that are mostly kept in a bank account or hard cash that you can walk around with.
- Equity – investing in company stocks, mutual funds, ETFs and even investing in startup companies.
- Fixed incomes – this is the equivalent of lending money to someone. It includes bonds, fixed deposits in banks, debentures, and post office products
- Real estate – investing in property such as residential, commercial, land, or industrial property.
- Commodities – investing in items that are valuable with an end-use such as precious metals, crude oil, and other commodities.
Real Estate Asset Classes: Types of property
1. Residential Real Estate Property Types (Asset Classes)
Residential real estate properties are quite diverse, meaning every investor can find something they can afford. Here are some residential real estate property types:
A single-family home is a property that is meant for only one family and sits on a single piece of land. It is an ideal choice for families that need privacy and space.
Pros of Single-Family Homes
- Privacy – families enjoy the privacy of having a single home and also the space. You have the freedom to remodel and renovate the space since you are using it alone.
- Affordable to buy – it is possible to find an affordable single-family home based on location, size of the home, and amenities. Financing a single-family home takes less time and effort.
- Appreciate fast – the need for privacy by family means that they are always on the lookout for family homes.
Cons of Single-Family Homes
- Challenging to maintain – the owner of the home is solely responsible for all the maintenance of the home.
- Unstable returns – since it is only one tenant responsible for raising the rent, financing the home can be a little bit tricky.
Co-ops are common in big and established cities like New York. If you are looking for stability and you do not mind living in an older house, co-ops are the best. The best thing is that co-ops are located in some of the best locations since they were built a long time.
When you buy a co-op, you buy shares into the cooperation that owns the building. The size of the home that you live in will depend on the size of your shares. At the end of it, you are given a lease to signify ownership.
Co-ops are ideal for those who prefer the old-school way of living. You are likely to know all your neighbors as opposed to someone living in a condo. Co-ops encourage the community way of living because the members are involved in the ownership process.
Condos are a good investment for single people who are not ready to buy family homes. Buying a condo can be cheaper compared to a single-family house in many ways.
However, you need to be careful and make sure that you buy a condo with good company. Reading the fine print is advisable, especially when buying off-the-plan.
Since condos are located in urban centers with high demand for housing, finding a tent is relatively easy. You are likely to have better returns with a condo than a single-family house.
Management and repairs are done by the company, so if you are a busy person with no time to take care of your home, this is a good choice for you.
A townhouse is great if you are looking for something bigger than a condo, but you are not yet ready for a single-family house. Townhouses are located near urban centers, so they are good for working-class families.
With a townhouse, you experience community living, and you also get some extra amenities that might not be available in a single-family house. Buying a townhouse is easy and affordable, but unfortunately, the cost does not go up easily when compared to single-family homes.
If you like privacy, then a townhouse is not ideal for you. On the bright side, selling a townhouse is easy compared to selling a single-family house when you finally decide to put it on sale.
Multi-family properties are considered safe for investors looking for rental income. If you are doing real estate as your main business, consider a multi-family property. These properties are less likely to be affected by economic changes.
In case the economy is not doing well, many people decide to move from their houses to apartments, so this is a good investment. However, you need to have enough money to invest in multi-family properties since they are big and require a hefty investment.
Investing in vacation homes needs a lot of planning and strategy. These homes are mostly located in tourist destinations, so choosing an ideal location for the home is everything. If you are going to run the vacation home on your own, then you need to be hands-on to make sure the management is done well.
Unlike other real estate investments, vacation homes are not passive. You will need to be part of the management to take care of the guests and also to make sure the home is in good condition. Fortunately, there are many ways to make money from vacation homes, including renting out to vacationers, filmmakers, or even for events.
2. Commercial Real Estate Property Types (Asset Classes)
Retail real estate investment is a good opportunity for investors. The investor divides the spaces and leases them to retail stores in agreed periods. Unlike residential investment, retail real estate is stable because the tenants sign long-term leases of up to 5 years.
The owner can make money from retail over a long time. When choosing this type of investment, make sure that you choose a good location so that you can attract tenants.
Investing in an office building can be lucrative for investors venturing into real estate. However, this type of investment requires a lot of money, so you can crowdsource with friends to buy the building.
If you have the money, nothing hinders you from acquiring the property all by yourself. And, by buying an office building, you can rent it to tenants and get rental income.
Since this is a commercial property, tenants get to sign long-term leases, which can be a great source of stable income flow. You can also buy an office building and resell it to another investor.
Investing in self-storage is becoming very attractive in the internet age. Most of the businesses today run online stores without physical locations. However, these businesses still need somewhere to keep their stock.
Investing in a self-storage unit is a good way to make money in the modern day. You can buy self-storage units that are already made, or you can buy land and build the self-storage on your own. Most of the self-storage units are made using shipping containers, so they are relatively affordable to construct.
Hotels fall in the category of hospitality real estate. When the economy is good, investing in hotels can be a good investment.
Hotel owners can own the building and run the operations of the hotel. On the other hand, there are hotel owners who will own the building and rent it out to a hotel owner.
Since hotel buildings are commercial investments, you need a lot of money for the investment. Hotel real estate might also be affected by the economy, but generally, it is a good investment depending on the location.
Also known as mobile homes, manufacturing homes is a good real estate investment. These are homes that are premade and assembled in a factory. Real estate experts argue that the appreciation rate of manufacturing homes is the same as that of traditional homes.
Investing in manufacturing homes is a good investment if you want to opt for something different. Construction of these homes is fast since they are already made. You will get value and returns for your money fast.
Storage and Distribution
Storage and distribution real estate investment work the same way a warehouse works. The space is constructed and rented out to different companies that do storage and distribution. Mostly you will find big empty spaces that are used for storage.
The best thing with storage and distribution is the low cost of maintenance. You do not have to spend a lot of money constructing and maintaining the space since you only need a big space. If you are starting in real estate, this is a good form of investment since you do not have to worry about the aesthetics of the space.
A flex space is a combination of office and industrial space. Ideally, you will have an office on the front and a space for storage or a warehouse at the back. If you want to start in commercial real estate, this is a good place to start.
Flex spaces are attractive to medium-sized businesses that might not have the budget to rent a big industrial space. If you are an investor, a flex space will give you access to a wide market, and you will always get tenants for the space.
Investing in a flex space requires less capital compared to the traditional industrial spaces that can be capital intensive because of the size.
Owning land can be a good or bad investment, depending on how you look at it. Buying raw land is not a good investment because it will not generate any income. This means that your money will remain dormant for some time.
However, if you buy land for economic activities like agriculture, this is a good investment. You will be able to make money from the land from doing farming or other economic activities. If you are buying land for speculation so that you sell it at a profit in the future, then this is also a good investment to consider.
4. Industrial Real Estate
Industrial real estate is a better investment than residential. When it comes to profit, the returns are higher than residential. However, the initial investment is high, especially when doing it on your own.
With industrial real estate, you rent out the space to manufacturing companies or related companies. You sign a long-term lease with them, meaning the risk is lower compared to residential real estate. With industrial real estate, you do not have to worry about dealing with residential tenants who can sometimes be problematic.