Real Estate Asset Classes
Any time you want to invest in commercial real estate, it’s important to have a firm understanding of the deal you’ll be getting into. This becomes even more essential if you’re not quite sure what the difference is between real estate asset classes and property types. This is important information if you’re hoping to get the most out of your real estate investments.
What Are Asset Classes?An asset class is best described as a grouping of investments or financial vehicles that all maintain somewhat similar characteristics. Thus, they’ll typically behave fairly similarly to one another in the marketplace. Three traditional asset classes are equities (or stocks), cash equivalents (or a Money Market) and fixed income (or bonds). Additionally, two common alternative asset classes are commodities and, as you may have guessed, real estate.
Asset classes in real estate are better understood if you think of them as alternative assets that fall into a category outside of the more traditional “common” investment assets (like those stocks and bonds we just mentioned).
Real Estate Property TypesIn the world of real estate investing, there are both types and classes of property. While both are technically in the realm of “real estate,” the concepts shouldn’t be confused, and they definitely would not be treated in the same manner.
At the most basic level, these two ideas can be explained as follows:
A real estate property class is how a real estate investment would be characterized - it’s a rating (typically on an A - D scale) that helps categorize neighborhoods and property types.
Types of real estate property fall into four primary sectors: residential; commercial; land; industrial.
Residential Real Estate TypesResidential property is exactly what it sounds like - homes and properties built for family use and living. There are multiple types of residential properties out there. We’ll cover some of the main ones here.
- Single Family Homes - Single-family homes are detached, freestanding homes. They do not have shared property and are built on individual land parcels.
- Condominiums - A condominium residential property is also built for families and individuals to live in. Condos are built within housing communities, where there is shared property and a common space that homeowners can enjoy. Despite the shared grounds, people can buy individual condominiums (just like you can buy a single-family home).
- Townhouses - A townhome is usually a multi-floor residence that shares one or sometimes two walls with immediate neighbors. Homes have individual, private entrances, but like condos, grounds are shared.
- Vacation Homes - Vacation homes are usually second homes people will buy to enjoy, either for their own benefit, or to rent out and earn extra income.
Commercial Real Estate TypesCommercial real estate is an income-producing property type that investors can buy into. There are a number of types of commercial real estate properties you could invest in. Let’s look at some of the most common.
- Multifamily - A multifamily residence is a type of commercial real estate property an investor would buy solely for one purpose - to earn income. Typically, an investor would not live in a multifamily property. These buildings generally have at least five, or more, units.
- Retail - Retail properties are a type of commercial real estate wherein buildings are used for retail shopping. Retail commercial real estate investments could be one, single freestanding building, or they could be an entire mall.
- Office - Office spaces are similar to retail in that there could be one single-tenant, or there could be multiple tenants throughout the space. Office spaces could be anything from a small space for just one office, or they could be a huge skyscraper with hundreds of tenants.
- Self Storage - Selfstorage hasn’t always been a category of commercial real estate. But in recent years, it’s become an extremely popular opportunity for investors. In fact, the self storage industry is actually one of the fastest growing investment opportunities in the world of commercial real estate today.
- Hotels - Hotels (and motels) are operated by investors who offer short-term rentals.
- Mobile Homes - Despite the popular misconception, mobile homes are not a subcategory of multifamily dwellings. Though new properties aren’t generally being regularly built any longer, occupancy is fairly stable and remains high, even in older mobile home parks.