In the previous chapter, we discussed various types of real estate investments available, including direct property ownership, mortgages and bonds or equity securities. What these real estate investments have in common is that each investment has one or more tangible real estate properties. This means that when you invest, it is important to consider the characteristics of the underlying real estate, because the performance of these properties will affect your investment performance.
One of the most important criteria (besides location, location, location!) when you look at the underlying property. It’s the type of property. When considering a purchase, you need to ask yourself, for example, whether a residential house, shopping center, warehouse, office building, or any combination of these are basic properties. Each type of real estate has different drivers for its performance. You can’t simply assume that one type of property performs well in different types of well-performing markets. Again, you can’t assume that a property will continue to be a good investment because it has done well in the past.
Income-generating and non-income-generating investments
There are four broad types of income real estate: office, retail, industrial and rental housing. There are many other less common types, such as hotels, mini-warehouses, parking lots and nursing homes for the elderly. The key criterion for these investments that we’re looking at is that they’re revenue generating.
Non-income-generating investments, such as homes, vacation properties or vacant commercial buildings, are as healthy as income-generating investments. Keep in mind that if you invest your equity in non-income-generating assets, you will not receive any rent, so all your returns must be increased through capital appreciation. If you invest in non-income real estate debt, remember that the borrower’s personal income must be enough to pay the mortgage, because there is no tenant income to guarantee payment.
The office is a “flagship” investment for many property owners. Because they are located in the heart of the city centre and in suburban offices, they are, on average, the largest and most expensive types of property.
At the most basic level, the demand for office space is related to the demand of enterprises for office workers and the average space of each office worker. The typical office worker deals with finance, accounting, insurance, real estate, services, management and administration. With the growth of these “white collar” jobs, there is an increasing demand for office space.
Returns on office property can be highly variable because markets are often sensitive to economic performance. One drawback is that the office is expensive to operate, so if you lose a tenant, it could have a significant impact on the property’s earnings. In boom times, however, offices tend to work very well, as space demand leads to higher rents, which take longer to build to ease market pressures and rents.
Retail properties range from large, enclosed shopping stores to single-tenant buildings in walking areas. Currently, the Power Center format is favored, with retailers occupying more space than enclosed malls, with high visibility and access to adjacent roads.
Many retail properties have an anchor, a large, well-known retailer that ACTS as the center of the draw. The famous anchor example is wal-mart. If a retail property has a grocery store as an anchor, it is said to be food anchor or grocery anchor; Such anchors often strengthen the fundamentals of real estate and make it more suitable for investment. Usually, a retail centre has one or more ancillary multi-bay buildings with smaller tenants. One small unit is called the CRU.
Demand for retail space has many drivers. These include location, visibility, population density, population growth and relative income levels. From an economic point of view, the retail sector performs best when economic growth and retail sales growth are high.
Returns tend to be more stable in retail than in offices, partly because retail leases are often longer and retailers are less willing to move than office tenants.
Industrial property rights
Industry is often seen as the “staple” of ordinary real estate investors. In general, they need less investment on average, less intensive management and lower operating costs than their offices and retailers.
The type of industry varies according to the purpose of the building.