No matter where you are or what’s going on in the world–people will always need a place to live and a place to work. This means that real estate will always be in demand and a perfect part of every portfolio. As long as the investment is not over-leveraged, real estate remains one of the most profitable and least risky of all investments.
There are five prerequisites to any investment decision. I won’t go over them here, but it goes without saying that there is no need to jump into anything that you don’t fully understand. While there are risks associated with investing in real estate; for example, market risk, asset-level risk, idiosyncratic risk and so on and so forth, there is an investment opportunity for every investor out there–regardless of your risk profile.
If you ever played Monopoly as a child–or even as an adult–then perhaps the term ‘real estate’ brings to mind the houses and hotels we used to buy, build and then charge exorbitant amounts of rent for–as a strategy to get rich. Without those green and red houses, there was no possibility of getting rich–let alone bankrupting others. The purpose of the game was to bankrupt everyone else and emerge as the sole winner.
When it comes to real life, however, I don’t recommend bankrupting everyone else who is in the game with you. In real life, when your tenants cannot pay, it negatively affects the return on your investment.
While the asset class ‘real estate’ does include the homes where we live and the hotels that we visit, real estate is so much more than that. It is the land itself, the buildings on it, as well as anything that grows on it or happens to be underneath it. Real estate, for the most part, cannot be moved and thus its value is tied to its geographic location.
As an avid traveller, I have dreamt of transporting my abode from one country to the next. But unless I magically morph into a hermit crab, the likelihood of that happening is highly unlikely.
Residential real estate is something most of us are familiar with. It’s where we live, eat, play and even build a home. Within this category, we find resale properties as well as new developments. This categories can be broken down even further to condos, cooperatives, townhouses, multi-family homes etc.
While many classify their home as a real estate investment, I beg to differ. If you’re living there, the likelihood is that you aren’t deriving income from the property–especially if you’re paying off a mortgage. Secondly, most people do not buy a property for the purposes of capital gains appreciation–especially if they intend to live there. While it is an asset that you own; as a general rule, I would not put it under the umbrella of ‘investment’.
The fundamental building block of real estate is the land itself. But buying a plot of land is only the beginning. It will require development of some sort before it begins bearing fruit. Which brings us to the topic of commercial real estate–which includes shopping centres, hospitals, offices, hotels (yes, those red houses I loved buying whenever I played Monopoly), as well as certain types of educational institutions. Since it takes a considerable amount of startup capital to invest in commercial real estate, most beginners start by investing in REITs–where funds from numerous shareholders are pooled together for the purpose of investing in real estate.
In addition to residential and commercial real estate, there is also industrial real estate–such as manufacturing plants, warehouses, distribution centres as well as storage facilities. Due to the growing necessity of e-commerce, this category of real estate is extremely likely to grow and continue growing. Compared to commercial real estate, industrial real estate sometimes costs less in terms of purchase price and maintenance due to cheaper vacancy costs, lower turnovers and lower incidences of cleanup and fix-up between tenants. This translates to a higher profit margin for investment purposes.
Industrial real estate comes with long-term lease commitments, which leads to a steady and stable stream of cash flow for investors. Much like the human skeleton which we cannot see, but know is indispensable to our very existence, industrial real estate is the backbone of economic progress. Everything we use has to be made, stored and shipped and while it is not the most obvious real estate investment we might make–it is undoubtedly one that has many benefits.
As with any investment, it’s important to do your homework, research and take the time to be thoroughly informed before taking that leap of faith.
6 thoughts on “Real Estate Asset Classes and Property Types | A Brief Introduction”
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