Real estate property types can vary; especially when it comes to what to ask before making a purchase. With that being the case, as an investor, you should be aware of these differences to know what you want to have in your portfolio and what is suitable for your particular strategy.
Raw Land / Development
Land is one of the least expensive assets to buy. This is due to the fact that further investment is required to in order to make it produce income and that it will not happen for some time. Because construction budgets tend to go over original contracts and it takes time to convert a property from raw land to be an income producing property. Its value is more adversely affected that other types of real estate during a downturn because of that. Building and zoning codes will dictate what the development possibilities are. Sometimes land is not able to be developed and there is nothing you can build. Other times, the city may grant you a zoning change or a variance which would allow you to develop something different than what is in the code.
Pros:
- You can create a new property based on today’s demand.
- Maintenance costs are low.
- If you are developing in a growing community, you can have generous upside.
Cons:
- Land can be more difficult to borrow against.
- Land often times wont have any immediate cash flow.
- Often Land will require a length, costly permitting process to build.
- With land you risk the chance of the economy falling when you are ready to lease or sell.
Residential / Multi Family
“Residential” properties are places where people live. This usually means single-family houses or small apartment properties. For more than four units, aspects may change for loans because they are classified as “residential multifamily” or “commercial multifamily.” Location plays a big role in the value of residential property.
Pros:
- Financing can be less complex than that of commercial properties.
- Most of these transactions have immediate cash flow.
- Low-risk over the long term—everyone needs to live somewhere.
Cons:
- Residential tenancy laws tend to favor tenants.
- Temptation to over-leverage can get investors in trouble.
- Rent control can effect who you can have as tenants; check your local laws.
Commercial
A commercial property can be a single free-standing convenience store, a shopping mall anchored by a “big-box” retailer, an office skyscraper, or anything in between. They are properties where business is done. Again, location plays a big role in the value of commercial property, as do market forces.
Pros:
- Less volatile in valuation than other property types.
- Great locations that are in high demand give you the ability to negotiate better term as a landlord including “triple-net” leases, and longer term leases.
- More objective price valuations.
Cons:
- More capital required up front.
- Sometimes you have to sign personally to get a loan.
- Can be expensive to self manage because lawyers are more often used for any communication.
Industrial
Industrial properties are dedicated to the manufacture, repair, or storage of products. This can involve heavy machinery, chemicals, and other hazardous materials. Unlike commercial and residential real estate, the location is depending on the tenant. For example logistics, manufacturing and storage each will require different locations based on its purpose.
Pros:
- Can be a great cash flow opportunity.
- Often managerial responsibilities is in the hands of the tenants.
Cons:
- Potential for property to be spoiled by hazardous materials.
- Rural locations value are difficult to forecast in the long term.
There are various types of investment types for an investor to get involved with Read more about that here.
