Real estate investments form an essential component of many investment portfolios, and understanding its fundamentals is key for successful navigating its complexities and seizing opportunities.
Real estate can be broken down into four main categories: residential, commercial, industrial and land. Each asset can serve different functions including storage, manufacturing and retail sales – as well as providing secure income streams.
Residential
Residential real estate includes structures designed for individuals and families to live in, such as single-family homes, townhouses and apartments. Residential property purchases tend to be one of the biggest investments people make during their lifetime, and its value can fluctuate based on market fluctuations.
Investors who invest in residential real estate can find great benefits in renting out their properties, as these rentals can generate stable streams of income through rental payments that cover mortgage costs, maintenance and other expenses. Furthermore, landlords may benefit from deducting mortgage interest and property taxes when renting their properties out.
Residential real estate investment provides lower entry barriers for beginner investors, as it is more affordable. Furthermore, zoning laws governing residential properties tend to be more lenient than their commercial counterparts, making development of properties easier as well as flexible financing options more available. Furthermore, tenants tend to pay their rent promptly while taking good care in maintaining the property itself.
Commercial
Simply stated, commercial real estate spaces are built to generate income for their owners or investors. This distinguishes commercial from residential property such as houses and apartment buildings designed specifically for people to reside.
Commercial real estate spaces usually command higher rental prices than their residential equivalents due to being typically large buildings on larger plots of land located near businesses that generate customer traffic and transactions.
Commercial real estate includes office spaces, retail locations, warehouses, apartments tailored towards business occupants and even hospitals and nursing homes.
There are various kinds of commercial lease agreements, including single-net, double-net and percentage rent contracts that are frequently found in retail and restaurant industries. Each contract differs in regards to who bears responsibility for insurance and taxes related to property ownership.
Industrial
Industrial real estate encompasses land and buildings that serve industrial uses such as manufacturing, assembly, warehousing, research storage and distribution. Although industrial real estate may not appear as glamorous as some sectors of CRE, its investments remain safe and sound for years to come.
Consumer consumption, trade, supply chain reconfiguration and e-commerce all drive demand for industrial space, while production offshoring drives growth in this asset class.
Class A industrial properties are recently constructed with top-of-the-line materials and amenities, such as tall ceilings and top-of-the-line utilities. Vacancies tend not to be an issue with these properties and lease terms tend to be long.
Class B industrial properties typically feature older designs with slightly lower ceilings or fewer truck docks, and tend to attract smaller tenants who reside further from major arteries or less desirable locations. Investors who view Class B buildings as potential value-add investments could consider leasing these spaces on a triple net basis (meaning tenants cover all maintenance costs).
Land
Real estate in its purest form – land – refers to any space within or attached to the earth itself and all of its natural resources, from its surface down through to its core and beyond. Land can be used both residentially and commercially or for special purpose applications like agriculture, mining or forestry.
Investment in raw land can provide future cash flows but is fraught with risks, including taxation and regulatory usage restrictions, leasing/selling a property as well as natural disasters.
Land and real property may seem similar; however, there are subtle distinctions. Real property expands on what can be defined as land by including rights associated with ownership (such as freehold, nonfreehold, life estates or concurrent estates). Land ownership may include extracting natural resources – from minerals to water resources or oil and gas resources which have become increasingly valuable over time – from its landmass.
