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Understanding Real Estate Asset Classes and Property Types
Key Takeaways
- Real estate is an alternative asset class with two main property types – residential and commercial. Each of them encompasses various subtypes and offers diverse investment opportunities.
- Properties are graded A, B, or C based on their quality and features. They’re also grouped by how they’re used – like shops or offices. This helps investors understand what they’re buying.
- Real estate is considered a tangible asset that can help diversify investment portfolios. Unlike stocks, it can hold value when markets drop. New platforms like Willow Wealth now let regular investors buy real estate that was once only for big institutions.
Understanding the difference between the real estate asset classes and property types is key for investors in the space. But information available can be either incorrect or difficult to understand. Whether you’re a budding real estate investor, or just curious to learn more about investing, here’s a crash course on real estate asset classes versus property types and what you need to know.
What is an asset class?
Before we dive in and start exploring the ins and outs of the real estate asset class, let’s make sure we’re all on the same page as to what an asset class actually is.
Put simply, an asset class is a group of financial instruments that have comparable characteristics and exhibit like behaviors in the marketplace. Below are just a few examples:
- Stocks
- Bonds
- Alternatives (Real Estate, Art Finance, Cryptocurrency, Private Equity, etc.)
As you’ll see from the list above, real estate is an asset class that is often categorized under the larger umbrella known as alternative assets. Alternative assets are assets that fall outside more traditional categories such as stocks and bonds. Until recently, there was a high barrier to entry for individual investors to take advantage of opportunities within alternative asset classes. Platforms such as Willow Wealth, however, are giving individual investors access to investments previously only available to institutions or the mega-wealthy.
Property Types Within Real Estate
Within real estate, there are property types and property classes. These two terms are not the same and shouldn’t be treated as such. A real estate property class refers to the characteristics of a real estate investment and is often categorized as Class A, B, or C. These classifications were developed by real estate investors, lenders, and brokers to provide a means to communicate and rate the quality of the property quickly. There are no set guidelines that define these ratings and often there may be some disagreement on a particular asset.
The real estate asset class, on the other hand, is broken down into two main property types: commercial and residential. Below is a detailed breakdown of the different types of both residential and commercial real estate.
Residential Real Estate
Residential property is simply real estate for living. It includes single-family homes, townhouses, condos, and vacation houses. Residential real estate properties are considered an investment if the asset is not owner-occupied, and it is owned for financial gain—either via rent or the appreciation in value.
As you may have guessed, there are a variety of property types that fall under the residential real estate property type. Here’s a quick breakdown of residential property types within the real estate asset class.
Single-family homes. Designed as a dwelling for one family, this type of property doesn’t share walls with neighboring residences or common areas. However, the property might be a part of a homeowners association (HOA) that provides access to community amenities such as a pool, tennis courts, and clubhouse, just to name a few.
Co-ops. Also known as housing cooperatives, co-ops aren’t considered real property because owners are technically purchasing shares in a corporation that owns the building. In lieu of a mortgage, individuals take out a share loan. You would then receive a lease that entitles you to occupy a particular unit in the co-op. Similar to condominiums, co-ops often have maintenance fees.
Condominiums. Unlike a co-op, condo units are owned by individuals but have shared access to common areas that are co-owned by all of the residents in the complex. Association fees are applied to maintain, improve, and fix common areas. Examples of shared amenities include a pool (or pools depending on the size of the complex), tennis courts, and package rooms.
Townhouses. A townhouse is another single-family residential property. Townhouses typically share walls with neighboring residences, but unlike condominiums, there isn’t a unit above or below. This type of residential property usually has outdoor space but also has access to neighborhood common areas. From a financing perspective, you can expect mortgage options to be in-line with standalone homes since townhouses are considered single-family residences by most mortgage lenders and banks.
Multi-family properties. Multi-family properties, such as duplexes, are buildings with multiple housing units. Multi-family structures can be anything from apartments to townhouses. However, if the property holds more than four units, it is then classified as a commercial property. From a residential perspective, multi-family properties, although typically more expensive, are often more attractive to banks as they are viewed as less risky since the income generated isn’t coming from a single tenant.
Vacation homes. Also known as second homes, a vacation home is a residence that typically is used as a seasonal accommodation—think beach house or ski cabin. These residences can be a single-family home, condo, or townhouse, and can be rented out when not in use by the owner. It’s worth noting that financing is usually more expensive than a primary single-family residence.
Commercial Real Estate
Commercial Real Estate, or CRE, includes any property that generates income. Let’s take a look at the different types of commercial real estate.
Multi-family. Multi-family properties are any properties that house more than one tenant. If a building has four or more rental units for living, then it is considered a commercial property. Just like with any residential property, multifamily properties can be anything from a townhouse to a condominium, apartment or duplex.
When it comes to multi-family real estate investing, property owners often don’t manage the daily upkeep of the property, but hire what is called a property manager or property management company to take care of the day-to-day.
Retail. Retail space can range from strip malls offering 5,000 to more than 100,000 square feet of space or can be a freestanding building, like a restaurant or a gas station. Additionally, there are commercial centers that host big-name box stores such as Target or Home Depot, with a store utilizing 30,000 to 200,000 square feet. Typically, multi-store retail centers are a better draw for investors as they host many tenants.
Office. Commercial office properties run the gamut from one-tenant properties to multi-tenant professional buildings and even skyscrapers. Office space can exist in cities, the suburbs, or even in more rural areas. However, when it comes to the attractiveness of commercial office property, location and the state of the building (Is it brand new or in need of renovations?) are key considerations for investors.
Self-storage. Self-storage facilities are a commercial property type that rents space to tenants either on a month-to-month or long-term basis. Spaces can range in size from lockers to rooms, containers, and even outdoor space for the storage of boats or RVs. From an investment perspective, US News and Money highlights, “Despite self-storage experiencing a runup in pricing and demand, the markets continue to grow and capitalization rates (a method for factoring return on investment) remain attractive.”
Hotels. Hotels offer a unique scenario in the commercial property class as they are able to adjust room rates to meet market demands. There are several ways to get involved in this type of commercial property. For example, you could purchase the actual hotel, invest in a crowdfunded hotel real estate transaction, buy into a real estate investment trust that owns hotels, or buy the stock of a hotel operator such as Hilton or Marriott. It’s important to note that the hotel industry is easily impacted by the economy, and in times of recession, return on investment can suffer.
Mobile homes. An often overlooked commercial property type is mobile home parks. From an investment perspective, you would purchase the land itself and then lease out the individual pads to residents that live in mobile homes. Since you are simply renting out the land, repairs and maintenance, as well as operating costs, are typically low. The turnover is usually minimal in this type of commercial property as it costs tenants thousands of dollars to move their mobile home to a different location. It’s also worth noting that mobile home parks have the highest capitalization rate of any real estate niche, at 7-10% nationally, according to Reonomy.
Land. Land investments typically fall into one of two categories: greenfield or brownfield. Greenfield land hasn’t previously been developed. Brownfield land was previously developed and typically requires clean-up before it can be used.
Industrial. While not as flashy as investing in a skyscraper or hotel, commercial industrial properties are typically stable, longer-term investments. It is worth noting that industrial properties can vary significantly from a business use case perspective. Here are a few examples:
Manufacturing
Quite simply, manufacturing sites are where goods are produced and assembled. Heavy manufacturing commercial real estate properties typically encompass anywhere from thousands to even hundreds of thousands of square feet to accommodate heavy equipment and production lines. Examples include automobile plants, shipbuilding facilities, or even pharmaceutical companies. In addition to space for the actual manufacturing, industrial properties also require significant storage space as well as loading docks to ship the market-ready products.
Storage and Distribution
Storage and distribution sites are the locations where the products made in manufacturing properties are stored and sent to the end-user. Depending on the type of products being stored, the size of this type of commercial property can have a large square footage range and have specific requirements. An example of these requirements might be a distribution facility needing to be central to a large population and ideally being located near an airport and shipping routes. For instance, Walmart fulfillment centers are more than 1 million square feet and employ over 600 people to handle the unloading and shipping goods.
General-purpose warehouses also fall under the storage and distribution category of industrial commercial real estate. These warehouses are more often for the storage of goods and products versus a central distribution hub.
A third storage and distribution type of property is a truck terminal. Truck terminals are used completely for distribution and serve as a mid-point site for goods to be shifted from one truck to another on the way to their final destination.
Flex Space
Flex Spaces are industrial commercial properties that are designed for diverse use. The site is typically comprised of at least 30% office space, as well as space for production. Examples include research and development facilities, data centers, and showrooms.
Is real estate an asset?
Let’s answer this burning question too. Yes, real estate is an asset. It’s a tangible investment with inherent value, and it falls into the category of real assets alongside commodities, equipment, and natural resources. Such assets have physical forms you can see and touch, unlike financial assets such as stocks or bonds.
Real assets, including real estate, can help diversify an investment portfolio. Their value often moves differently from stocks and bonds, which can balance risk. Due to this nature, real estate is a useful tool for investors who look to spread their investments across different types of assets.
The real estate asset class offers a wide range of opportunities. Investors can put money into a variety of locations, property types, stages of development, and real estate classes to help diversify their portfolios. Interested in investing in real estate as an alternative asset but not looking to purchase a property on your own? Willow Wealth provides a seamless experience designed for investors to take advantage of real estate opportunities across the asset class. See if the Willow Wealth platform is right for you.
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Willow Wealth enables you to build a private markets portfolio across real estate, private credit, private equity, and more. Our platform provides access to differentiated individual investments and diversified funds, as well as an automated investing solution that handles everything for you. Join more than 500,000 members and start investing today.
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