10 Real Estate Asset Classes You Must Know Before Investing
Read this article if you are even remotely considering getting into real estate investing.
Alternative Title: A blog post with actual specifics and not just typical finance-blog fluffy BS trying to sell you a course or something.
There are many different asset classes in real estate. While definitions are nice, here I will outline how you can actually partake in these types of deals. We will cover the processes, money required and amount of work involved in each asset class.
Of note, these star ratings should be taken in a very general manner. Every investment is different, these ratings are just there to give you a general feel. Finally, if there is a range to the ratings, this means the risk or return is highly deal dependent.
Ok, let's start with our favorite asset class...
Self Storage - Our favorite asset class!
Passiveness (more stars is more passive) ⭐⭐⭐/5
Return on Investment (more stars is more ROI) ⭐⭐⭐/5
Safety (more stars is safer) ⭐⭐⭐⭐/5
Knowledge Required (more stars is less knowledge required) ⭐⭐⭐/5
You are on the "Investing Storage" website, so obviously this goes first on our list! Self storage is a great asset class but not to be taken lightly. It has performed well even during economic downturns but you will be operating a "business" not just passive real estate.
The basics of getting your first facility include finding the deal, running the pro-forma numbers, assessing demand (typically in sqft/capita), performing due diligence, financing the deal and then operating the facility. But this is easier said than done.
Our entire business here at Investing Storage is to find/finance/purchase and manage self storage. We are a small group that is glad to chat with anyone regarding this process. So if you have a plot of land, or have a facility that you are looking to purchase, send us an e-mail and we can help educate and even partner with you to finance and operate your first facility!
Investing In Single Family Rental Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐/5
Riskiness (more stars is safer) ⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐⭐⭐⭐/5
It doesn’t get much simpler than this. The single-family rental is a way that non-real estate folks make the jump into real estate. When it comes time to move to a new house, some realize that becoming a landlord is better than selling their (former) primary home.
Other investors focus on acquiring single family rentals as investment properties because there are so many of them. There are lots of opportunities to buy these properties and competition is not as fierce when compared to multifamily.
Oftentimes the BRRR method is utilized when buying these houses with the intent of renting them out. With this method, you buy the property for a low price point, rehab it, and then refinance it at a higher price point enabling you to pull out lots (sometimes all) of the money that you initially put into the purchase/rehab.
Investing in Multifamily 2-4 Unit Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐⭐/5
Riskiness (more stars is safer) ⭐⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐⭐⭐⭐/5
These are nicely sized deals for the new investor as well. However, competition is an issue as lots of mid-size investors focus on this class. Often times, owners of these multifamily properties may receive mailers or cold calls to see if they are interested-in selling.
2 to 4 units is also the perfect size for the “house, hack“ concept. In this concept, you use your standard FHA loan (or other type of low down payment loan) to buy a 2 to 4 unit and live in one of the units. This allows you to buy a multi-unit property and still have a low down payment (3.5% for an FHA) AND a relatively low interest rate. In general your primary home interest rate will be lower than an investment property and this counts as your primary home so you get the lower rate. Using the house-hack concept, you can house-hack about one property per year, allowing you to acquire several multi family units within the span of five years. Competition here for properties is tougher when compared to single-family homes.
Investing in Mid-Size Multi Family 4-50 unit Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐⭐⭐/5
Riskiness (more stars is safer) ⭐⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐⭐⭐/5
There are two cutoffs here that make this class different from Small Multifamily. First, since it is over 4 units, you are not able to use an FHA mortgage - so no 3.5% down. Secondly, I differentiate this from large-multifamily based on the amount of resources needed to operate/find/fund/vet a deal. There is no “official” size cut off when it comes to mid vs large multi-family. Furthermore, it’s often stated that there isn't that much more needed to run 4 units vs 10 units. Still there is clearly a difference between a 8 unit rental in your neighborhood and a $50million 150 units Class A apartment complex.
Actively Investing in Large Multi Family Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐⭐⭐/5
Riskiness (more stars is safer) ⭐⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐/5
These are big boys. 50+ units. You will see these as part of a syndication or being bought or developed by a REIT. If you are doing this deal on your own, then you don’t need to be reading this blog.
Investing in Commercial Retail/Office Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐⭐⭐/5
Riskiness (more stars is safer) ⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐⭐/5
Simple, buy a retail or office building and rent it out. You can imagine the risks with this. Look what covid did! Commercial tenants are harder to find than residential tenants as you need a specific type of tenant. There are only so many dentists or insurance companies that want to rent office space! Still, tenants here can stay for long periods of time especially if the tenant is location dependent.
Investing in Commercial Industrial Real Estate
Passiveness - ⭐⭐⭐/5
Return on Investment - ⭐-⭐⭐⭐⭐/5
Riskiness (more stars is safer) ⭐⭐/5
Knowledge Required (more stars means less knowledge required) ⭐/5
These can range from renting out land to a concrete manufacturing plant, renting a large warehouse to an industrial paint manufacturer or smaller car repair shops. This is like commercial retail on steroids. In any asset you rely on the tenant but here the most so - your success is directly tied to the success of the tenants business. These tenants may want to build out the property to suit their needs. These can also be structured as a “Triple Net Lease” where the tenant pays all the insurance, property taxes and building repair.
Investing in Land Development
Passiveness - ⭐/5
Return on Investment - ⭐-⭐⭐⭐⭐⭐/5
Riskiness (more stars is safer) ⭐/5
Knowledge Required (more stars means less knowledge required) ⭐/5
In general this requires purchasing land and getting it “ready” for the end use. For example, maybe you buy a large property in a rural area that is zoned for farmland but you know it would be perfect to parcel off and sell to a contractor. So you buy the land, go to the city, get it rezoned and then divide all the parcels ready for the contractor.
There are many types of land development. Again, the end use is often what drives the development. If you see ads for “shovel ready” land for sale, these were previously land development deals. I see these frequently in self storage. Someone buys the land, does all the availability studies, gets the engineering and clears the build with the city so you are “shovel ready”.
This can range from fairly straightforward (like the self storage example) where you just need approvals/engineering to very complex deals like you may see with massive developments or Amazon warehouses. These deals can involve relations with local politicians and the city and even community outreach to get help get land approved for development.
Investing in STRs (aka short term rentals)
Passiveness (more stars is more passive) ⭐⭐⭐/5
Return on Investment (more stars is more ROI) ⭐-⭐⭐⭐⭐/5
Safety (more stars is safer) ⭐⭐⭐/5
Knowledge Required (more stars is less knowledge required) ⭐⭐/5
Aka AirBNB and VRBO. These can be a business in themselves or you can use this type of rental to buy a cash flowing vacation home with a low to moderate amount of extra effort. Here is an opportunity to have a management company take over and exchange revenue for less work. Lot's of cash flow opportunity here, but be prepared for a bit of work.
Investing In Syndications vs REITs
Passiveness (more stars is more passive) ⭐⭐⭐⭐⭐/5
Return on Investment (more stars is more ROI) ⭐⭐/5
Safety (more stars is safer) ⭐⭐⭐⭐/5
Knowledge Required (more stars is less knowledge required) ⭐/5
These are mostly passive investments and have reasonable returns in the 12-25% range. Although some are higher. The main difference between the two is that with a syndication you are investing in a single (or small group) of properties - a single deal. Here your money is often held till the deal is over. It’s important to do your own due diligence during these types of deals or to do deals with VERY trusted syndicators. REITs are somewhat similar but much larger. You invest into a giant fund which can be involved in multiple deals. These REITs are often publicly listed and allow you to invest smaller amounts. Syndications will likely have a minimum investment. This is because they are raising money from a small group of people (in general 2-50 people) and don’t want to deal with investors who only want to put in a couple bucks. These minimums are often $20k-$100k but they are not set in stone. Feel free to ask syndicators if they would make an exception. Some will, some wont - there is no law (that I know of) that makes these minimums set in stone. Finally, some syndications are open only to accredited investors only.
Legend Explained
Passiveness (more stars is more passive)
The degree to which an investment is passive is up to you. It is based on the effort you put in to make your investment passive. And remember, you can often exchange passiveness for income or even risk for income. For example, in self storage syndication, you can dig deep into understanding financials, environment surveys, occupancy rates, market trends, etc. (a basic understanding of these is important) or you can simply “trust” your syndicator that they did quality due diligence. Often times, this is a normal part of being an investor. There is always some degree of trust but you are always welcome to put in lots of work and look into every detail yourself.
STRs are another perfect example. Management companies will not provide the same personalized touch that you will and will cost you a % of revenue. But, hiring a manager will make your STR as close to passive as possible.
Return on Investment (more stars is more ROI)
Pretty self explanatory here but again, this is extremely variable. I don’t think I have to tell you that no investment is guaranteed!
Risk (more stars is safer)
Remember that this is HIGHLY variable. And comes with tons of caveats. Any deal is risky if you get into a crummy deal. Even a REIT has risk (look at Evergrande). Then again, holding pure USD in your bank account would have resulted in massive losses from inflation alone over the past couple years. Hence my mantra....
"You are always investing".
Knowledge Required (more stars is less knowledge required)
I mean, technically, you don't have to have any knowledge to invest in any of these! You could just give your money to people and see what happens. Obviously, thats a dangerous move.
So Now What?
Ok, now you have a general outline of the real estate classes. Next, you can break down the individual steps of investing in each asset class. The house-hack of 2-4 multifamily is rather straightforward. Investing in a 25 unit apartment complex is a bit more in depth but still doable. It is useful to ask yourself: do I want to do a big deal to start with? How much money do I have available for my first deal? Do I have other investors? How much time am I willing to put into this deal to get it started? How much time am I willing to spend to maintain my property? How do I plan on financing the deal? What is my exit plan for the property?
Understand these asset classes. Run hypothetical deals, listen to some podcasts and you will slowly start to understand the path to the first steps of investing in real estate. Good luck!
Finally, please email us if you have a self storage facility that you want to buy or build and need an advisor/partner.
p.s. This is a blog on the internet, not formal financial advice and we are not soliciting an investment. But you knew that, didn't you?