Real Estate Crowdfunding provides Investors with the opportunity to invest and receive passive income from various types of real estate located in different parts of the world. Real estate consists mainly of residential, office, retail and shopping malls, industrial and warehousing, and hotels.
Investors should understand the real estate market’s underlying dynamic and outlook before investing in a particular type real estate matching their investment preference. In this article, we highlight the various types of real estate and key considerations before investing in a particular type of real estate.
Why office buildings are the backbone of real estate investment
Office buildings are generally located in cities and towns, the center of economic hubs with retail shops and hotels located in this area as they benefit from pedestrian foot traffic. Office buildings are the core of economic hubs as they provide citizens with jobs, which in turn fuels the economy as employees spend money at retail shops and restaurants.
Office buildings usually have a mix of tenants consisting of small and large companies to ensure stable rental income is generated over a 3 to 5-year time horizon or weighted average lease expiry (WALT), which is explained further in a subsequent post. As a result, rental income is consistently generated each month, even as office tenants move in and out of the office building, which results in what real estate professionals refer to as an occupancy rate.
Office rents are usually the highest among all types of real estate given their central location and function in the economic hub. During periods of economic growth, office buildings can generate high rental income and lead to strong capital appreciation, depending on other factors such as economic condition and supply of office building space in the city.
Office building typically forms the core of a real estate investment portfolio since the investment size is generally larger than others (residential, industrial) with potential for high and stable income generation making it an attractive investment.
Why invest in residential property as a landlord
Residential properties range from a small apartment to large housing complex generally located in close proximity to cities and towns. Residential property is the core type of real estate investment since it provides individuals with accommodation, a fundamental necessity, which makes it easiest to understand from an investment perspective.
Residential properties generally have a single tenant, small house or large housing complex with individual apartments, providing investors with greater accessibility in terms of investment size and tenant management. Single tenant means rental income can be ‘choppy’ as tenants move in and out of different homes, especially as their social behaviors change (e.g. starts a family, needs a larger space).
Residential property located within or close proximity to economic hubs generally carry the greatest value as individuals seek the convenience of a shorter commute to and from their office. Residential properties located close to hospitals and schools is also an important consideration, especially for residential homes suitable for families.
Residential property typically represents the highest yield among its peers in the real estate market. Real Estate Crowdfunding means Investors can obtain fragmented ownership in the residential property while holding other types of real estate.
Why invest in retail with the rising popularity of e-commerce
Retail property range from small shop fronts to large-scale shopping malls. Retail property is generally located within cities and towns to leverage on pedestrian foot traffic paying for products (groceries) and services (hairdressers).
Retail property generally has a single tenant (e.g. hairdresser, restaurant) seeking a shop where similar types of retail businesses are located to capture [like-minded] pedestrian foot traffic. Retail property is important to the makeup of a city or town but faces a key question as a type of real estate investment.
The popularity of online shopping, such as Amazon, questions whether retail property, especially large-scale shopping malls, will survive e-commerce retail. Retail shops located in city centers will attract higher-income consumers, especially tourists, with companies justifying retail rent as (physical) advertising and brand awareness expense alternative to digital marketing.
What the investment rationale is for an industrial property
Industrial property is generally storage warehousing that provides companies with the space to store products sold at retail shops in the city or online. Industrial property is usually located outside of cities and towns as it requires access to transportation networks, such as highways and airports.
Industrial property generally has several tenants sharing sections of a storage warehouse with different access to loading bays for trucking access. Industrial tenants leverage the cheaper cost of real estate in the outskirts since it primarily functions as a storage unit. Rental income generated from the industrial property is usually ‘smoother’ than residential as turnover within the industrial property is lower.
Industrial property benefits from retail consumption of products, whether at retail shops in city centers or through e-commerce. For example:
- A retail shop located in the city center that sells music instruments would typically store large instruments (pianos, for example) in a warehouse on the outskirts. Once a customer orders a piano, for example, the store would package and deliver from the warehouse to the customer.
- An e-commerce company selling books online would typically store books in a warehouse on the outskirts and once a customer orders a book, a shipping company would pick up from the warehouse and deliver to the customer.
As you can tell, both retail and e-commerce sales create demand for warehousing storage, whether it be the production or consumption of goods.
How do you invest in a hotel?
Hotel property generally ranges from small (50 rooms) to large hotels (500 rooms) located in cities and towns as temporary accommodation for travelers visiting the particular city or town for two key purposes: business travel and tourism. In addition to the size of the hotel (number of rooms), hotel guests usually seek a particular class of hotel (Holiday Inn vs. Four Seasons) during their stay.
Hotels generally have a single tenant, who manages hotel operations (a Hotel Management Agreement), with various retail shops and restaurants as other tenants within the hotel premises. An investor would enter a Hotel Management Agreement with a service provider and separately manage the retail shop and restaurant tenants, which leverage the capabilities of the hotel service provider.
In general, hotel property investment is considered a ‘trophy asset’ whereby it forms the ‘missing piece’ to complete a real estate investment portfolio. Real Estate Crowdfunding means an Investor could acquire a fragmented ownership in a hotel as part of their portfolio.
What other real estate investments are available
Other types of real estate investors would commonly acquire would be land, agriculture, schools, hospitals, docks, golf courses, to name a few.
Investors require a certain level of expertise in the particular type of ‘other’ real estate, for example, zoning requirements of land, operational needs of a hospital, or topography design of a golf course. This is where Real Estate Crowdfunding Platforms hire real estate professionals to provide relevant expertise, for example analyzing the market dynamics of land that is freehold or leasehold, which is explained further in a subsequent post.
In conclusion, Investors benefit from being able to identify the characteristics of different types of real estate (highlighted above) to make a comparison and decide on which opportunity best matches their investment preferences (size and time horizon of investment).
What’s up next? Denzity will cover the key considerations an Investor should make before making an investment in a Real Estate Crowdfunding project.