Types of Real Estate Investment

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.

Introduction to Real Estate Crowdfunding

Real Estate Crowdfunding provides individuals with the opportunity to invest and receive passive income in real estate, one of the oldest forms of investment that has demonstrated a long history of consistent capital growth.

Crowdfunding in real estate means a number of individuals (“Investors”) combine their money to purchase a real estate property with a Real Estate Crowdfunding Platform (“Platforms”) that hire real estate professionals (“Sponsors”) to achieve the goals of income generation and/or capital growth. Investors have a lot of factors to consider when investing in real estate, let’s walk through step-by-step.

This article’s purpose is to explain the key considerations of Real Estate Crowdfunding so that Denzity users understand how to decide on a Real Estate Crowdfunding investment (“Project”).

How much to invest in Real Estate Crowdfunding?

Investors decide exactly how much they invest into a Project, regardless of the underlying real estate property’s value. Each Investor receives an ownership (in the form of shares) proportional to how much they invest — this is fragmented ownership.

For example, an Investor commits US$50,000 to a Project where the underlying property is valued at US$1,000,000 and generates net income of US$100,000 per year. The Investor’s fragmented ownership is 5% of the Project and would receive US$5,000 in passive income (5% of the property’s US$100,000 net income). In comparison, traditional real estate investment would have required the Investor to commit around US$200,000 and be liable to pay a mortgage payment every month, as a mortgagor.

Where to invest in Real Estate Crowdfunding?

Investors decide which real estate market to invest, usually based on the Platform’s expertise and investment objectives. Each property type (e.g. residential versus hotel versus office) requires specific knowledge held by real estate professionals to match the property’s net income and value with the Investor’s investment objectives.

Investors would typically select a developed real estate market (New York or London, for example) where rent is generated in a commonly held currency (United States dollar, British pound) to generate stable passive income and capital appreciation. In contrast, Investors seeking large capital appreciation would seek an emerging real estate market for long distance real estate investing like Vietnam, for example.

Which type of real estate property to invest in?

Investors decide which type of real estate property to invest and obtain fragmented ownership in a Project, for example, a residential home, office building, or industrial warehouse.* Each real estate property has different characteristics and Investors should decide based on their individual investment preference for risk and return.

*We will talk more in-depth about the various real estate property types in the future.

Which Platform should I invest in Real Estate Crowdfunding?

Platforms will typically be focused on a certain real estate market geography and type of property. As a result, Platforms will hire a team of real estate professionals with specialized knowledge in its focus areas. As an Investor in a Project, the Platform provides you with fragmented ownership but has sole discretion in operating and managing the Project.

Investors should decide whether to proceed with a given Project having made careful consideration of the Platform’s track record and reputation. Denzity provides users with the relevant information to make an informed investment decision on Projects and Platforms.

How long should I invest in a Real Estate Crowdfunding Project?

Each Project will have a different investment (time) horizon. While equity crowdfunding (usually 3–5 years) is typically longer than debt crowdfunding (usually 2–4 years) it can provide a higher return to investors (around 5–15% for equity vs. 7–10% for debt crowdfunding). Based on the investment horizon, Investors can decide how much to invest in any given Project.

In conclusion, each Investor can decide exactly how much to invest in any given Project with consideration to the Platform’s track record and reputation towards achieving passive income and capital appreciation through fragmented ownership in Real Estate Crowdfunding.

What’s up next? Denzity will cover the various types of real estate properties available for investment and highlight the considerations each investor should make before investing.

Stay tuned!

Denzity Team