Types of Commercial Real Estate Investments
Updated: Jun 21, 2020
Today I will be outlining several of the different types of commercial real estate investments that will be encountered out in the “real world” as you make your foray into commercial real estate investing.
I will provide an overview below with all of them, and break them down briefly below. Feel free to jump around if there are any that are of particular interest to you. In the future, we will look at each one more closely.
Anything from a single-story building with several office suites for tenants to a sixty-story high-rise office building in the central business district. This is a very broad niche within commercial real estate as there is such a wide range of buildings that would be considered office space.
Often, investors in office space typically find an even more focused niche within the segment. Things like garden offices within suburban neighborhoods, or office parks located close to airports or major highways.
Strip centers with multiple tenants, pad sites with single tenants, and convenience stores are just several examples within the retail segment of commercial real estate. Just like the others, investors often find a strategy that they are knowledgeable about and comfortable with and lean in on it.
Whether you want to lease retail space to laundromats and title loan companies or fill the spaces up with clothing outlets, there is a strategy suitable to each investor’s risk tolerance and skill set.
Similar to, if not a branch off of the retail segment, the shopping center segment consists of neighborhood markets, regional shopping centers, malls, and big-box stores.
While this is typically not taken on by individual investors, it is definitely a strategy that can be implemented nationwide.
Logistical hubs, fabrication or manufacturing plants, warehouses, you name it. All of these are great examples of industrial real estate. Long term tenants and (hopefully) stable rental income are the name of the game with industrial property.
Typically fewer tenant improvements (TI) are required to make the spaces suitable for interested tenants, and the lack of flashy amenities in this segment typically means fewer cosmetic facelifts over the lifetime of this property type.
Multifamily, apartment communities, apartment complexes...whatever you like to call them, multifamily properties are any real estate that consists of five or more units that are intended to provide housing for five or more separate families.
This is the segment that I specifically have the most knowledge and expertise on, and could talk about all day. To keep this brief: people always need food, water, and shelter.
Apartments provide one of the three necessities for survival. Although some multifamily properties can be taken down for hundreds of thousands of dollars, others in hot markets can run all the way up into the nine-figure price tag range.
The two biggest camps within the multifamily segment are the value-adders and those who buy and hold. The value adders go into a below market value property and add value in certain places to force appreciation of the property through increasing revenues and decreasing expenses.
Things like new flooring, appliances, bathrooms, etc. to raise rents and water conservation programs, LED lights, and allocating utilities to tenants to reduce expenses.
Hotels, motels, hostels, and short-term rentals.
This is a very specialized niche with sub-markets that focus on taking over and re-flagging failing hotels, as well as those who invest privately with the intent to bring in a big name flag down the line.
Special purpose properties typically have very limited uses if any other than their intended use upon construction. Meaning, if the current tenant vacated, a tenant in the same industry with the same space requirement would be required to re-lease it.
A few examples of these would be car washes, golf courses, go-kart race tracks, and water parks. See what I mean?
You might be scratching your head right now saying, “I am sure there are other businesses that could use those properties, right?” And if you are, you’re exactly on par with everyone else right now! When these properties go up for sale, it can be a great opportunity for those who are both creative and business savvy.
This segment consists largely of land bankers or those who purchase land in the path of development with the intent to hold it for the long term until a speculator or developer comes along and wants to purchase it from them for a price that justifies their holding period.
This is a longer-term investment vehicle with typically lower annual cash flow if any. Many people lease out the vacant land to farmers so that they can bring in some revenue, but it is typically not comparable to multi-tenant commercial buildings with businesses leasing them out.
Farm & Ranch:
Do you farm or ranch? If not, you might be leasing out this property to farmers or ranchers!
I don’t pretend to be a farmer or rancher, but when purchased as an income-producing real estate with a lessee on the property, farms, and ranches can be very profitable.
As always, be on the lookout for the next post and feel free to reach out with any and all of your real estate questions and needs. If I don't have the answer or the expertise to help you, I will connect you with the right person!
Matt Moreland, Realtor® is a real estate agent serving the Lubbock, Texas, and the South Plains. After graduating with a Bachelor of Business Administration in Finance with a concentration in real estate from Texas Tech University, he began practicing real estate full time at McDougal Realtors in Lubbock, Texas. Matt enjoys spending time with his wife and their dog. Some of his hobbies include investing in real estate, elk hunting, backpacking, barbecuing, and playing guitar. To schedule a commitment-free consultation please call 469-744-3610 or fill out this form to get started.