December 19, 2019
Investing in real estate is becoming increasingly mainstream. The main reason it has become such a sought after asset is that it outperforms all other asset classes. That’s why institutional investors have held real estate in their portfolios for decades. Luckily, more opportunities for retail investors are available than ever before.
Are you considering investing in the $2.7 trillion industry? Then knowing about the subsets in commercial real estate will be of great help to you. Below, we discuss the most commonly defined commercial real estate (CRE) sectors. Then we’ll focus on one category, multifamily, in detail.
The following six sectors are where most people invest in:
The relative risks associated with each subset and their potential rewards depend on various factors. The two main ones are what the market conditions are like and state of tenancy. With the latter are other related issues, such as the strength of tenants, how likely it is for them to renew their leases, and the cost of the renewed lease.
All of the subsets contain a mixture of property types. How much an investment in a property will bring you may depend on the class of the property. A confluence of different factors, such as the location, condition, and amenities in a building determines the tier it will belong to. Usually, the first three classes, A, B, and C, are considered to contain investment-grade buildings. While this is true for all CRE subsets, we will be focusing on the multifamily property type.
There are several reasons why many investors consider choosing the multifamily property type. Large-sized multifamily buildings come with a very low default rate. Even in the last recession, Fannie Mae-backed multifamily loans showed a delinquency rate of less than 1%. Combined with high and stable rates of return, these factors make multifamily a very safe investment. Moreover, purchasing single-family residences one at a time may become too expensive. Investing in a multifamily building, on the other hand, can often be the less expensive approach.
Manufactured housing communities form the fifth class. The owner leases to individual owners of manufactured homes. In the last category, you’ll find housing specially-purposed for students, senior, subsidized, or low-income inhabitants.
The risk and reward vary with property class. However, most of the time, Class A investors will enjoy more security due to the properties being of the top tier. Additionally, they won’t have to deal with outstanding issues or expend capital on the building. However, this class is sensitive to recession since it can lead to high-income earners losing their jobs.
These are in high demand. All of Class A and many Class B assets are part of major markets because they offer:
The remaining Class B and many C properties may have higher CAP rates. The risk is higher since the property is older and may be present in a lower-income site or has lower-income tenants. Thus, investors may expect:
Class C and D assets get financing from local banks, which means investors can expect:
Thus, usually, the class an investor chooses will influence how stable their investment remains and the rate of its growth appreciation. The best class for capital preservation is Class A. Does that mean Class C properties do not make for good investments? Not at all! B and C can be better options for capital appreciation.
The DiversyFund approach makes sure of that. We select Class C properties in well-reputed areas with the highest growth potentials. With our value-adding strategy, we elevate Class C properties to a Class B. Our objective is to help our clients grow their capital while protecting their investment. Find more information here. Or, start investing here!