What Are the Four Types of Real Estate?
Aside from the fact that land is a finite resource, the various real estate types offer diverse investment opportunities, even in times of economic uncertainty. With the U.S. real estate market value standing at a staggering $3.81 trillion in 2022 and climbing to $5.85 trillion in 2030, it’s a wonderland of opportunity. With an impressive market worth and a plethora of investment avenues, it’s clear why real estate remains a popular choice in the investment world.
The Value of Real Estate
Real estate provides long-term value to investors. Think of it as a time capsule, storing the present value of all the future benefits you’ll reap from owning the property. Unlike a short-term investment, the perks of real estate ownership unravel slowly over time.
The value of property stems from a variety of factors, each adding its unique twist to each property. These factors dance to the tunes of economic and social trends and sway under the influence of governmental regulations and environmental conditions. All these elements come together to influence the four cornerstones of value:
- Demand: This is the yearning for ownership, backed by the financial muscle to fulfill this desire.
- Utility: This is the property’s potential to tick the boxes for future owners’ desires and needs.
- Scarcity: Real estate, much like diamonds, gains its value from scarcity. With a limited supply of properties to compete with, each piece of land becomes a coveted asset.
- Transferability: This is the convenience of passing ownership rights from one person to another. The smoother the transfer, the more valuable the property.
Real estate investment can be either active or passive in nature. Active investing involves hands-on management and involvement, while passive investing is more of a ‘set it and forget it’ approach. Each has its benefits and fits different investor profiles.
Residential real estate revolves around properties designed for people to live in, be it a cozy cottage, a sprawling mansion, or anything in between. Imagine a jigsaw puzzle with billions of pieces, each representing a residential property — that’s the U.S. residential real estate market for you.
The residential real estate market also continues to grow. Predictions indicate that this market is set to grow at a rate of over 2.10% in the forthcoming years.
There are two types of residential real estate: single-family homes and multifamily properties.
Single-family homes are standalone dwellings designed to house one family. According to a Statista 2021 report, these standalone homes don’t just constitute a majority of available residential real estate; they’re a whopping 82 million out of 129 million occupied units.
Moreover, single-family homes are a symbol of personal success and stability. They attract diverse buyers, from first-time homebuyers stepping onto the property ladder to seasoned investors looking for a stable asset with potential for appreciation and rental income.
Multifamily homes are designed to house more than one family — think apartment buildings, duplexes, and triplexes. Instead of buying individual properties, you invest in a single building with multiple units.
One of the biggest benefits of multifamily investing is income potential. With several units under your belt, you get more than one stream of income. Even if a few units are vacant, the others can still generate income, making it less risky than single-family homes. Moreover, multifamily properties are often easier to finance than a portfolio of single-family homes.
Lenders view them as a lower risk because they’re less likely to stand vacant. Plus, managing multiple units in one location can be easier than managing the same number of single-family homes spread across a city.
Larger, multifamily properties with more than four units are considered commercial real estate. This is primarily due to their income-generating potential and how they’re financed.
But the commercial real estate universe extends far beyond multifamily properties. It’s a colorful mosaic of various property types with unique market dynamics. Here’s a snapshot:
- Office buildings: These range from small professional buildings to towering skyscrapers. The market dynamics can vary greatly based on the location and the class of the building.
- Retail properties: These include shopping centers, strip malls, and standalone stores.
- Hospitality properties: Hotels, motels, and resorts fall into this category.
The commercial real estate market often involves longer lease terms, different valuation methods, and potentially higher returns. For instance, investing in commercial multifamily properties can offer a steady stream of income and diversification. However, it can also be complex and requires a solid understanding of market dynamics.
Industrial real estate refers to buildings and properties used for industrial activities, like manufacturing, production, distribution, and research.
In Q1 of 2023, all the deals or “transactions” in the industrial real estate market added up to $7.7 billion. It’s also one of the fastest-growing areas, fueled by the e-commerce boom and an increasing need for distribution centers.
Industrial real estate is less dependent on foot traffic and more on strategic location and accessibility. These properties are typically close to major transportation routes, making it easy to move goods quickly and efficiently.
Here are a few examples:
- Warehouses: These can range from massive distribution centers to smaller, last-mile facilities.
- Manufacturing facilities: These properties are designed for producing goods. They’re equipped with heavy machinery and often require specific zoning.
- Flex industrial: These spaces are a mix of warehouse and office space.
- Data centers: As the digital economy grows, so does the demand for data centers. These facilities house computer systems and related components.
- Research and development facilities: These properties are used by companies to conduct research and development activities. They often have a mix of office and lab space.
Industrial real estate may not be as glamorous as shiny skyscrapers or ritzy retail centers, but it’s a vital component of the economy.
In real estate, land is the earth’s surface and upward to the sky, including the air and the space overhead. It’s the original real estate with infinite potential.
Here are a few types of land assets:
- Residential land is zoned for homes. It could be a single plot for a family home or a massive tract for a whole housing development.
- Agricultural land is used for farming or ranching.
- Raw land is undeveloped land with no buildings or improvements.
- Infill land refers to vacant or underused parcels within urban areas surrounded by development.
While land is a tangible asset that doesn’t wear out or depreciate, it requires a good understanding of the market and potential development costs before investment
Special Purpose Property
Unlike other types of real estate that can adapt to various uses, special-purpose properties are built for a singular purpose. That’s their charm, but it can also be a challenge. If their specific use is no longer needed or viable, repurposing them can be a logistical challenge.
Examples of special-purpose properties include:
- Stadiums and arenas;
- Schools and universities;
- Hospitals and medical facilities;
- Churches and places of worship;
These properties require specialized knowledge, expertise, and resources to invest in — not to mention staying up-to-date on the changing needs of their particular market.
How To Invest in Multiple Types of Real Estate
The allure of real estate isn’t just in its tangible nature or the prospect of regular rental income. It’s also in how diverse the investment opportunities are.
Here are a few ways you can distribute your portfolio and invest in multiple types of real estate:
- Real estate mutual funds pool money from multiple investors to invest in a portfolio of properties or real estate companies.
- Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing properties. They’re traded like stocks, and investing in them gives you a slice of a broad real estate portfolio.
- Private equity funds or real estate syndication offer the opportunity to co-fund larger real estate projects. They’re like a more exclusive, high-stakes version of a real estate mutual fund.
Investing in real estate can be hands-on or hands-off. If you’re the kind who loves the thrill of buying, selling, and managing properties, owning real estate directly can be incredibly rewarding. But if you prefer a more laid-back approach, passively investing in real estate funds or sponsored projects can be attractive.
Whatever your investing final goals, remember: real estate is a vast world teeming with opportunities.