3 Types of Real Estate: A Breakdown for Investors
Real estate comes in different flavours. What are the three types of real estate? Find out how Parvis categorizes deals.
Here at Parvis, we categorize real estate into 3 different types: residential, commercial and industrial. This article will discuss broadly the various forms of real estate, as well as considerations when investing in each of the categories. Please read further to discover and learn more.
Residential Real Estate
The first category is residential real estate. Broadly speaking, residential real estate is defined as real property with land and buildings on it used mainly for residential purposes. This can take the form of many different types of structures such as single-family homes, condos, cooperatives, duplexes, townhouses and multi-family residences.
Stand-alone homes or single-family homes are the most common types of houses and stand alone on their own plot of land. Townhouses or townhomes are individually owned units often sharing one or two exterior walls with a neighbouring property. Condominiums are privately owned residential units located within a community of other units. Depending on the ownership structure, condos can be owned outright by the owner or jointly with the condo owners association. Multi-family residential units are where multiple separate housing units for residential purposes are houses within one building or several buildings within one complex. Units can be side by side or stacked on top of each other ie. townhouses/houses or apartments.
Investing in Residential Real Estate
Investing in residential real estate deals is a popular choice for investors because it offers the opportunity for the growth of capital without having the hassle of direct investment in residential property. It can offer a shorter investment horizon than outright buying a residential property (which can be a commitment of up to 20-30 years), and is a great way to diversify your portfolio with this alternative asset class.
For example, the Parvis project, Centra, has been popular with our investor base due to its projected return of 17.5% and shorter project time of 2 years, all the while offering a moderate risk level. In contrast, another Parvis project, The Queensway IV, offers a longer time horizon to be invested at 6.75 years with a projected return of 20% per annum.
Commercial Real Estate
The second category is commercial real estate. This can be defined by any property used exclusively for business purposes such as apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, restaurants, shopping centres and retail spaces. Often commercial real estate is leased for longer periods of time which provides income to the owner over multiple years. Usually lease rates are quoted by square foot on a monthly or annual basis and can run anywhere from 1 to 10 years, with the length usually being determined by the size of the property; ie. larger well known retail names would sign a lease for 5-10 years due to the size of the property, the prime location and difficulty of moving/packing up inventory annually.
Commercial Real Estate Investing
Investing in commercial real estate can be a good way to hedge against the volatility of the stock market, with investors either able to make money from the appreciation of the investment when they sell it or else the regular rental income, which is steady due to the factors mentioned above. Typically, commercial real estate investing is appealing to a more knowledgeable investor due to its complexities and also due to the higher rent yields guaranteed over a longer period of time. On the flip side, there are more risks associated with this type of investment compared to residential real estate projects – so again, knowing your risk profile and tolerance is fundamental in making the right investment.
Industrial Real Estate
The third category is industrial real estate. Industrial real estate is any property used for manufacturing, production, distribution, storage, and research and development. It is the business of providing properties for non-commercial use, that are rarely open to clients and where behind-the-scenes work goes on. Specific uses of the property can vary greatly from mechanical engineering to research and development to storage facilities. Industrial property can be classified as commercial real estate, and the two terms can sometimes be used interchangeably. However, there are several key differences between the industrial sector and most commercial properties.
What is the difference between commercial and industrial property? Commercial property is likely to have some type of interaction with the public, but industrial properties don’t, which impacts how they look and operate. Commercial properties such as retail stores, restaurants, grocery stores and other spaces, all rely on an appealing shopfront to entice customers to shop at that location. Even offices, which are classified as commercial property, have some element of aesthetic appeal to clients and staff and have interactions with the public. On the other hand, industrial locations seldom have clients at their properties. They do not need to look appealing or have commercial zoning, the only things they need are space and location.
Investing in Industrial Real Estate
From an investment point of view, industrial leases tend to be for much longer time periods and also are far more expensive. This is attractive for many investors who can expect to see guaranteed returns for a longer period of time, offering a more stable type of investment. Also, industrial real estate tends to have the most recession-proof property values as there is always a need for this type of property.
Real estate is a critical driver of economic growth in any country. As an asset class, it can be especially lucrative. As with any investment, due diligence should be conducted meticulously as well as an understanding of the risks and the rewards involved. Understanding the type of real estate investment best suited to your investing strategy is key, whether it’s residential, commercial or industrial.
In general, there are three main things to consider when making an investment in any type of real estate.
- Everyone has a different level of risk tolerance which will impact and determine what type of investment strategy you pursue. Understand what your risk tolerance is and adapt your real estate strategy to that.
- Markets vary hugely depending on country, city or region - so do your due diligence as to what returns might look like accordingly.
- Levels of exposure and participation vary as well. As an investor, there are multiple ways to invest in real estate - from outright ownership to fractional ownership, and REITs to equity participation in alternative assets with firms like Parvis. Take your time to research which type of investment is most suitable for you.
At Parvis, we offer a range of investment opportunities to suit a variety of investment styles and risk appetites. Fixed income (loan), Core Plus (buy and hold), Value Add (fix & flip) and Opportunistic (risk & reward) are the four strategies Parvis offers its investors to access high-quality, institutional-grade real estate deals via its platform.
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