Personality Type & CRE Investing
Investing in commercial real estate has always been a must when considering a well diversified portfolio. Even when markets fluctuate CRE remains a desirable investment thanks to its stable nature. In addition to this, CRE offers an asset that can appreciate over time and produce cash flow. But not all commercial real estate properties are created equal. Considering your personality type might help you decide which type of CRE property is best for you.
6 Property Types & Their Characteristics
There are 6 CRE types that make up the majority of your investment opportunities. Let’s consider each of them and the different characteristics that need to be considered when deciding which property type to invest in.
RETAIL PROPERTIES
Retail properties mainly consist of anchor tenants, independent retailers and multisite businesses. The question to ask yourself when considering investing in retail is whether or not there is an anchor tenant.
When a plaza has a large well known chain or service provider they are known as anchor tenants. A sizable amount of the plaza is taken up by these types of tenants and they will bring confidence to other retailers that they will bring a lot of foot traffic which means they have negotiating power and the lender is more comfortable extending credit.
Anchor tenants might include national chains, franchises or a larger, well known local business. If a retail property doesn’t have an anchor tenant or loses an anchor tenant foot traffic will be considerably reduced until a new anchor tenant is found.
OFFICE PROPERTIES
We are all familiar with office properties. They serve the needs of a variety of white collar industries. Office properties require little to no customization before a new tenant moves in and depending on the tenant, can offer on average higher lease rates.
Some things to consider when investing in office property is the economy and the location. Office property cash flow tends to be closely tied to economic fluctuations. Office property occupancy rates are high as long as they are located in areas of higher population density; if the population shifts vacancy rates will be affected.
While office properties offer some of the highest ROI they can also be the most volatile.
MULTIFAMILY PROPERTIES
There are basically 2 types of multifamily properties: High rise & low rise.
Multifamily properties will typically have steady demand during economic contractions & recessions; depending on the depth of the downturn you may see a rise in demand.
Mutilfamily is relatively stable and with government-backed residential mortgage insurance, multifamily owners can secure loan insurance, which can sometimes support higher LTV or lower interest rates when purchasing.
Some things to consider when investing in multifamily properties. Leases only last 12 months, and depending on where you live, could convert to month to month after the initial 12 month lease. There is also constant turnover with varying tenant start and end dates.
Also, depending on location, tenant protections could stop landlords from raising rents more than a maximum per year. Typically no more than 1-2% per year unless verifiable upgrades can be proved to raise rents higher. This creates a lack of pricing power for the owner.
Finally it is imperative to hire a good property manager! With higher than average turnover rates, multifamily owners need to keep the property well maintained in order to keep rents high and property value up.
INDUSTRIAL PROPERTIES
Industrial properties fall into 2 categories: Heavy & Light.
Heavy Industrial: Usually large, standalone sites that will require considerable customization in preparation for a new tenant. Most will have heavy manufacturing features associated with them and are only occupied by one tenant.
Light Industrial: These properties will more often than not, require less customization. They are usually warehouse facilities located in large industrial parks and have a customer transaction component related to them.
As an investment property the high customization that comes along with heavy industrial properties needs to be considered. If a tenant goes out of business it could take some time to find a new one, and when you do, it will be expensive to modify the property in preparation for the new tenant. On a positive note, these types of tenants tend to stay in the properties for a very long time.
As far as light industrial properties are concerned, it usually requires less modification to move in but it can take some time before a new tenant can be located.
SPECIAL USE PROPERTIES
The special use classification serves as a broad umbrella for an array of property types that don’t fit into any other category. Such as: Golf courses, hotels/motels, hospitals, student housing, restaurants, bars, night clubs etc. These properties are considered special use because of structural customizations and are closely linked to economic cycles.
As an investor there are a few considerations when it comes to special use properties:
- It could be hard to get a new tenant into the facility in the case of defaults without significant modifications.
- Special use properties usually have lower loan to values and shorter amortizations.
- Special use properties are closely linked to economic cycles.
a) when business is bad for one restaurant or bar, it is bad for all of them
b) When a tenant is most needed that is when there are none.
Special use properties are the backbone of most retail small businesses, are vital to a healthy economy and can bolster tourism. For these reasons and more governments are willing to back banks in providing loans to these types of CRE properties.
BARE LAND
When considering investing in bare land there are 2 types: Serviced and Unserviced.
Serviced land has access to the power grid, water, and sewer systems; unserviced doesn’t.
Bare land is typically held for future development projects. There is usually no tenants or cash flow and the down payment for bare land will be considerably more.
If you find a great deal on bare land and are ok with holding it for a while until you can put together a development plan, then bare land might be a great investment for you.
Which Property Type Fits Your Personality Type?
There are many reasons why investors seek to own commercial real estate:
- Great store of value that does not fluctuate daily
- Good protection against inflation
- Generates cash flow
- Allows businesses to re-allocate rent costs into equity
5. Allows access to high levels of leverage, in most cases as much to 80% LTV,
sometimes 90 to 100% (75% leverage is not an option with stocks & bonds).
But all investors have very different personality types, as well as financial circumstances. As you read through some of the above basic characteristics of each property type one will usually stand out more than all others to invest in.
Which property type fits your personality? No matter which type stands out to you more, Synergy Commercial Funding can find you money for your next CRE investment.
Are you looking for financing options for your business? If so, Synergy Commercial Funding is ready to help. We offer a wide range of commercial finance services to help businesses of all sizes achieve their objectives, whether it’s purchasing new equipment or purchasing a new commercial property.
Interested in creating a second line of income just by talking with your existing network? Want to help the economy grow by helping businesses around you grow? Think about becoming a Synergy Commercial Funding Partner. Visit our "Referral & Broker Program" to learn more.
