How to choose the right asset class to match your investment goals
Learn which asset class is the best choice for you as a real estate investor
Every type of real estate investment has its own set of potential advantages and disadvantages. When you’re looking to buy a real estate property, it’s important to select the asset class that aligns with your specific investment goals.
Real estate investment asset classes vary in terms of how management-intensive they are, and how much of a return on investment you can expect to receive.
The least management-intensive real estate properties will give you the least opportunity to influence and improve upon the return on investment. An example of this asset class is a ground lease property.
With a ground lease investment you own the land, but not the building on the land—so there’s no management responsibility. Often, a large corporation like McDonald’s, CVS or Arby’s will own the building, and it’s their job to maintain it. As the owner, you simply own the land the building stands on.
Net leases are a similar concept except that you own the building, and there may be some minor management issues that you as an owner have to deal with. Common examples are triple net leases, where the tenant is responsible for paying property taxes, insurance and maintenance, and double net leases, where the tenant is responsible for paying property taxes and insurance.
With a net lease, there’s almost nothing for the owner to do, and the lease term is often ten or even twenty years. On the other hand, there’s not much you can do to improve the asset.
Next on the spectrum are commercial assets: office buildings, retail buildings and industrial buildings. You’re dealing with tenants, but you have a little more say in the operations of the property. You can decide what things you can do for tenant buildout, what kind of leases you want to sign, and what kind of tenant mix you want.
You also have input into the maintenance of the building, parking lot and landscaping. Because of this, there’s more opportunity for you to influence the performance of the property.
On the other side of the spectrum is where you’ll find multifamily properties. As you move from Class A apartment buildings to Class C or D apartment buildings the management intensity can change significantly, due to changes in tenant profile.
The most management-intensive multifamily asset is mobile home parks. Here, you’re dealing with park-owned rental homes where you own and are responsible for both the land and the homes.
There are other options, too. You can make a hybrid real estate investment, where you invest passively in a syndication along with an operator who is responsible for operating the property. With this hybrid between different ends of the spectrum you can get a much more management-intensive asset, or a value add property that requires more effort, but as an investor you personally don’t have to put in any of the work—you simply let the operator take care of it and collect a preferred return plus upside.
As a real estate investor, it’s essential to choose an asset class where the management intensity matches your goals.
If your objective is to be a hands-off owner and secure a 4–5% return, then a ground lease or triple net lease will match up perfectly. Should your objective be to achieve a higher return then a passive investment in a syndication may be better. If you want full control over your assets, then multifamily properties may be a excellent fit.
If you’re looking for something that’s more hands-on, where you have the opportunity to influence the performance of the property, we recommend you look at an asset class that’s more management-intensive.
Can’t decide which asset class matches your goals? As experienced multifamily investment advisors, the team at 100Units.com can help. Our commitment is to provide the insight and advice you need to secure the best real estate investment property. Contact us to learn more.
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