One of the beauties of real estate is that there are not only various business strategies, but also a variety of asset classes to suit one’s preference and risk appetite as well as to further diversify within real estate.
Should you look for ways to diversify beyond multifamily, there are many other asset classes to consider. Below we name a few for your consideration, though the list is a long longer than that.
Self-Storage: Rents storage space, also known as “storage units,” to tenants, usually on a short-term basis. Self-storage tenants include businesses (commercial) and individuals (retail). Key items and terms to consider when evaluating self-storage deals include: population density, proximity to residential area, total square footage (vs. unit count), rent $/square foot, physical occupancy with reservations, seasonality, tenant mix (retail vs. commercial), online presence, staff, branding, property condition, opportunity for expansion, demand factors (for specific unit types), and smart tech. Self-storage is known as recession resistant as in theory when markets soften and people lose jobs, they downsize and need space to store personal property & possessions. And in good times, as people accumulate personal property, they need more space to store it. Commercial clients tend to like larger units relative to retail clients.
Mobile Home Parks: Rent pads (or the pad with the mobile home on it) within mobile park communities.Most were developed in the 1970s and are mom and pop owned. The lack of new inventory built creates scarcity. And the age coupled with many being run by mom and pop operators create opportunity for value add and appreciation. Mobile home parks are graded on a 1-5 start scale, with 1 being the lowest/worst and 5 being the highest/best based on location, amenities, and condition. Key consideration to keep in mind include – number of units the mobile home park owns(park owned vs. tenant owned; preferably it will be park owned whereby the operator owns the pads only; banks would typically not lend on the unit itself as it is considered mobile personal property), location in need of affordable housing, utilities (avoid lagoons, septic tanks and wells). As mobile home parks are affordable, they are considered another recession resistant asset class.
Short or Medium Term Rentals: Renting a room by the night. Key metrics to watch for and understand include Occupancy, Average Daily Rate, Revenue Per Available Room, Location, and Seasonality. While hotels tend to be cyclical (as seen most recently during the CV19 recession), short or medium term rentals performed well as people were looking for getaways away from dense urban areas. People also view short term rentals as more convenient during travel (e.g. ability to be with the full family together or bring your pets). Medium term rental provide more flexibility to certain tenant bases such as traveling nurses or digital nomads who may need the flexibility to rent on a shorter term basis (vs. being tied to a 12-month or longer lease).
Commercial Retail and Industrial: Entail leasing shops, stores, restaurants, industrial warehouses. Key items to consider when evaluating such opportunities include credit quality of tenants and tenant mix, anchor tenants, lease rollover and built in rent escalations, and common area maintenance (CAM) charges. Industrial properties (somewhat similar to multifamily) are graded on A (best) through C (worst) scale.
Special Purpose Properties: Include assisted living facilities, hotels/motels, hospitals or rehab facilities, data centers, cold storage, gas stations, churches, schools, parking lots, etc. Most entail also running and operating a business. Hence, the operator’s background in operating such business (beyond real estate) is essential.
As you embark into other asset classes, just like with any investment, please ensure you are comfortable with the operator, market, business plan and understand how those assets are underwritten. These are the key ingredients to vet the investment upfront.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.