OFRE S4: Which Real Estate Asset Class is Right for You?

In this episode (while drinking old fashioned cocktails) we discuss the Advantages and Disadvantages of Different Real Estate Asset Classes including Single Family Residential, Multi-family Residential (duplex, triplex, quad), Apartments (5+ units), Commercial (Office, Retail, Industrial) Some of the highlights we cover include. Single Family Residential Pros : Low cost of entry, Generally lowest risk due to cost (market dependent), Appreciation is not tied to rental income, Typically lower tenant turnover compared to other residential classes Expenses tend to be lower than other asset classes, Most common asset type and Rents tend to be higher than similar unit in multi family configuration. Cons:More volatile on price since primary value is based on comp sales. Property is either completely occupied or completely vacant (No STR’s) Cash flow not as much as other classes, No economies of scale due to single tenant, single location relationship. Financing is recourse Multi-family Residential Pros: More stability. Two (or more) tenants vs single, Greater income potential Values don’t fluctuate as much as single family Income approach is weighed more heavily in valuation Appreciation can be forced through rent increases, Easier to finance (typically) than single family Cons: Higher turnover than single family Expenses run higher (tax assessments, pest, landscape, turnover costs) Financing is recourse. Higher barrier to entry Apartments Pros: Generally most stable of asset classes Tenant base is diversified. Rents on apartments tend to recover faster after a downturn. Value is generally tied to NOI (income after expenses) More predictable due to rents being primary driver of value Appreciation upside can be tremendous equity addition Greater principal reduction on loan=faster equity build Typically greatest demand due to rent price Non-recourse financing, depending on loan size Cons: Higher barrier to entry, Higher expenses than other residential asset classes, Consistent turnover of units-expenses are constant. Commercial Pros: Longer term leases , Lease flexibility (tenants can pay tax, insurance, maintenance), Stability – Tenants can be large companies presenting less risk. Value is tied to NOI Financing – Non-recourse depending on loan size and lenders tend to look at the project as much or more than the borrower. Lower expenses compared to residential asset classes as a percentage of revenue More passive typically than residential Cons: Vacancies last longer, Re-leasing expenses are far greater than residential Tenants are more susceptible to the business market cycle whereas housing demand is constant. More competition Shifting trends in desired locations (high rise office less in demand in some markets)