Hey there! If you’ve read about the Wealth Chakras and what keeps them spinning, it should be clear to you that combining your resources with a group creates tremendous buying power. You can compete effectively with the ultra rich and acquire large scale income-generating properties that significantly boost your passive income while providing amazing tax benefits.
In this article, let’s learn a little but about the types of commercial properties you and your group can buy to create passive income. We will introduce you to five well known types of commercial properties (also called asset classes) to invest in—and help you understand the benefits and challenges that make that asset class unique.
Let’s start with the most important of all the asset classes – Multifamily properties. These serve to meet the core need for housing providing a roof over the heads of millions across the country. So, it is considered an evergreen asset class with solid fundamentals in almost any market situation.
Also known as apartment complexes, these are typically buildings that contain more than one rentable space. Owners of multifamily properties are in charge of filling units with tenants, maintaining the property, developing cash reserves, and ensuring a return on investment.
While it may seem more cost effective to purchase and rent out a single family home, studies show that banks are more likely to approve loans for apartment buildings because a multifamily property yields a consistently higher cash flow. The economies of scale and monthly cash flow that is afforded by a multifamily property allows for a greater safety net, which makes the property less likely to go into distress.
The larger the size of your multifamily property, the more likely it is that your income from monthly rent will allow you to hire a property management company to handle the day to day operations of your property. This allows you to take a hands off approach to your investment, as your property becomes increasingly self sufficient as it grows.
If you should choose not to use a property management company to handle the day to day operation of your property, you will be directly responsible for the headaches that come with being a landlord. If you go this route, it is important to ensure that you are prepared to handle juggling leases, maintenance needs, and tenant concerns. Working with a group gives you the option to designate a certain person (or people) to handle this role.
Like any investment, multifamily properties do experience vulnerability during period of economic crises. When tenants are unable to make consistent and full rent payments, you may have to deal with a costly eviction process, and also be prepared to fill that new vacancy in order to avoid a loss of monthly income. Once again, the economies of scale act in your favor. The larger the property in number of units, the lower is the expense ratio (expense/income) and means a lower threshold to breakeven. So the property can tolerate a lot of vacancy before the income dips below expenses. Compare that to a single family house where you will pay out of pocket for every month your house is not rented.
Average profit return on investment? 9.75%
SENIOR ASSISTED LIVING
A variant of multifamily is another type of housing, this time catering to a specific section of the population. As a type of housing, it is considered a strong asset class especially with the expected increase in demand.
Senior Assisted Living Facilities (ALFs) provide housing and care to elderly citizens who require ongoing or extenuating physical or mental attention. Many ALFs partner with local hospitals or medical schools to provide training for medical personnel. All ALFs provide round-the-clock care from licensed nurses and trained medical professionals.
There are two straightforward ways to get involved in owning an ALF. First, there is the option of purchasing a commercial scale property and leasing it to a third party company to run as an ALF. This is a far more hands off approach. If you have the knowledge and wherewithal, there is also the option to purchase the property and run it yourself as an ALF. This approach requires in-depth knowledge of local and federal rules for elder and medical care, which can be a deterrent for some investors.
Experts look forward to a promising future for the demand for ALFs as a generation of Baby Boomers join the 75+ age group in 2021. As this generation of people age, demand for ALFs will significantly increase in the long term, and it will be up to property owners to meet that demand.
The short term future of ALFs is uncertain as the COVID-19 pandemic continues to affect the number of residents they are able to take in, as well as the challenge the pandemic has posed to the staffing of these ALFs. This has made investment in ALFs somewhat riskier in the short term, while also inviting innovation from property owners and ALF managers as they rise to meet these new complexities.
Average profit return on investment? 9.4%.
A friend who works exclusively in the self-storage space once told me he thought it’s the dumbest asset class in the commercial real estate industry. And yet, he swears by it. It’s made him a millionaire many times over and for significantly less effort than any of the other asset classes.
Self-storage buildings are indoor or outdoor complexes composed of individual storage units that are rented out on a monthly basis to people looking to store personal possessions outside of the home. Owners of self-storage buildings manage and maintain the property, maintain security for the building, and fill units with month to month tenants to ensure income.
One thing that makes self-storage units a unique opportunity for commercial investing is their inherent flexibility. Self-storage units are used for a variety of purposes, from storing products for small businesses to temporarily housing a families’ belongings as they move or downsize. This versatility allows self-storage buildings to remain resilient as the economy shifts.
Many small to mid-sized self-storage buildings are virtually self sufficient, and require only part-time management. This cuts expenses for the property owner significantly, by allowing the owner to bypass paying a management company and potentially handling the property themselves.
The month to month nature of self-storage leases allows for another way for property owners to increase rental rates. As improvements are made to the property, the month to month lease will allow the property to incrementally increase rental rates to reflect those improvements.
In order to increase rental rates and be competitive in an ever-growing market of self-storage buildings, property owners must cater their properties to the needs of their communities. This can be accomplished by providing 24/7 security, climate control, providing a gate around the property, and proper drainage to prevent flooding. These amenities will increase expenses for the property owner, but will also make their self-storage building more appealing to potential tenants.
Average profit return on investment? 17.43%
Office buildings are a diverse commercial property investment that range from 20 story office buildings that make up a downtown area to a single story strip mall in a rural area. Office buildings are categorized by Classes A, B, and C, with Class A being the highest quality office buildings, then decreasing in quality down the scale. This scale allows for a wide range of potential investments in office buildings.
Unlike other commercial investment properties, office buildings are unique in that they tend to appreciate over time. Because the nature of office buildings is to host companies and their clients, tenants have a higher incentive to maintain the property. As a result, office buildings generally appreciate in value because the property owner’s and tenant’s interests are positively aligned.
Another aspect of office buildings that sets the investment apart is the length of leases, which typically last from five to seven years in the US. These lengthy leases allow for a long term and consistent stream of revenue, making it a lower risk investment for the property owner.
Lengthy leases are increasingly beneficial to owners of office buildings because vacancies are incredibly expensive for property owners. A vacant office must be cleaned and repaired, maintained for showing to potential tenants, and sometimes renovated before a tenant will move in.
As the US continues to struggle with the COVID-19 pandemic, the uncertain future of office work brings a new challenge to property owners. While more and more companies transition their workforce to work from home, the demand for office buildings has decreased. This uncertainty brings with it a new kind of risk to commercial investing in office buildings.
Average profit return on investment? 9.4%
RETAIL SHOPPING STRIPS
Retail shopping strips are a type of shopping center in which a single building is comprised of a number of individual retail spaces, which share a front sidewalk and parking lot. Owners of retail shopping strips are tasked with managing and maintaining the building, as well as leasing the retail spaces to reliable store owners.
Continuous streams of revenue from a diverse set of industries set retail shopping strips apart from other commercial investments. Retail shopping strips are capable of hosting a wide variety of retail establishments, from restaurants and coffee shops to gift shops and boutiques. This diversity in tenants helps to protect the property owner from being seriously affected by downturns in individual industries.
Retail shopping centers can house anywhere from three to upwards of ten individual properties. The greater the size of the shopping center, the greater the opportunity for the property owner to diversify their portfolio. A diverse portfolio can open doors to larger and more exciting investments in the future.
While the diverse nature of retail shopping centers are an appeal, they are highly vulnerable to economic downturns. During times of economic stress, the demand for property in retail shopping centers falls. This trend is being seen as the US continues to struggle with the COVID-19 pandemic. Additionally, COVID-19 restrictions have affected some companies’ abilities to bring in revenue, thus making rent more of an obstacle than it has been in the past.
COVID-19 isn’t the only risk factor to consider when making an investment in a retail shopping center. Online shopping has greatly reduced shopping in brick and mortar stores over the last several years, presenting an ongoing challenge to tenants and property owners alike.
Average profit return on investment? 8.6%
These are some of the more popular and well-known asset classes among commercial properties. As we go through this journey to learn more about group investing, we’ll introduce and discuss several other lesser known asset classes as well as specialized commercial projects. All of these are designed to create passive income and build generational wealth.