In our last blog, we discussed ways to diversify your real estate portfolio. We stated that risk of significant capital loss could be reduced by acquiring multiple properties varied in purpose, location, ownership structure, management structure and tenancy because it would be unlikely that all such properties would experience challenges at the same time.
Today, we’d like to explore one of these aspects a little deeper. A property’s purpose is a major factor to consider when acquiring the property. The way the property will be used will have a substantial impact on whether or not the property produces or depletes income. There are many types of purposes a property can have. As we previously listed, these include: residential, industrial, retail, commercial, office, healthcare and more. However, these purpose types are broad, and each type can be broken down further into many different kinds of residential properties, many different kinds of industrial properties, many different kinds of retail properties, etc.
As we look at some of these kinds of properties, you will see that each has advantages and disadvantages to consider as you look to acquire property. Furthermore, you cannot only look at how the property will be used, but you must also look to ensure that the location, management, tenants, and lease structure are suitable to give the property it’s best chance for success.
Let’s start by looking at some of the different types of properties that have been funded through 1031 Crowdfunding in the last year.
Candleglow Apartments, a 152-unit garden style multifamily community located in Brooksville, Florida. The property had a Victorian design and lush landscaping to offer residents a pleasant environment surrounding their residence. The property was located in an area with high demand for multifamily housing and limited market saturation.
Investors like apartments because:
- The occupancy rates typically remain high. When one or two tenants terminate their leases, the vacancy rate remains minimal in contrast to a single tenant property that has an instant 100% vacancy rate if the lease is terminated.
- Affordable housing is always in demand. When economic times are good, there are always people looking to break out on their own, whether it’s young people moving out of their parents’ homes or single people looking to rid themselves of roommates. In difficult economic times, there are always people forced to downsize, creating a higher demand for affordable apartment housing.
Depreciation of apartments occurs over a shorter period of time than the depreciation of commercial real estate. This offers additional tax benefits for the investor who owns apartments rather than commercial real estate.
Komar Desert Center, a retail center in La Quinta California. The center was built in 2008 with over 77,000 rentable square feet. The center was located along a popular highway and near a neighborhood of country club homes, apartments and schools.
Investors like retail centers because:
- Occupancy rates typically remain high. Like apartments there are multiple units to rent, so the occupancy rate should always remain higher than the vacancy rate. Retail centers can be comprised of a handful of about-equal sized units or comprised of a handful of equal sized units with one larger unit that makes up nearly half of the rentable space. A center with a large unit may be riskier than a center comprised of equal sized units because of the danger of losing the occupant of the larger unit. However, if the tenant in the large unit is a well-known grocery or other credit-rated tenant that is in consumer demand, then the risk may be decreased because you can count on the large unit to remain occupied.
- Leases are often triple net leases. A triple net lease requires the tenants to pay the operating expenses, property taxes and insurance, which means the investor doesn’t have to factor those items into their gross income.
- Leases are often long-term. Unlike residential unit lease terms that can be made on a month to month basis, retail unit lease terms can last for 3-10 years. This reduces leasing costs and the risk of vacancy. It also gives the investor an expectation for future income.
- Tenants can be credit-rated. Retail companies that are public companies and have multiple store locations may be considered credit tenants. These are tenants that have well-known brand names that will attract customers. They have parent companies to support and provide resources to keep the company in business. These types of tenants are stable. They can be expected to uphold the lease agreements and occupy the space for long-terms.
Industrial facility in Odessa, Texas, that was leased to MRC Global. MRC Global, a public Fortune 500 company, is the largest global industrial distributor of pipes, valves, fittings and related products/services to the energy industry based on sales. They had revenues of $5.9 billion in 2014 and had a net worth at the time the property was acquired of approximately $1.4 billion.
Investors like industrial facilities because:
- Space is flexible. Most industrial facilities are built as simple warehouses with a small amount of office space to run the facilities. These warehouses can be filled with whatever equipment may be necessary to meet the needs of any type of industrial tenant.
- Maintenance is uncomplicated. With a couple of walls, simple plumbing, simple electric and a lack of landscaping, an industrial facility manager’s job is fairly simple.
- Space is in demand. Developers are trending toward the creation of residential and retail properties. Many old industrial properties are re-zoned and re-modeled for commercial purposes. New city plans do not include zones for industrial space. Industrial companies must have the facilities to produce, store and distribute their goods, but available space is limited. If you have industrial space to rent, you will probably have stable occupancy.
- Leases can be triple net.
- Leases can be long-term.
- Tenants can be credit-rated.
Virginia Women’s Center in Mechanicsville, Virginia. This approximately 20,000 square foot facility was the largest women's healthcare private practice in central Virginia, with 33 physicians and 8 mid-level providers at seven clinical sites. The property was strategically located near Interstate 295 within 1-mile of Richmond's Memorial Regional Medical Center, an award-winning hospital servicing residents of Richmond, Hanover and Henrico counties, and Virginia's Northern Neck.
Investors like healthcare facilities because:
- Regardless of the economy, people require healthcare services. Baby boomers are reaching an age when additional healthcare services are required. People are living longer than they used to with chronic diseases that require continued healthcare services. There will be a constant demand for healthcare services now and in the future. The healthcare providers occupying space in these facilities will have stable work loads to support their abilities to meet lease agreements.
- Triple Net Leases.
- Long-term leases.
In addition to the above types of properties, 1031 Crowdfunding participated in raising funds for various properties that were triple net-leased to single credit-rated tenants, including office space for API Healthcare Corporation, commercial space for 24-Hour Fitness, and retail space for CVS Pharmacy, Advanced Auto Parts, AutoZone, Dollar Tree, PNC Bank and others.
These types of properties, purposed to serve the needs of a single-tenant, have the advantage of being simple and stable; although it is important to put the right tenant and lease structure in place. With a triple-net lease, the tenant is responsible for all property operations, leaving the investor simply responsible for the mortgage. With a credit-rated tenant, the lease terms can be longer and the risk of vacancy is minimal.
Over the last year, we’ve had a diverse set of offerings; however, the offerings we’ve listed don’t even come close to the breadth of real estate types available. We are excited to explore new options and see what opportunities become available for us to offer to you in the coming year. Real estate has a lot more to offer from properties with generic purposes and others with more particular purposes like mobile homes, student housing, self-storage, car washes, hospitals, senior living facilities, hotels, or land that can be leased for solar panels or wind turbines. What will be your next real estate venture?