The Diverse Purposes of Real Estate

Risks of significant capital loss can be reduced by acquiring multiple properties varied in purpose, location, ownership structure, management structure, and tenancy. This is possible because it is unlikely that all such properties will experience challenges at the same time. 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 the property produces or depletes income.

There are many types of purposes a property can have. These include:

Residential
Industrial
Retail
Commercial
Office
Healthcare
Agriculture
Special purpose

However, these purpose types are broad, and each type can be broken down further into many different subtypes. These kinds of properties have 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 its best chance for success.

Some of the different types of properties funded through 1031 Crowdfunding include:

Apartments

Investment property owners like apartment buildings for real estate diversity because:

The occupancy rates typically remain high. When one or two tenants terminate their leases, the vacancy rate fluctuation remains minimal in contrast to a single-tenant property that has an instant 100% vacancy rate if the lease is terminated.
Affordable housing is in demand. When economic times are good, there are people looking to break out on their own, whether it’s young people moving out of their parents’ home or single people looking to rid themselves of roommates. In difficult economic times, there are people forced to downsize, creating a higher demand for affordable apartment housing.
Depreciation of apartments often occurs over a shorter period than the depreciation of other commercial real estate. This offers additional tax benefits for the investor who owns apartments rather than other types of commercial real estate.
Equity can build, especially as the property increases in value.

However, adding an apartment complex to your diverse investment portfolio can have these drawbacks:

Significant time investment: The process of finding a lucrative apartment investment, financing it, and following through with the purchase can take several months. Even if you hire a property manager for day-to-day tasks, you will still need to remain involved to a degree to ensure your apartment investment property is profitable.
Low liquidity: If you sell the apartment building in the future, the process can take several months. Other investment types are easier to sell.
Tenant issues: Though apartment complexes have high occupancy rates, tenants can cause several problems, such as defaulting on their rent payments, damaging your property, or unexpectedly leaving their long-term lease.
Liability for crimes and accidents: Apartment building owners need an insurance policy to protect their investment property. However, the owner can still be held liable for crimes and accidents that occur on their property. This risk may not exist with other available investments.

Retail Centers

Investment property owners like retail centers because:

Occupancy rates typically remain high. Like apartments, there are multiple units to rent, so the occupancy rate should remain higher than the vacancy rate. Retail centers can comprise a handful of about 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 with 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 another credit-rated tenant that is in consumer demand, the risk may be decreased because you can count on the large unit to remain occupied or in a long-term lease.
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 expenses into the calculation of their bottom line.
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 three to 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 longer terms.

The potential disadvantages of a retail center investment include:

More responsibility: Numerous tenants can protect an investor from market disruptions. However, they can create more management needs. For example, an investment property owner may need to be available to respond to their tenants’ emergencies, manage the various property leases, and offer several payment options. Some owners may consider hiring a property management company to handle these tasks.
Lease expectations: Though retail centers often have triple net leases, some tenants may expect a gross lease wherein the investment property owner pays for taxes, insurance, maintenance, and other secondary expenses. Owners only offering triple net leases may lose potential tenants who have budgeted for a gross lease.
High maintenance costs: Depending on the lease details, the owner can be responsible for common building and maintenance expenses. These needs can become costly and time-consuming. However, this drawback can be avoided through triple net leases.

Industrial Facilities

Investment property owners 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.

Industrial facility investments may incur these risks:

High investment costs: Industrial facilities can be more costly compared to other types of properties, barring some investors from diversifying to this property type.
Risk of long-term vacancy: Industrial facilities may be tailored to the tenant’s unique needs. If they leave, the property may be unsuitable for some industrial sectors. This factor can make it difficult to find a new tenant.
Obsolete facilities: An older industrial facility may be unable to meet the needs of modern innovations, such as a low clearance height or minimal floor space for large machinery. These limitations may make the property undesirable for potential tenants, requiring the investor to renovate the property or risk obsolescence.

Healthcare Facilities

Investment property owners 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 workloads to support their abilities to meet lease agreements.
Leases can be triple net.
Leases can be long term.

The disadvantages of investing in a healthcare facility property include:

High barrier to entry: Medical office buildings can be difficult to invest in, especially for investors just implementing their diversification strategy. Smaller properties are often owned by physicians’ groups, and larger properties may be owned by real estate investment trusts (REITs) and hospital systems. Furthermore, the niche sector may prevent some investors from diversifying with a healthcare facility.
Accessibility regulations: Healthcare facilities must meet specific requirements for accessibility per the Americans with Disabilities Act (ADA), such as handicap-accessible parking spaces and level parking lots. Older properties may need renovations to comply with city, state, and federal laws, requiring the investor to have the capital on hand to fund them.
Location concerns: Location can determine a healthcare facility’s success. For an on-campus facility, occupants may be willing to pay a premium to rent the space since practitioners may be eligible for higher health insurance reimbursements. However, on-campus properties tend to trade for lower cap rates and higher prices compared to off-campus properties.

Single-Tenant Properties

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. 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.

Investment property owners like single-tenant properties because they have:

A rental stream that is stable or increasing.
Passive management responsibilities through triple net leases.
Value retention.
Long lease terms of 10 to 20 years.

However, single-tenant properties can have these challenges:

Fluctuating rental income: The quality of the single tenant determines the cash flow. If the tenant defaults on their rental payments, the investor’s rental income could be severely impacted for the life span of the lease. Breaking the lease to find a more reliable tenant can incur hefty penalties.
Risk of total vacancy: If a tenant does not continue their lease, investors will have a gap in their rental income until a new lessee is found. Otherwise, there is a risk of total vacancy by the end of the lease term. An income gap may not be desirable for investment property owners that need capital for property improvements and other property expenses.
Tenant improvement expenses: Single-tenant properties are typically customized to the current tenant’s needs. For example, a restaurant will have different interior requirements than a clothing store. When a tenant leaves, the investor may have to budget for a tenant improvement allowance that would help renovate the space for the next tenant’s needs. While this allowance makes the property more marketable and may encourage a potential tenant to lease the space, it is an expense that must be accounted for.

Learn More About Diversity in Real Estate Investment Opportunities From 1031 Crowdfunding

Over the last year, 1031 Crowdfunding had a diverse set of offerings. We explore new options and see what opportunities become available for us to offer our clients as 1031 exchange properties.

What will be your next real estate venture? Contact 1031 Crowdfunding for more information about our 1031 exchange properties and other real estate investment opportunities. Learn more about diversification strategies for your real estate investment portfolio on our blog.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.