Property Investment - Types of Property

When you're looking at the underlying real estate, one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. Each type of real estate has a different set of drivers influencing its performance. You can't simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can't assume one type of property will continue to be a good investment simply because it has performed well in the past.
 Income-Producing and Non-Income-Producing InvestmentsThere are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office PropertyOffices are the "flagship" investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.
At its most fundamental level, the demand for office space is tied to companies' requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these "white-collar" jobs grow, there is greater demand for office spaces.
Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents.
Retail PropertyThere is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Center format is in favor, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways.
Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail center has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU).
The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.
Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.
Industrial PropertyIndustrials are often considered the "staple" of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts.
There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs.
Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential PropertyMulti-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.

Location Location Location

Real Estate Investments:
How about location within location?

 

When deciding about a property purchase as capital investment, the selection of the correct location plays an important role. “Location, location, location” is probably the oldest wise saying in the field of real estate; even the Roman Emperor Caesar evidently recognized this and built his forts at top-locations, like Rhine (Rhein) and Main.

Until today, nothing much has changed about it. "Rhein Main" could be said to be a typical major or macro location.

But once one has agreed about the macro location, the rest of the homework is far from being complete. About just as crucial is the question of the micro location.

What is a micro-location? Let’s consider a city as Cape Town as the macro location; it is the city (or if applicable the region - in this case the Western Cape), the larger perimeter of choice.

In other words, the micro location is the small location, the “mini location” within the larger scope, the macro location.

This can be explained easily with some current examples. As before, we are taking Cape Town as a model. Without question, Camps Bay is always part of the top real estate locations in Cape Town ; it generally ranges traditionally next after Stellenbosh as number two or sometimes number three but seldom further down.

However, for a private investor, who wants to invest in a property as capital investment, normally the residential property is what interests him most – hence we can examine the best micro locations with regard to living.

Which are the best living locations in Cape Town? No problem to answer that, if one is an insider and knows the city – of course one first would name Camps Bay, Paarl, Stellenbosh and almost in the same breath.

But strictly speaking however, these are only districts and no real micro locations.

 

If we allege that some areas are less desirable, we need to ask: Less desirable for whom? For everone? Or reverse: Are there people who like to live in locations that are “less desirable for some”? When going for a stroll in the streets around the local station one will find out very fast that no flat stays empty apparently, thus some people obviously don’t mind. Someone is always living there – after all, it is still Camps Bay.

Here enters the question of one’s own investment philosophy. Let us take the example of an average investor who would like to let out lastingly for a good rent to a clientele who works in Cape Town, has a good level of income and more elevated demands to the living ambience.

Didn’t we just define a target group for our acquired property? Exactly so!

Thus we, as potential investor, always need to ask the following questions first:

Whom would I like to have as tenant? Which kind of future tenant do I have in mind as my partner, who shall pay the major part of the property for me in the long run, but who is also willing to take care of it and to treat it well?

Admittedly, most capital investors seldom ask themselves such difficult questions, or they simply work out that point of the checklist without further ado in their subconscious.

Also this is easily understood:

Anyone who spent half of his life in a certain city, knows intuitively the areas he should avoid and those he should look for. And he knows which clientele of tenants likes most to live where. In accordance with this, he will make his pre-selection without needing any sophisticated preparations.

We have however asked a crucial question for the understanding of the term micro location. That question is: Which clientele of tenants do I want to get?