Your Guide to Real Estate Asset Classes & Types
What’s an asset class?
An asset class is a collection of investment types with similar characteristics and behaviors in the marketplace. Asset classes are either considered traditional or alternative.
Traditional asset classes can be divided into three categories:
- Equities (stocks)
- Fixed-income (bonds)
- Cash equivalents (money market)
Then there are alternative asset classes. Examples include real estate, private equity, hedge funds, start-ups, art, commodities, and crypto. New alternative classes are still emerging, and you’ll likely see many new ones through the years.
The real estate asset class
The real estate asset class falls under the umbrella of alternative assets. You can further divide the real estate asset class into property types and property classes (we’ll go into both below).
The real estate asset class deals with “real property.” When you invest that includes the land, everything attached to the land, and the rights associated with the parcel. For example, you own retail space. The real property consists of the parcel land, the building structures, and the right to lease individual retail spaces.
Property types within real estate
There are four real estate property types: residential, commercial, industrial, and land. Let’s dive into the differences and look at some examples.
Residential Real Estate
Residential property is intended for living. There are a lot of different types of residential dwellings:
- Single-family homes: Detached houses meant for one family on their own plot of land
- Condos: Condos are built in housing communities. There is typically a common space and amenities that residents share.
- Townhouses: Homes with shared walls but has an individual and private entrance. Like condos, there are often shared amenities.
- Muti-family property: In the residential classification, these are often duplexes.
- Vacation homes: Often used as second homes, vacation homes are purchased for a family’s benefit and are also used for extra income.
You don’t have to personally live in your residential property for it to be considered residential. You can even rent out your properties. But if your residential property has over four units, it will be classified as commercial real estate.
Commercial Real Estate
Commercial real estate is bought expressly to generate money for its owners. As one of the most popular types of real estate, commercial real estate comes in many shapes and sizes:
- Multi-family properties: A multi-family property houses more than one family. You will see apartments, duplexes, and condos all get this classification. A unit with more than four houses is classified as a commercial property. Many of these larger multi-family properties have management companies.
- Retail: Many retail spaces are rented to people so they can run stores, restaurants, or services from a specific location. Examples include large malls, strip malls, or single freestanding locations.
- Offices: Office space, similar to retail, is often rented to businesses. Offices exist in urban, suburban, and rural areas. But location and quality of the building are essential for prospective renters.
- Hotels: Hotels are uniquely appealing because they earn different rates at different times. However, in economic downturns, hotels are especially hard-hit.
- Mobile home parks: A mobile home park functions much like a multi-family property, except you essentially lease out the land. So the repairs and upkeep are minimal.
- Self-storage facility: You rent space for tenants to store their belongings. You can set contracts for the long-term or just month-to-month.
Industrial
You may not always notice industrial spaces, but they are essential parts of the economy. This means their real estate value is worthy of your consideration as an investor. Here are some examples of industrial real estate holdings:
- Manufacturing: Manufacturing sites are often factories where goods are created or assembled. Factories need ample space. For example, manufacturing usually is done in single-story buildings because conveyor belts cannot go upstairs. They also need significant storage space.
- Storage and distribution: When products are manufactured, they are sent to warehouses and go out via distribution centers. Many of these facilities are large and employ thousands of people.
- Flex space: Many businesses need an area that can do a lot. You may see a building with offices, warehouses, and retail all housed in one space.
Land
Land is another type of real estate that can be incredibly profitable because it offers buyers and renters a blank slate. There are two classifications for land:
- Brownfield: Brownfield is a land classification that denotes prior development. This space must be cleared off and re-worded before development can occur.
- Greenfield: Greenfield is land that has not been developed yet. It is an authentic blank slate, and often time was only farmland beforehand.
Land can be used for a variety of things. You can build commercial or residential buildings. But you can also use the land for ongoing revenue by renting it out for farming, grazing, and natural resources like water or mineral rights.
What are property classes?
Real estate professionals classify properties based on the property’s assessed quality. You can think of a property class as a grade. This helps realtors, lenders, investors, and brokers quickly understand the property. These letter grades are based on property age, rental income, appreciation, market value, and more. As a real estate investor, it can help you assess risk and potential return on investment.
Here are the property classes of real estate defined:
- Class A: Properties have a great location and newer, high-quality buildings. Buildings have excellent amenities and are well-managed by professionals. Tenants earn high incomes, and the rental income is high.
- Class B: Buildings are older, with tenants with lower incomes. Professional property management does not always manage buildings. This translates to a lower rental income. Facilities may also need updates or repairs. (With the proper investor, Class B buildings can be bumped up to Class A status.)
- Class C: Often over 20 years old, located in low-income areas, require renovations. Rental income is low as well.