For individuals, an investment in real estate is a great way to generate ancillary income, diversify a portfolio, and reduce taxable income through the strategic use of depreciation. For many, these benefits are well understood so the next logical question is which type of real estate to invest in.
In this article, we are going to discuss ten different real estate “niches” into which potential real estate investors can deploy their capital. We will describe what they are, why they work, and how to access them. By the end, readers will be able to identify one or more potential niches that fit their risk tolerance and return objectives.
At First National Realty Partners, our niche is grocery store anchored retail centers. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.
What is a Real Estate Niche?
The real estate market is incredibly large and diverse. There are many different property types and they each come with their own operational quirks, risk/return profile, and level of management responsibilities. For example, owning and managing a single family home looks very different from owning and managing a 150,000 SF commercial retail center. Because the market is so large and diverse, investors tend to specialize in “niches” which are small parts of a much larger market.
Below are ten different commercial real estate niches that potential real estate investors could consider investing in.
#1. Commercial Real Estate
Commercial real estate is defined as a type of property that is purchased and leased to businesses with the intent to earn a profit through rental income, price appreciation, or both. In the commercial real estate industry, there are four widely accepted property types.
Retail investment properties are those that house direct to consumer retail businesses. Common examples of retail properties include strip malls, regional malls, power centers, and the grocery store anchored centers that we invest in. Investors like retail properties for their long term leases, high visibility, and good locations. There are many professional investment firms (including ours) who partner with individuals to purchase and manage them.
Office rental properties are those that house the space necessary for businesses to operate on a day to day basis. Office properties range from general office use, like an accounting firm, to specialized use cases like medical offices or research labs. Investors also like office properties for their long term leases and good locations and can partner with a professional firm to gain access to them.
Industrial properties are used to store, distribute, and manufacture things. They include warehouses, logistics facilities, and light manufacturing plants. Investors like them for their economic necessity and low operating costs. Again, they can be purchased directly or by partnering with a professional real estate firm.
Self-Storage properties are used to store personal items for individuals. They are typically constructed with many different unit sizes and are located in suburban locations where the land cost is cheaper. Investors like self-storage for their growth potential and low operating costs.
Commercial properties can be purchased directly or individual investors can purchase a fractional share by partnering with a professional real estate company like a private equity firm or real estate investment trust (REIT), which is likely the best option for most individual investors.
For investors who like residential property, but want more scale than just a single family home, a duplex (2 units), triplex (3 units), or quadplex (4 units) may be a good option. Investors like these properties because they are far less expensive than a commercial asset, the property management responsibilities are less intense, and the terms for which debt can be obtained are generally favorable.
#3. Apartment Buildings / Multifamily Complexes
A commercial apartment building/multifamily complex is one that has more than four units. These property types can be found in nearly all cities and can come in different layouts. For example, high rise apartment buildings are often found in the downtown areas of major cities (like New York City) while garden-style, multi-building properties are often found in suburban areas where there is more land available.
Investors like multifamily for their stable consistent cash flows, favorable lender terms, high occupancy levels, and renters who prioritize housing payments during times of economic distress.
Hospitality properties include hotels/motels at all levels of service and price point. These rooms are rented on a short term basis, usually a single night to a week or ten days, and can be fabulously profitable as long as they stay occupied. Investors like hospitality properties for their high profile and high rental rates.
#5. Single Family Detached
A single-family, detached home, is the most logical entry point for real estate investors. It could be used as an airbnb, vacation rental, or a monthly rental to a single person or small family. Investors like single family homes for their relative affordability, wide availability of debt, low interest rates, and regular rent payments.
Condominiums are also a popular choice for new investors. They are very similar to a single family home or townhome, but the key difference is that they are found within a larger building, are attached to other units, and the monthly payment likely includes HOA fees, which can increase the monthly carrying cost. Like single family homes, investors like condos for their relative affordability, availability of debt, and plentiful rental opportunities.
Residential communities are property types that contain a wide variety of options for investment property from retail to multifamily, townhomes, single family, and special use cases like golf courses. Access to communities is often restricted by age (say 55+ years old) or membership and investors like these types of properties because the sum of the parts can create a profitable investment strategy. For example, an investor may buy a luxury home in a community with a golf course, shopping center, and fitness facility. These extra amenities can increase demand for the home, which can lead to healthy increases in market value over the long term.
For those with a long term time horizon, land can be a good choice because it can have many uses. For example, it could be used as farmland to grow crops. Or, it could be developed into any of the types described above. In the right location, land can appreciate rapidly and can be sold to a real estate developer for a profit. Investors like land for the depreciation it throws off and the diversity of things that it can eventually be used for.
#9. Parking Structures
Parking structures are used to provide places for people to park and they are commonly found in high density areas like business districts and high traffic areas like sports complexes, shopping centers, and airports. In the right location, parking structures can be incredibly profitable and investors like them for their strong cash flow and low operating costs.
Medical properties are those that cater to medical tenants. They can include research labs, urgent care centers, hospitals, or dentists offices. Investors like medical offices because they usually come with long term leases and the constant demand for medical services means that tenants usually represent lower credit risk.
Other Potential Niches
The niches described above are not the only options that are available for real estate investment. Depending on an investor’s level of experience, their risk demographic, and time horizon, other potential niches include: foreclosures/distressed assets, mobile homes, student housing, short sales, flipping houses, rent to own, or specialty assets like golf courses or amusement parks.
How To Find Real Estate Investment Opportunities
Investors can unearth potential real estate investment opportunities in a number of ways including:
- Realtors / Real Estate Agents: These are individuals who have specialized expertise in local markets and are most commonly associated with single family properties.
- Real Estate Brokers: Also experts in their markets, brokers can specialize in either commercial or residential properties.
- Internet Searches: Investors can browse listings on sites like Zillow.com (for residential) or LoopNet.com (for commercial) to find a property that is a good fit for their own preferences.
Finding a property can be time consuming and, at times, frustrating. Potential investors should be patient and disciplined to ensure they find a property that is a good fit for their budget and risk tolerance.
Investing With a Private Equity Firm
For each of the niches described above, there are two ways that individual investors can gain exposure to them.
The first option is to purchase a property directly. In some cases, this could be relatively easy, in others it could be very difficult. For example, a single family home, vacation home, or land are accessible options for individual investors due to their relatively low cost and minimal management involvement. But, something like a parking facility or retail center is much more difficult because they are exponentially more expensive and require a hands-on management approach.
The second option is to work with real estate professionals and/or the firms they run to gain fractional exposure to institutional quality properties. In this scenario, an investor could own 1% of a 500 unit multifamily complex instead of 100% of a single rental home. For many investors, this option is preferable because they can leave the property identification, underwriting, financing, and management to the professionals while they can sit back and earn passive income. Common professional firms include real estate investment trusts (REITs) and private equity firms (like ours).
Summary & Conclusion
For individuals, an investment in real estate can be a great way to earn ancillary income and diversify an investment portfolio.
But, the “real estate market” is very broad and there are a number of different property types from which to choose. Each comes with its own risk/return profile, operational quirks, and cost.
For this reason, investors tend to specialize in certain niches so they can become very familiar and experienced within them.
Potential real estate investment niches include: retail, office, industrial, multifamily, single family, land, medical facilities, parking structures, and self-storage.
Before choosing one, each investor should take stock of their own individual preferences, risk tolerance, time horizon, and return objectives and then choose a niche that is a good fit.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.