Offering potential diversification benefits to a stock and bond only portfolio, real estate is an important alternative asset class.
Real estate presents investors with the opportunity to employ financial leverage, obtain tax benefits, and help hedge against inflation.
Property Types (6) and Characteristics
1. Vacant Land
- Investors: Short term speculators, long term developers, investors seeking a potential long term inflation hedge.
- Investment Traits: Passive approach, illiquid asset, wait for asset appreciation, nothing to depreciate for tax purposes.
- **Influences on Returns:**Increase in demand for land, strategic location, favorable zoning policy.
- Risks: Land does not increase in value, opportunity cost of having capital tied up.
2. Apartment Buildings
- Investors: High net worth investors with significant capital on hand.
- Investment Traits: Significant leverage, greater liquidity than other real estate types, income generating, potential appreciation in value, rent increases can move with inflation, and depreciation tax shield.
- Influences on Returns: Regional demographics.
- Risks: Requires managerial oversight, competition from other segments of the housing market, and can be challenging to start up.
3. Office Buildings
- Investors: High net worth investors with significant capital on hand, public and private organizations.
- Investment Traits: Medium liquidity compared to other real estate types, income generating, potential appreciation in value, and depreciation tax shield.
- Influences on Returns: Regional economic growth and tenant optimization.
- Risks: Requires managerial oversight, competition from other properties, building can become technologically outdated.
4. Hotels and Motels
- Investors: High net worth investors with significant capital on hand, real estate investment trusts (REITS).
- Investment Traits: Moderate leverage and liquidity compared to other real estate types, and depreciation tax shield.
- Influences on Returns: Strategic location, number of tourist events and conferences.
- Risks: Requires managerial oversight, competition from other hotels, staff turnover, and maintaining utilization.
5**. Shopping Malls**
- Investors: High net worth investors with significant capital on hand.
- Investment Traits: Moderate leverage but low liquidity compared to other real estate types, requires strategic location.
- Influences on Returns: Regional demographics, regional economic growth, strong lease management, possession of a marquee tenant.
- Risks: Requires managerial oversight with high service, vacant units, and competing malls.
6. Warehouses
- Investors: Investors wanting cash flow with limited managerial oversight requirements.
- Investment Traits: Passive approach, with medium leverage and liquidity compared to other real estate types, income generating, low leasing costs, and depreciation tax shield.
- Influences on Returns: Regional commercial activity and strategic location.
- Risks: Competition from other storage type properties, outdated facility technology.
