Of all of the commercial property types, multi-family is often the most pigeonholed. Most investors will look at the category and see only apartment complexes. However, the category is actually much more nuanced with expansive opportunities based on their locations.
Below is a list of four asset sub-types outside of traditional apartment complexes which exist in the multi-family market. As with any property type, each of these properties will have both positive and negative factors as well as methods to increase the revenue which they generate.
This sub-type was introduced to the world of commercial real estate by the artist community. The requirement for affordable space which would double as both art studio as well as a place to live was something which could (almost) only be provided by older industrial spaces.
Live-Work space is arguably one of the most viable forms of market rate development for commercial/industrial districts. However, we recommend you take caution, as there may be rezoning hurdles or limits to the type of work that can be performed out of these joint use spaces. Understanding ordinances and open communication with both local officials and tenants can help to remove any misunderstandings regarding space use.
At one time considered a niche, student housing has more recently become a staple of well-rounded multi-family investment portfolios.
In recent years enrollment for higher education has increased creating a shortage for on campus housing. Commercial real estate investors have been more than willing to fill this void with off-campus student housing.
The design of these units is normally 2-4 bedrooms with 1-4 bathrooms, a kitchen, and a common area, though the design may fluctuate based on the type of market and the demand.
What makes this sub-type so attractive is the fact that income is generated not on a per unit basis but a per bed basis. This rental basis allows for a smaller number of units to generate the same cash flow as a property with a larger number of units.
While there is a lot of upside, student housing has it’s own set of challenges which are unique to this property sub-type.
To generate the best return on investment, leases for these properties needs to be structured for a full 12 months. Unfortunately, college students are notoriously hard on their housing and the overlap of the tenants vacating and new tenants moving in leaves a very small window for repairs. If properties are not repaired and rented prior to the beginning of the next academic year, they are likely to stay vacant for that year.
Mobile Home Parks
This sub-category is often overlooked as a viable investment option. Many look at these communities on the same level of low income housing, however, many investors find the lower cost per unit and high demand from older renters extremely appealing.
Most investors who have success in this category aim for parks where they own only the pads and not the actual mobile homes. This model allows for an increased net operating income due to the fact that the park owner is no longer responsible for repairs to the units, the utilities are more easily billed to the tenants via sub-metering the system, and high moving costs for these manufactured homes will keep tenant turnover low.
Normally, zoning requirements will only allow these communities to exist in secondary/tertiary urban or rural areas. But don’t let that discourage you. There has been an uptick in seniors wanting to retain home ownership while on a fixed income, and mobile homes can be a good way to meet those needs. Plus, the recent surge in demand has allowed park owners to steadily increase rates.
Senior Living Communities
Although senior living may not seem like an emerging market, the fact is that the population is getting older. According to the United States Census Bureau 20% of U.S. citizens will be over the age of 65 by the year 2030. That’s 98 million people over the age of 65 in just 12 years (that’s more than double the current 46 million).
While Senior Living Communities are a sub-category of multi-family, the term actually includes a wide variety in its own right. You have Independent Living, Assisted Living, Memory Care, and Skilled Nursing.
Independent Living is the category where commercial real estate investors generally find the greatest potential for positive cash flow without high expense margins.
Often referred to as 55+ or “age qualified” communities, the design of the communities are focused on ease of life but often do not require skilled nursing staff to be present.
The other categories of this sub-type are much more management intensive as they actually provide different levels of care to their residents. This properties include Assisted Living, Memory Care, and Skilled Nursing Facilities all of which provide typical services including 24-hour supervision & assistance, exercise & wellness programs, housekeeping & maintenance, meals & dining services, medications management or assistance, transportation, and personal care services. These services must adhere to strict regulations and licensing policies, so this may not be for everyone, but it is an option.
When investing in commercial real estate, one of the most important factors is understanding that your investment prospects are not limited. There will always be different options for asset types, markets, and methods to purchase the property; allowing you to choose the right assets for your portfolio.
If you would like to learn about other types of assets as well as methods for investing in any type of market, check out our schedule for upcoming Commercial Property Academy Live Events.
During the course of these seminars, students are guided through the many complexities of commercial real estate investment as well as creative methods for securing financing even if there are obstacles which would prevent conventional methods. Plus, opportunities to network with other investors and opportunities to ask questions directly to J. Scott Scheel.