There are seven types of commercial real estate which leads many to ask, “What type of commercial real estate is the best investment?”
Each asset class has distinct features that differentiate it from the others in terms of risk and upside potential. So, how do you determine which type of commercial real estate is the best investment?
As with all things regarding commercial real estate investing, the answer is highly dependent on you—your goals, skillsets, experience, situation, and environment you’re currently in. However, if you’re looking for a general starting point, here are some of the best types of commercial real estate to invest in.
The Types of Commercial Real Estate That Are the Best Investments
1. Large Multifamily
Apartments, also known as multifamily real estate, are among the best type of commercial real estate to invest in because they’re profitable and serve a purpose that is resilient to economic downturns. Everyone wants a place to live, and with the global population surging right now, housing demand is high.
Additionally, investors in multifamily real estate often enjoy a high level of cash flow and stability due to the high number of tenants in apartments. Apartments historically have some of the lowest vacancy rates in commercial real estate and provide a clear entry point for new investors.
Why Invest in Multifamily Real Estate?
- Everyone wants a safe and comfortable place to live
- The high number of tenants helps properties cash flow consistently
- You can force appreciation by renovating the property and increasing rents or reducing expenses
- Apartment buildings are also great tax shelters
- Multifamily real estate is the most similar to residential real estate and makes for an easier transition into commercial real estate for experienced residential investors
2. Self-Storage Facilities
Self-storage facilities are a great type of commercial real estate investment, and they’re gaining popularity amongst investors as a result. One of the key differentiating factors between self-storage facilities and other types of commercial real estate is that the “tenants” of self-storage units aren’t human—they’re things.
Yes, your customers are human, but your customers aren’t inhabiting the building every day. With this, most of your customers will be low-maintenance because they drop off their stuff and let it sit there indefinitely until they need to access it. Another thing to consider is that people in the U.S. population, in particular, seem to be more attached to their “things” and therefore more willing to pay not to get rid of them. Since self-storage facilities are often affordable by a middle-class standard, self-storage facilities are resilient to recessions since people would instead find a way to keep paying the $120/mo to keep their stuff than to get rid of it.
Why Invest in Self-Storage Facilities?
- Low-maintenance customers (and “tenants”!)
- Customers often sign on and pay consistently for years at a time
- Less maintenance than many other types of commercial real estate
- Low staffing needs and operating costs
- Resistant to economic recessions
- You can force appreciation by increasing rents or decreasing costs
Learn more in our article: Are Storage Units Profitable?
3. Shopping Centers
While the growing popularity of online shopping has hurt many traditional shopping malls, shopping centers still serve a great purpose in every community and are thus still a good type of commercial real estate to invest in.
Big box stores like Best Buy, Home Goods, PetSmart, etc., all provide ample options for folks who want to shop in person for any reason and provide long-term stability as tenants. Additionally, small local businesses such as pet groomers, laundromats, and restaurants generate consistent daily business. By placing different tenants in a shopping center, you can diversify your portfolio to be economically resilient and create excellent cash flow.
Another great component of shopping centers is that most tenants in a shopping center like to sign lease terms that range from 5 to 20 years. This is appealing because if you’re confident in the type of business entering the lease agreement, it helps ensures long-term income stability.
Why Invest in Shopping Centers?
- People still want and need to shop locally
- You can diversify your portfolio with different types of businesses
- You can create cash flow stability by signing long-term leases ranging from 5 to 20 years
- You can sign Triple Net (NNN) leases so that maintenance and repair costs are paid by the tenants and provide you with reliable cash flow
4. Mobile Home Parks
Mobile home parks are one of the hottest types of commercial real estate investing now. They flew under the radar for many years but are now at the forefront of commercial real estate investing largely due to their high yields and cap rates that can exceed 10% with cash-on-cash returns that can exceed 20%.
One reason mobile home parks maintain their value is because most cities and municipalities in the United States do not allow new parks to be established. Historically, mobile home parks have been seen as grounds for unhealthy and unsafe living conditions, and the opposition from property owners living near them gained legislative backing. Because of this, mobile home parks are in decline. Projections show that fewer than ten new parks are opened in the United States each year which is less than the number of mobile home parks closed each year.
With skyrocketing home prices, a well-run mobile home park serves a great social purpose by providing safe and stable housing to lower-income individuals and families. Because of this, they’re now seen by investors as an in-demand “sweet spot” in the market and a good type of commercial property.
Why Invest in Mobile Home Parks?
- The demand for affordable housing is growing
- There aren’t many new parks opening so the existing mobile home parks are increasing even more in value due to their scarcity
- Tenants are responsible for their own mobile homes and tend to stay a long time
- Most mobile home parks are owned privately and make it more possible to acquire them with special terms like seller-financing
If You Want to Know What type of Commercial Real Estate is the Best Investment, You Have to be Clear on Your Situation and Goals
While we covered some of the better types real estate to invest in from a general perspective, it’s always important to stress that investing is personal; what may be a great property for one person may be a horrible property for another.
Therefore, always start with your situation and goals in mind and evaluate each deal in light of those. If you’d like some additional guidance, learn what makes a commercial property a good investment. As an additional resource, be sure to read our complete guide to real estate investing for beginners.
Once you understand what factors you need to evaluate to determine if a property is a good real estate investment for you or not, you can make better decisions for yourself and become a more successful investor.