The Five Major “Food Groups” of Real Estate Investment

-
Real estate as an asset class is divided into three major types: Residential, commercial, and industrial. NAREIT (National Association of Real Estate Investment Trusts) tracks twelve main property types in investment real estate and provides data on the returns realized in those property types (and several sub-types). Most real estate private equity funds, however, focus on one of the five main property types or “food groups”: multifamily, industrial, retail, office, and healthcare.

Multifamily


Multifamily is defined as any residential property consisting of more than 4 separate dwelling units. Many federal agencies and most lenders classify residential real estate as 1-4 family or multifamily, based on the number of dwelling units. In many instances, multifamily may also include senior housing, particularly free standing independent living or age-restricted living (55+). Multifamily properties generally include some type of on-site management to handle repairs and maintenance, upkeep and cleanliness, and have some type of amenities like a pool or clubhouse.

Industrial


Industrial properties involve manufacturing, storage, and logistics. Most manufacturing firms own their real estate (“owner-occupied”). Warehouses and distribution centers are often rented, creating opportunities for private equity to own the real estate and generate positive returns by leasing the space to one or more tenants.

Retail


Retail real estate is perhaps one of the most familiar asset types, and currently one of the most maligned. The combination of enclosed malls falling out of favor with the rise of online shopping have stressed this sector in recent years (and makes for a fascinating real estate investment case study in perception and reality). Retail is generally broken into sub-types of regional malls, shopping centers (often anchored by a major grocery store), and free standing. Free standing means there is only one tenant on the parcel- think of a McDonalds, Walgreens, Dollar Tree, or an AutoZone.

Office


Office properties range from downtown skyscrapers to suburban office parks. Occupancy types span from a single tenant in a building to multiple tenants scattered throughout. Much like multifamily, multi-tenant office properties are more management intensive and generally involve shared amenities like reception, shipping and receiving, and break rooms or lounges for employees.

Healthcare


Healthcare real estate divides into three main sub-types: hospitals, medical offices, and senior care. Hospitals may include traditional acute care facilities, surgical hospitals, or specialty hospitals. Medical office may be single- or multi-tenant, and is also discussed in terms of on-campus or off-campus (campus referring to an acute care hospital- so either “on the campus of a major hospital” or not). Senior care encompasses for-profit assisted living, memory care, and skilled nursing.

Real Estate Sector Investing


Private equity firms segregate their investment funds into these primary sectors or property types because investors seek exposure to particular property types. These investors have reviewed real estate investment case studies and believe that certain property types will achieve returns that help balance and diversify their overall portfolio. Private equity real estate returns are most meaningful to investors when property types are segregated.

Comments

Post a Comment

Popular posts from this blog

Real Estate PE Technical Interview Questions I Ask at My Megafund

-
This post includes technical questions that I ask when interviewing candidates at my real estate private equity megafund. These questions are softballs meant to test your basic grasp of easy concepts. If you struggle with these real estate PE interview questions to any degree, then you’re not yet up to par. If you need to brush up, I highly recommend you check out Leveraged Breakdowns , the premier resource for real estate private equity education. Practice Until These Technical Questions Feel Like Baby Math Your interviewer considers the following technical real estate private equity interview questions to be easy, baseline checks of your skill. Practice until you’re comfortable in a high-stress interview. Also, make sure your mental math skills are tight. If not, there’s plenty of basic apps and websites out there that will help you practice. What is NOI? Question: What is NOI? What are the most common items included in NOI? Answer: Net operating income (“NOI”) is the st...
Read more

Why Asset Underwriting Skills Are Necessary For Real Estate Private Equity Interviews?

-
Why are asset underwriting skills necessary for a real estate private equity career? Real estate private equity interviews demand serious preparation. Although no two funds are the same, each will expect a strong understanding of real estate underwriting. Traditionally, real estate underwriting has been hard to learn outside of a real estate private equity career. Thus, industry outsiders have struggled to acquire the basic investments skills necessary to underwrite even a simple single-asset acquisition. This post details why asset underwriting skills are beneficial and how Leveraged Breakdowns’ real estate private equity course will help you ace your next REPE interview . How asset underwriting helps you better understand real estate private equity funds? No two real estate private equity funds are the same, each varies across countless factors. Some of the most important factors to understand when searching for your real estate private equity career are: Size Sector Focus...
Read more

Cap Rates - Wicked Simple or Wicked Complicated?

-
Are cap rates wicked simple or wicked complicated? The snarky answer is “Yes.” What we mean is cap rates have an “everyday” application that is intuitive and simple. Its foundation, however, is much more complicated. As you move toward a career in a real estate private equity firm, you will need to learn to use cap rates in their simple form. But it never hurts to understand the origins of the concept.   What is a Cap Rate? To begin, the term “cap rate” is shorthand for “capitalization rate.” The term is well-defined in real estate appraisals, and is aimed at determining a market rate of return for the property being appraised (see more on appraisals here ). The appraisal breaks the cap rate down into three component parts: the risk free rate, the equity rate, and the debt rate. The sum of these three rates becomes the capitalization rate used to arrive at the property value based on the income approach (specifically, net operating income divided by the cap rate equals th...
Read more