Every investment carries some risk. Investment properties are no different. However, the level of risk can vary dramatically from one property type to another. Some types of real estate are inherently riskier than others based on where their cash flow comes from, who the target market is, and how they are capitalized. Look at the details of the deal to help you identify the safest real estate investment option.
By identifying the risks of real estate investment ahead of time, you can look for the right property to meet your needs while planning ahead on how to mitigate the associated risks.
REAL ESTATE INVESTMENT RISK FACTORS
Some common risk factors for real estate investments include:
- Tenant Issues
- Cash Flow Problems
- Short-Term Volatility
- Active Management
- Illiquidity
When you’re considering the safest real estate investment types, these risks are always taken into account. How well does a certain type of real estate reduce risk? How stable is the investment during ups and downs in the economic cycle?
These are the 3 safest types of real estate for investors:
1. MULTI-FAMILY
Out of all the investment real estate types, multi-family is one of the safest asset classes. Multi-family has a few things going for it.
First, multi-family properties tend to be highly resistant to economic downturns and poor market conditions.
When you’re renting out multi-family units, you also have a lot of separate tenants. This means that even if there is a high tenant turnover rate or you experience long vacancies on some units, the other tenants will help keep the property afloat.
Related: Mitigating Recession Downside with Multifamily Investing
The downside to having many individual tenants is the need to manage them all.
Finally, new real estate investors and veterans alike can jump into the multi-family space without a lot of hassle. Financing for multi-family tends to be simpler than financing for other classes of CRE.
2. INDUSTRIAL
This is a great real estate investment type for stability.
The biggest problem that comes along with industrial is that you’re relying on a single tenant (or a few, at most) for your entire cash flow.
Industrial can be a lucrative class of real estate for investors, especially once a tenant settles into a long-term lease. However, high initial capital requirements and the risk of long vacancy periods between tenants make it less accessible to new investors or anyone without an already solid portfolio.
3. OFFICE
Like industrial properties, office buildings exclusively rent to tenants with revenue-generating operations.
The good thing about working with these tenants is that they tend to prefer longer leases. Businesses need a consistent location.
Tenants looking for office space may request improvements to be made in order for them to make the best use of the space. This is normal practice with office buildings. Some tenant improvements may be paid for by the tenant, others by the owner.
The reliance on strong economic conditions and the tendency to have long vacancy periods makes office real estate a bit riskier than industrial and multifamily.
FINAL THOUGHTS
Having been in the multi-family investment space for years now, my opinion is that multi-family is generally the safest option for commercial real estate investment. With the steady market demand, large numbers of rent-paying tenants, and lower capital requirements, you can get a great ROI.
The best way to lower your risk is to perform thorough due diligence before you make any investments. If you get connected with the right group of experienced syndicators, or you find a viable property that aligns with your risk tolerance, you’re more likely to get a better outcome than if you jump into a deal unprepared.
No real estate investment can ever be 100% safe, but by planning ahead and choosing the right type of real estate to invest in, you can successfully hedge yourself against a big portion of the risks.
Want to dive a little deeper? Download the full version of this article to get more insights, including commercial real estate honorable mentions. Sign up here if you would like to view our investment opportunities.
ABOUT THE AUTHOR
Ismael “Rey” Reyes has been actively investing in residential real estate since 2005 and has focused exclusively on multifamily since 2016. He has led MI Real Estate in investing in 13 multifamily properties in Alabama, Florida, Georgia, and Tennessee, totaling 599 units and valued at over $38 million. Rey also provides independent consulting to multifamily investors and is the international bestselling author of