Types of Investment Property

A wide range of property is available for investment, and the type of property suitable for you will depend on your assets and risk profile.

Types of investment property are raw land, residential income properties, office building, commercial properties, and industrial properties.

Raw Land

Investment in raw land can be extremely profitable;e if good research skills, good instincts, and good luck come together in one transaction. This type of property investment also can be extremely risky for novice investors. Cities and Counties in Colorado, when trying to get a handle on growth guidelines, often change land uses in an area, which may have either wonderful or disastrous consequences. Income tax laws can change the feasibility of many projects. Raw land usually does not offer cash flow and it requires continuing infusions of funds to pay property taxes and interest on mortgages. Timing is important because the longer the property is held, the lower the rate of return tends to be.

The most important determinant of value for a vacant site is the location. If the land is planned for commercial use, it must have access and visibility from a major road. Shopping centers should have easy access to expressways. The topography is important because it can affect building costs to correct for heavily sloping land.

Residential Income Property

A single-family rental home provides you with a breakeven cash flow or little income if you combine good management with good luck. It also has some limited tax advantages from depreciation. Because the margins are so slim.

Large properties such as multifamily property benefits from the efficiencies of land use and management. Where single-family homes usually are breakeven propositions, large properties can bring substantially higher yields. Because of the much larger investment required, you should make a complete and detailed investment analysis.

Office Building

In the 1980s, office building construction was spurred on by the tax code and by infusion of capital into the market through limited partnerships. As a result, the office market became overbuilt in almost every major city and vacancy rates of 25% were common. Many of the buildings were economically unsound and there were many foreclosure sales. The market finally began to recover in the late 1990s and developers are building again. Lenders, however, still are cautious and demand strong financial statements and tenant commitment to ensure reasonable occupancy rates when the buildings are complete.

Small investors must analyze the office building market carefully before committing their funds. Some questions to keep in mind are:

• What is the competition?
• How many new buildings are permitted?
• What’s happening in the area economy?
• Is it enough to look at the overall occupancy rate?

It is not enough to look at the overall occupancy rate. You should segment the market by age, location, and amenities. It is possible the vacancies are high in the older downtown buildings, while newer suburban office parks are nearly full. Prestige office buildings can be unprofitable. They are really pretty but often have low yields.

When analyzing the rent rates for competitive properties, you should pay careful attention to the services and tenant improvements included. Many buildings pay for utilities and janitorial services and give each tenant an initial allowance for partitioning.

Many investors prefer office buildings to residential apartments because tenants tend to occupy the properties longer, tenant complaints usually are made during business hours, and fewer collection problems occur. Smalle office buildings tend to have somewhat higher tenant turnover than buildings rented by national tenants.

Commercial Property

Many opportunities exist for small investors as well as shopping center developers to invest in commercial properties. Small strip shopping centers, because of their rectangular shape, lend themselves well to a variety of uses. They can be converted from storefronts to offices to restaurants with relatively little expenses. A typical strip center consists of a 100 foot by 60-foot building with four 25 foot or five 20 foot wide bays.  The market in many areas became very soft during the last economic downturn, making new construction loans difficult to obtain for some years. The market has improved in recent years, becoming attractive again to small investors.

Larger neighborhood shopping centers usually include a grocery store or drugstore as the anchor, along with some personal service stores such as dry cleaners, laundromats, or restaurants.

Community shopping centers may include a Home Depot, Kmart or Stein Mart as the anchor, along with a supermarket and other retailers, restaurants, and service companies. Management should try to arrange the mix of tenants so that each complements the others in the center; the overall effect is to generate additional traffic. Lease terms in these centers run longer than in strip centers. Professional property managers usually manage centers for this kind.

Regional shopping centers usually have three or more major department stores as anchors. They generally are located near expressways to draw more distant shoppers to the sites. The centers often have a large number of general merchandise retailers. A professional manager is essential to enhance the value of this very large investment.

Industrial Property

Industrial Properties usually are located near expressway, airports or railroad lines. Investment in industrial property requires substantial research and carries significant risk. Most small investors should serve special purposes and are subject to long periods of vacancy in market downturns. However, with a successful company as a tenant, industrial property can achieve reasonable returns.

Contact

If you have questions about Colorado investment opportunities, please don’t hesitate to send me a message or call at 970-333-0567. I’ am here to help you with all of your Colorado real estate investment options.