A common misconception is that all real estate behaves and is valued in a similar way, but that is not the case. Different types of real estate can have fundamental differences. When you hear about real estate in the media, statements usually pertain to single-family homes and condos. This sector of real estate does not always behave in the same manner as investment-grade real estate.

We divide real estate into these main categories:

• Residential
• Income-producing, which includes apartments, commercial and industrial
• Development
• Lending

The last three categories can be summarized as investment-grade real estate.

Each real estate category behaves differently. Different risks, rewards, and cash flows. Most often, when you hear about the hot or cooling real estate market, the focus is on single-family home ownership. Single-family residential real estate can trade on emotion and the relative price of other homes in a given neighbourhood. Investment-grade real estate does not work the same way.

Income-Producing Real Estate

Income-producing real estate consists of apartments, commercial, and industrial properties. Multi-residential apartments are purchased for the income they generate. They are viewed and valued as a business based on the profit they produce, and decisions are made using investment analysis to determine how to maximize the return on invested capital. The more income an apartment owner can generate, the higher the potential sale price.

Commercial and industrial real estate, like multi-residential apartments, is valued as a business based on the profits they produce. These types of properties tend to have longer leases to accommodate on site businesses. Commercial and industrial properties can require a bigger initial investment. It can take longer to lease spaces, as different tenants require different things to meet their specific business needs. Vacancy in commercial and industrial properties can be higher during times of financial hardship.

Opportunities and Risks

Investing in real estate has historically generated favorable, absolute and relative total returns over the last 33 years. The five primary classes of Canadian real estate have generated average annual returns ranging from 8.1% to 10.5%, and all five classes have outperformed Canadian bonds. When most investors think of fixed income investing, they are usually referring to corporate or government bonds. Today, however, mortgages and lending may provide a more attractive complement to an investor’s traditional fixed income allocation.

It is important to recognize and understand where you are on the risk ladder. When it comes to lending, the investment can generate monthly cash flow, but the initial capital is at risk should the borrower have issues. The main risk associated with lending is the risk of a borrower’s default. Due diligence on the creditworthiness of the borrower and the viability of the real estate investment itself is paramount.

Development: High Risks, High Rewards

Development is the process of converting land or a property into saleable real estate. It is essentially real estate manufacturing. It can be a lengthy and involved process. While overall returns can be healthy with a well-executed project, there are increased risks when compared to other real estate categories. Possible risks include those relating to timing, approvals, and market changes.

It is important to remember that development projects do not provide cash flow, or in fact returns to the investor, until the project is completed. There is often no revenue generated during the development or construction phases.

Returns are often treated as capital gains in the hands of investors once a project is completed, so it is important for investors to be patient while waiting for the completion of the development.

Why Real Estate Knowledge Matters

People often lump real estate into one category and assume that it all behaves the same, but that is not the case. Understanding the differences can help you make the best decisions on how to create wealth through real estate.

At Equiton, we are real estate experts with decades of experience evaluating, purchasing, and investing in real estate. We know how to find the intrinsic value in properties and develop revenue generating strategies that can create wealth for our clients.

Want to Learn More About How to Invest?

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Whether you are a seasoned investor looking to diversify your portfolio or a first-time investor seeking to explore the potential of real estate, we have tailored solutions to meet your unique needs. Our investment offerings encompass a diverse range of property types, such as residential, commercial and development.

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