Alternative Investments in Commercial Real Estate

When it comes to commercial real estate, many only think of the traditional areas of investing – multifamily, office, retail, and industrial. However, in today’s world of real estate, alternative property types are growing in popularity with a high return opportunity for investors. 

Alternative investments offer many opportunities as their traditional counterparts but face less competition. Alternative investments add a new and fresh element to the real estate world for investors interested in diversifying their commercial real estate portfolio. 

What Are Alternative Properties?

Any property that falls outside the traditional four asset types – retail, multifamily, office, and industrial – is an alternative property type. They’re a more imaginative form of commercial real estate investing, opening up the possibilities to investors from all backgrounds.

Each property type – traditional and alternative –  has potential benefits and drawbacks. However, alternative investments may be the key to success for investors looking to diversify their portfolios. 

For investors looking to diversify their portfolios, alternative investments could be the key to success.

Alternative Investments: Real Property and Investment Funds 

Commercial real estate remains relatively steady as the economy grows and contracts over the decades. Commercial real estate investing has historically been the number one solid wealth-building strategy.

Real Property Alternative Investments 

In terms of real property, the options are varied. Here are a few of the most popular and lucrative alternative real estate properties:

• RV Parks
• Manufactured Housing Parks
• Storage Units
• Senior Housing
• Medical Offices
• Student Housing
• Raw Land

Real Estate Investment Funds 

Furthermore, alternative investments aren’t necessarily real property. In some instances, investors choose to invest in commercial real estate properties via crowdfunding or investment funds. These options allow investors from all backgrounds to purchase real property or mortgage shares. These alternative real estate investments have recently gained popularity, allowing more people to invest in real estate.

Commercial real estate remains relatively steady as the economy grows and contracts over the decades. Commercial real estate investing has historically been the number one solid wealth-building strategy.

Types of Alternative Real Estate Investments (H2) 

Alternative real estate investments are a broad spectrum of opportunities from many different asset types. 

The tangible property types are examined below, where investors can purchase assets with historically steady returns.

RV Parks 

As more Americans turned away from crowded city life and the increase in remote working rose during the Coronavirus pandemic, RV sales exploded. RV parks have always been a relatively painless commercial real estate investment, but a billion-dollar industry grew with the rise in popularity.

With many more RVs on the road, RV parks have seen unprecedented numbers in daily customer counts. Data suggests that many families choose the open road, national parks, and RV parks over hotels or airports as inflation hits the economy. 

As the price for goods, services, and gas continues to increase across the country, RV travel remains a way to travel and vacation while having control over cost. Many RV park owners and investors are experiencing a significant return on investment – returns typically range anywhere from 10% up to 20%.

How to Invest in an RV Park 

There are two ways to purchase an RV park.

1. First, an investor can buy raw land or vacant property and build an RV park from the ground up. This often includes adding water and electricity for each space, bathroom and shower facilities, a main office, and possibly other amenities like a swimming pool, playground, or picnic areas. While this represents a significant initial investment, keep in mind that returns typically range anywhere from 10% up to 20%, making RV parks one of the highest-yielding commercial real estate asset types.
2. Secondly, investors can purchase existing RV park properties and expand or renovate the current lot. This investment comes with water, electricity, and other amenities already in place, and renting can begin immediately while additional repairs are made over time. 

Benefits of Investing in an RV Park 

As mentioned above, RV parks see some of the highest average returns of any commercial real estate asset class due to several factors: 

1. First, RV parks see a steady stream of customers. Since late 2020, RV parks have only seen their occupancy rates increase, which is likely to continue for the foreseeable future. 
2. Secondly, RV parks require limited maintenance costs. Each spot typically provides water and electricity for visitors, plus a few amenities such as WiFi, shower facilities, or gathering areas. While it is vital to have exceptional property management on-site to assist visitors, the maintenance costs are substantially lower than you would experience with other alternative investments.

Disadvantages of Investing in an RV Park 

RV parks are specialized alternative properties. It is essential to have qualified and experienced property managers on-site knowledgeable on the issues specific to RV parks. 

Also, successfully operating an RV park requires a significant time investment. Issues may arise at any time. A team ready to solve them is needed. 

Additionally, many RV parks are seasonal businesses. While some visitors remain year-round – and some consistently return to the property throughout the year – the bulk of business happens in the summer or other holidays. Therefore, owners must financially prepare for slow months.

Manufactured Housing and Mobile Home Communities

Manufactured housing parks have many similarities to RV parks for investors. The most significant difference, of course, is dealing with full-time tenants rather than visitors just passing through. RV parks often have permanent residents, but these tenants don’t make up the bulk of an RV park’s income like in communities. 

By contrast, manufactured housing parks provide permanent space for manufactured homes. The tenant owns the trailer home, while the investor rents the land and provides other amenities. 

Manufactured housing communities are a hidden gem when it comes to alternative investments. The returns may be lower than with RV parks, but this alternative real estate class is generally stable in any economic climate. 

How to Invest in Mobile Home Communities 

Like RV park investing, the most common strategy for investing in mobile home communities is to either buy a vacant lot to transform into a mobile home community or purchase an existing park. However, in this case of purchasing an existing park, investors would buy both the land and the business and continue renting lots to tenants.

Benefits of Investing in a Mobile Home Community 

There are multiple advantages to investing in alternative real estate like mobile home parks. 

1. First, it’s not a particularly “attractive” asset type. Therefore, investors often overlook it, and there is less competition.
2. Second, there is limited maintenance required at mobile home parks. Since the tenants own the units themselves, they are responsible for the upkeep of the home. The park owner is only responsible for maintaining the property’s common areas, pools, grounds, sewer, and water lines.
3. Also, mobile homes tend to experience more extended occupancy than other multifamily investments because it is expensive and time-consuming for homeowners to move their units to another location, providing for reliable income and limited vacancies. Therefore, most homeowners stay in one place for many years. 
4. Lastly, investors typically get lower rates on mobile home park loans and tax benefits.

Disadvantages of Investing in a Mobile Home Community 

Because mobile home parks represent an incredible opportunity for profit, they come with a large price tag. Investors must expect to fork out significant upfront capital. 

Also, single-family home lending programs make it easier for buyers to purchase homes. Many are not buying mobile homes like in past years, leaving many owners a hard time filling spaces. 

Finally, investors must recognize that owning and operating a mobile home park has cultural challenges. Those living in these communities might not react well to rent increases or new regulations. 

Storage Units 

The storage unit market has been proven relatively durable, with positive returns seen even during the challenges of economic times – like the 2008-2009 recession. 

Thanks to Americans’ love of consumption and capitalism, people have more “stuff” per person than nearly any other nation. Over the past several decades, goods have become more affordable than ever. As e-commerce took hold, it’s now incredibly easy to purchase just about anything from a home computer or mobile device.

As this consumerism exploded, people ran out of room to store all these possessions. As early as the 1960s, the phenomenon of renting space just for “stuff,” or the storage unit revolution began. 

Today, storage units are a booming industry. For investors, these alternative investments represent an opportunity for significant annual growth. In 2019, the American storage unit industry raked in $38.6 Billion in revenue. 

There are three types of storage units: 

• Individual Storage Facilities
  Individual storage units represent the bulk of the self-storage industry. Most have seen them in their community or off the highway, but storage units come in various sizes, locked securely behind a gate.More than 12% of all American households currently rent at least one storage unit, at an average of $90 per month per unit. For investors, this means a total of 41% profit margin – a significant return.

  These storage facilities vary significantly in square footage, facility amenities, security, and cost. Newer, high-tech facilities feature climate-controlled units, 24-hour security, and even biometric locks to keep high-value items safe.

  The cost of such an investment – and the profit potential – vary greatly depending on the property’s location, condition, and amenities.

• Cold Storage
  Cold storage facilities represent another alternative real estate investment opportunity in the self-storage class. Many businesses are scrambling to find cold storage space as e-commerce and grocery delivery services increase.The COVID-19 pandemic led to a marked increase in contact-free retail purchases, including groceries and other refrigerated goods. Because of this change, businesses moved from large retail centers to more online-based business models.

  This led grocery stores and other foodservice retailers to stockpile perishable goods, preparing for future shortages.

  Furthermore, pharmaceutical corporations require cold storage for vaccines, medications, and other treatments. Pharmaceutical companies will always need cold storage, especially as researchers discover new treatments for various illnesses.

  All of this demand leads to an incredible investment opportunity. Demand is currently outpacing supply, leading to a frenzy of building activity. Investors looking to add alternative investments to their commercial real estate portfolios should consider this growing asset type.

• Warehouse Space
  As with other storage asset types, there’s a high demand for warehouse space, which is slightly different from a traditional industrial facility.Brick-and-mortar retail stores floundered as e-commerce increased in popularity and began to follow the new model to meet demand. As such, these businesses need more storage space for their goods, leading to an increase in demand for warehouse space.

  This increase in demand led to a 33% increase in warehouse space rents from 2014-2019.

  For investors, warehouse space represents one of the highest returns on investment (ROI) of any commercial real estate class.

How to Invest in Storage Units 

Depending on whether you’re considering a traditional storage facility, cold storage space, or warehouse property, you’ll need to consider several factors carefully:

• Location of the property
• Saturation of other similar properties in the area
• Local demand for storage
• Local economic and business trends
• Cap rates for existing properties

Once you’ve determined which storage unit type to purchase, several options exist for finding the ideal property. First, an investor must decide whether they want to be an active or passive investor. 

• Passive Investor: Some real estate investments are passive with trusts (REITs) and other investment funds allowing investors to purchase a share of these facilities and receive dividends based on performance. 
• Active Investor: Active investors purchase land and build from the ground up or purchase an existing facility. 

We recommend contacting our experienced commercial real estate brokerage team. Our dedicated brokers can identify potential properties, work with you to determine whether it’s the best investment for your portfolio, and help you close the deal.

Benefits of Investing in a Storage Unit 

There are multiple benefits of self-storage, cold storage, and warehouse investing. 

1. First, storage units are one of the most lucrative investment options in the commercial real estate market. While they may be expensive to purchase, the high rates of return are typically worth the sizable initial investment.
2. Second, storage units require very little overhead and maintenance costs. Whereas other asset types, like residential or retail centers, require costly maintenance and property management services, storage units generally don’t require much beyond some security detail, part-time office staff, and perhaps the occasional maintenance request.
3. Finally, there is an increasing demand for storage space in America as more goods continue to be purchased. 

Disadvantages of Investing in a Storage Unit 

One concern with this alternative real estate class is the possibility of market saturation. Self-storage units have become increasingly popular with investors, and therefore there is a risk of saturation in certain markets. It is important to carefully analyze investment opportunities in the area to determine whether they are lucrative.

Additionally, purchasing or developing a storage center can be extremely costly. Most are owned by real estate trusts or other commercial real estate funds, making it difficult for individual investors to afford such facilities. 

However, if you want to actively invest in these alternative investments, you can either purchase land and build from the ground up or purchase an existing facility. The method you choose depends mostly on your available capital, the location, the local market, and necessary renovations. Again, an expert investment advisor can help you determine if a property will be profitable.

Senior Housing

The most populous generation in American history – the Baby Boomers – are now senior citizens. As they age, there’s an increasing demand for senior housing, senior nursing facilities, and long-term care centers. It’s estimated that the number of people aged 75 or older who need at least some assistance will triple by 2050.

 

For investors, this alternative property type represents a significant opportunity for profit. The long-term care and senior housing sector will only grow as medical advances continue to make for longer lives. 

Senior housing does not just fall into the alternative real estate type category. It’s essentially a mix of retail, hospitality, and medical sectors working together to care for older adults. Senior housing investments might mean a multifamily complex, such as senior-only apartments. Senior housing investments could also look like an assisted or long-term care facility. There are also progressive care properties where adults can essentially live independently as long as possible before being moved to greater medical care as needed.

Most commercial real estate investing experts agree that senior housing and long-term care is an underrealized asset type rich with earning potential.

How to Invest in Senior Housing 

The most popular way to invest in long-term care facilities and senior nursing homes is through a real estate investment trust (REIT). Essentially, this allows a wide variety of investors to purchase shares of the CRE property. 

Lower-net-worth investors can still invest in this lucrative property type and receive portions of the profits. However, high-net-worth investors might choose to purchase land and build age-restricted multifamily homes, purchase an existing community, or invest in individual multifamily units. 

Benefits of Investing in Senior Housing  

Each of the senior housing property types has its own set of advantages and disadvantages. 

Overall, the general senior housing sector expects a 10.5% annual return over ten years. This return growth far outpaces other residential returns by about 6%.

With each generation living longer, senior housing and assisted living facilities will only become more critical in the future. 

Also, this alternative real estate class promises reliable returns with a steady income because these facilities are in demand, which means high occupancy rates whether the economy is booming or in a recession. 

Disadvantages of Investing in Senior Housing 

A significant disadvantage of senior care facilities is the sudden drop in occupancy that can occur. As seen during the COVID-19 pandemic, many seniors left their care facilities to move in with family or live independently due to the extreme outbreaks in these communities.

Additionally, property management, maintenance, and other staffing costs represent a significant financial burden. These facilities require much upkeep as residents often cannot perform maintenance duties safely. Furthermore, property management must ensure properties meet local and national standards.

Medical Office Buildings 

The boom in medical office building investments began in 2010 after the creation of the Affordable Care Act. Under this plan, some 20 million previously uninsured Americans received health insurance, dramatically increasing the need for medical facilities nationwide, including small clinics, urgent care centers, medical office buildings, and other medically-associated real estate properties.

Seasoned commercial brokers have been encouraging real estate investors to buy into what has been deemed the most desirable asset – healthcare centers or medical office buildings. Due to the current climate, medical offices are crowned the supreme asset type by commercial real estate investors due to their resilience during market shifts, high occupancy rates, and a positive outlook – timeless and necessary.

How To Invest in Medical Commercial Real Estate Properties 

Because of their large-scale and specialized needs, most medical office buildings require an incredible amount of capital. Therefore, most individual investors go through a real estate investment trust (REIT) or an exchange-traded fund (ETF). 

High-net-worth investors may be able to invest via a joint venture, working with other investors or firms to purchase a medical office property.

Benefits of Investing in Medical Offices 

Medical offices, hospitals, urgent care clinics, and other health centers are vital to American life. There will always be a need for medical care; therefore, investors can count on this asset type to perform relatively steadily over time. 

Furthermore, as Americans continue to age – and live longer lives – we will need greater access to medical care. Therefore, medical office buildings are expected to increase in popularity among commercial real estate investors.

Disadvantages of Investing in Medical Offices 

Medical offices are a specialized type of alternative property. Therefore, vacancies can take longer to fill depending on the need for medical care. 

Also, medical offices often require more maintenance and renovation than other commercial real estate properties. Due to the technical nature of these properties, owners and property managers may be expected to upgrade their properties to suit incoming tenants.

Student Housing 

Student housing is one of the most underutilized alternative investments. These properties range from campus-run apartment complexes to off-campus multifamily builds to duplexes. Student housing investments are an excellent option for beginning investors.

Most student housing properties see occupancy rates above 90% yearly, giving the owner a stable and reliable income. And as college enrollment numbers continue to increase, investors can only expect to see occupancy rates, demand, and rents rise. 

How to Invest In Student Housing Real Estate 

Because of the variation in student housing types, there are equally as varied means of investing in these alternative properties. 

Individual investors often purchase a single unit (like a condo or townhome) near a college campus. Sometimes, the investors are parents who buy a property as a living space for their students. This is an excellent strategy that saves money on housing costs while offering the potential to generate income each year. When the student graduates, parents can either sell the property or continue to rent to college students in the future.

Other investors choose to invest in multiple units or to invest in large-scale student housing projects. These might include REITs or ETFs that fund new construction or complete renovation of an existing building. Joint ventures are also a common way to fund these alternative investments.

Benefits of Investing in Student Housing 

College enrollment is at an all-time high as campuses opened back up, and it has been deemed safe to attend in-person classes. Therefore, more students than ever need a place to live. For investors, that is a recipe for success. There are always students coming and going on a college campus so investors can count on nearly-constant occupancy.

Furthermore, many students still rely on their parents (or a guarantor) to cover housing expenses. Property owners can typically expect rent to be paid in full and on time because the parents – not the students – sign the lease and cover the bill.

Unlike other multifamily rentals, finding new tenants is almost effortless. Property owners and property managers simply have to advertise around campus or ask their current tenants to spread the word. There’s always a student in need of an apartment close to campus.

Finally, owners can expect slightly higher cap rates near a college campus than in another location. Rates are typically 0.5% to 0.75% higher for student housing properties, making the returns on these investments more lucrative. 

Disadvantages of Investing in Student Housing 

Of course, even with all these benefits comes disadvantages, hoeverver investors still rent to college students. Even the most responsible are young and inexperienced, so frequent maintenance calls, noise complaints, and other such issues can be expected. 

Additionally, plan on increasing cleaning and repair costs when a tenant leaves. Some student housing property owners charge a higher security deposit to offset these costs, or you can factor that inevitability into your monthly rent.

Other Alternative Real Estate Investment 

There are many other alternative investment options not mentioned above, including:

• Raw land
• Data centers
• Hotels
• Co-working offices
• Farms 
• Billboards
• Single-family rental properties

Ways to Purchase Alternative Properties for Every Investor 

As we mentioned above, there are many ways for investors of nearly any income to invest in commercial real estate these days. You don’t have to be a high-net-worth investor to stake a claim in these alternative properties.

Various methods now exist to help both beginning and experienced investors profit from the commercial real estate industry.

Real Estate Investment Trusts (REITs) are a great way to make commercial real estate investments available to every investor. These trusts allow investors to purchase shares of a property rather than financing the entire property outright.

Direct Investments 

Directly investing in alternative properties provides the best access to returns for those with significant capital. While direct investments also mean being completely financially responsible for operating costs, maintenance costs, and other expenses, it also means receiving the bulk of the profits.

Many lenders require at least 25% down on commercial or rental properties, so direct investors must consider the upfront costs and determine whether or not this is the best option. 

Real Estate Investment Trusts 

Real Estate Investment Trusts (REITs) are a great way to make commercial real estate investments available to every investor. These trusts allow investors to purchase property shares rather than financing the entire property outright.

With a REIT, shareholders aren’t responsible for expenses related to leasing, property management, or any other daily operations of a property. 

Essentially, a larger real estate developer or corporation purchases the property and then sells shares of that property to investors. The returns are distributed based on the property’s performance and how many shares each investor holds.

Many investors choose REITs because of their simplicity. With a REIT, shareholders aren’t responsible for expenses related to leasing, property management, or any other daily operations of a property. 

Exchange-Traded Funds and Other Traded Stocks 

Exchange-Traded Funds, or ETFs, are stocks or mutual funds traded and handled by a financial advisor. Like REITs, investors buy shares of the ETF and therefore have little to no involvement in the property’s operations or business decisions. 

Many ETFs and other traded stocks include some commercial real estate holdings but contain shares in other businesses and financial sectors.

Joint Ventures 

Because many alternative investments require a significant amount of capital, most individual investors cannot do it alone. Joint ventures, however, allow multiple investors or investment groups to join forces and fund a project.

In a joint venture, two or more entities work together to purchase a real estate property, renovate the property if needed, and manage the property. The profits are then split according to the agreement made between all parties.

Crowdfunding 

Crowdfunding is a more recent development in commercial real estate investing. Crowdfunding has been around for a while, collecting funds from various sources to finance individual or business projects. 

Just as GoFundMe or Kickstarter helps small businesses raise funds after a disaster or when a new product idea is working, CRE crowdfunding sources are also springing up online. This method came about after the 2012 JOBS Act but is gaining popularity. 

The method opens up commercial real estate investing to nearly anyone, sometimes with as little as a $500 investment. Then, like with REITs or other ways, investors receive dividends or shares of the profits based on their initial contributions.

At Lumicre, we are skilled in guiding investors on their next big project. Our expert team has years of experience in successfully helping investors purchase their alternative investment properties and reach beyond success. Contact us today to see how we can help achieve your investment goals.