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Top 3 Niche Real Estate Assets for Investing and Why They Work
Why Invest in a Niche Real Estate Sector?
Commercial real estate is broad and complex, offering a wide range of investment options to property investors. Most industry players, however, often focus on a few well-established property types, such as multifamily, industrial, retail, or office buildings. Meanwhile, several niche real estate asset types can provide the same benefits, while often being more feasible with lower upfront costs, especially for smaller private investors.
Investing in a niche property sector can help investors diversify their portfolios and shield themselves from eventual economic downturns. Additionally, focusing on a niche allows industry players to become experts in one area, helping them to make better investment decisions in the long term. Below we examine three real estate niches, which can be highly lucrative for both established and first-time investors. Find out why.
Small Apartment Buildings
Although definitions differ for this real estate niche, small apartment buildings are usually those considered to be between five and 50 units. Investors starting in the real estate business tend to buy smaller apartment buildings due to their affordability compared to larger multifamily communities in most markets across the U.S.
Nonetheless, smaller buildings offer many of the same benefits as larger multifamily complexes: consistent cash flow, tax benefits, and a hedge against inflation. Lenders are also more likely to approve a smaller loan with lower risk for those just starting to expand their real estate portfolio.
What’s more, there are many agency and conventional loans designed specifically for small apartment building investors. These include the Fannie Mae Small Loan program or Freddie Mac’s Small Balance Loans, along with traditional financing from banks or credit unions.
Before choosing to invest in this niche real estate sector, however, make sure that you choose the right property, in the right market to ensure a successful investment. Check out our internal rate of return (IRR) calculator to find out the annual rate of growth you can expect from your next investment.
Self-Storage Facilities
Once described as the ugly duckling of real estate, self storage has become a popular niche sector, attracting both institutional and private investors. Relying on life-altering events, such as downsizing, displacement, divorce, and death — also known as “the Four Ds” — self storage is considered to be one of the most recession-resistant sectors. And this proved to be true during the pandemic, when self-storage demand skyrocketed across the U.S., with rental rates reaching double-digit growth in many markets.
Investing in self-storage is highly affordable, even for first-time investors, and the cost to maintain a facility is significantly lower compared to apartments or other asset types. Thanks to coded gates, kiosks, security cameras, and online rental options, self-storage facilities can be easily managed without an on-site property management team.
Some of the most popular financing options available for self-storage properties include the SBA 7(a) and SBA 504 loan programs, which are typically secured through banks or credit unions. However, life company and CMBS loans are also available.
If you choose to invest in this niche real estate sector, make sure to evaluate the market where you want to grow your portfolio. Major aspects to consider include population growth, location, existing facilities within a 3- to 5-mile radius, and the economic occupancy rate of the building.
Medical Office Buildings
As the pandemic upended the office sector’s decade-long growth, more and more investors turned to subsectors, or niche real estate. These include medical office buildings, often referred to as MOBs. The COVID-19 crisis highlighted the resiliency of medical office demand, in contrast with traditional offices. Even during economic or health crises, people continue to seek out regular and necessary care, making the sector an essentially recession-proof investment option.
MOBs are specifically designed for healthcare providers, including primary care physicians or dental practitioners. Buildings can vary from 1,500 square feet to significantly larger medical office complexes. While MOBs can be found almost anywhere, ones on hospital campuses are often in particularly high demand.
Although investing in a niche sector such as MOBs might be difficult for those starting in the commercial real estate business, it’s ideal for property investors with experience in the traditional office sector who are looking to diversify their investment portfolio. Some of the most popular financing options for MOBs include bank, conduit, or life insurance company loans.
Nonetheless, smaller medical buildings are often owned by medical practitioners. For doctors looking to start a practice, some of the best loans available include the SBA 7(a) and SBA 504 programs.
Related Questions
What are the top three niche real estate assets for investing?
The top three niche real estate assets for investing are self-storage facilities, mobile home parks, and student housing. Self-storage facilities are considered to be one of the most recession-resistant sectors and are highly affordable, even for first-time investors. Mobile home parks are a great option for investors looking for a steady income stream, as they often have long-term tenants and low maintenance costs. Student housing is a great option for investors looking to capitalize on the growing student population in many cities. Popular financing options for these niche real estate assets include the SBA 7(a) and SBA 504 loan programs, which are typically secured through banks or credit unions, as well as life company and CMBS loans.
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What are the advantages of investing in niche real estate assets?
Investing in a niche property sector can help investors diversify their portfolios and shield themselves from eventual economic downturns. Additionally, focusing on a niche allows industry players to become experts in one area, helping them to make better investment decisions in the long term. Investing in self-storage is highly affordable, even for first-time investors, and the cost to maintain a facility is significantly lower compared to apartments or other asset types. Thanks to coded gates, kiosks, security cameras, and online rental options, self-storage facilities can be easily managed without an on-site property management team. Some of the most popular financing options available for self-storage properties include the SBA 7(a) and SBA 504 loan programs, which are typically secured through banks or credit unions. However, life company and CMBS loans are also available.
What are the risks associated with investing in niche real estate assets?
Investing in niche real estate assets can be highly lucrative, but there are some risks associated with it. For example, niche real estate assets may be more difficult to finance, as lenders may be less familiar with the asset type and may require more detailed information. Additionally, niche real estate assets may be more difficult to value, as there may be fewer comparable properties in the area. Finally, niche real estate assets may be more volatile than traditional asset types, as they may be more sensitive to economic downturns.
For more information on the risks associated with investing in niche real estate assets, please refer to this article.
What are the best strategies for investing in niche real estate assets?
Investing in a niche property sector can help investors diversify their portfolios and shield themselves from eventual economic downturns. Additionally, focusing on a niche allows industry players to become experts in one area, helping them to make better investment decisions in the long term. Some of the best strategies for investing in niche real estate assets include:
- Evaluating the market where you want to grow your portfolio. Major aspects to consider include population growth, location, existing facilities within a 3- to 5-mile radius, and the economic occupancy rate of the building.
- Taking advantage of popular financing options available for niche real estate assets, such as the SBA 7(a) and SBA 504 loan programs, which are typically secured through banks or credit unions.
- Researching the asset type you are interested in and becoming an expert in that area.
What are the most important factors to consider when investing in niche real estate assets?
When investing in niche real estate assets, the most important factors to consider include population growth, location, existing facilities within a 3- to 5-mile radius, and the economic occupancy rate of the building. Additionally, it is important to evaluate the market where you want to grow your portfolio.
Source: Top 3 Niche Real Estate Assets for Investing and Why They Work
What are the current trends in niche real estate investing?
Niche real estate investing is becoming increasingly popular, especially for smaller private investors. Self-storage facilities are one of the most popular niche real estate asset types, as they are highly affordable and considered to be one of the most recession-resistant sectors. During the pandemic, self-storage demand skyrocketed across the U.S., with rental rates reaching double-digit growth in many markets.
Popular financing options for self-storage properties include the SBA 7(a) and SBA 504 loan programs, which are typically secured through banks or credit unions. However, life company and CMBS loans are also available.
When investing in this niche real estate sector, it is important to evaluate the market where you want to grow your portfolio. Major aspects to consider include population growth, location, existing facilities within a 3- to 5-mile radius, and the economic occupancy rate of the building.