by Norma Walton, President and CEO, Rocket Property Ltd.
Real estate is defined as land and buildings plus the rights of use and enjoyment that come with the land and its improvements. This includes any natural elements of the land such as grass and crops and may include the rights to minerals, resources and water.
There are many types of real estate that fit into that broad definition. When you consider investing in property, it is helpful to understand the full spectrum of options available to you. That will enable you to choose the best type to both meet your objectives and fit with your tolerance for risk.
There are nine different types of real estate:
1. Residential real estate
a. Detached houses
This is the type of real estate people are most familiar with. Most families own or aspire to own a detached house. The title is generally freehold, meaning the owners own the sky above the house to a certain height and the dirt below to a certain depth. This type of ownership often comes with a garage and a yard.
b. Semi-detached houses
This is the exact same as a detached house, except that a semi-detached house is attached to one house beside, such that it is touching another home. The property line cuts right through the middle of that adjoining wall.
This is also called a row house and is similar to a detached or semi-detached house except that it is attached on both sides to another townhouse or row house. The property line cuts right through the middle of those two adjoining walls.
d. Duplexes, triplexes and fourplexes
This is typically a detached house that is divided into two residences, three residences or four residences such that two, three or four families can live independently in the same house. There are generally separate doorways for each residence. Ownership is typically held by one of those families or by someone who does not live in the house at all. The other families rent from the owner.
This is often the only type of residence that a first time buyer can afford. Condominium title is different from freehold. It is most typically a suite in a larger building. When you purchase a condominium, you own a specifically defined floor level, specifically defined dividing walls – a box in essence – along with common access to the lobby, hallways and amenities. You are obligated to have membership in a condominium association with a Board of Directors that makes decisions on behalf of the building.
This is a common type of ownership in New York City but not as common in Toronto. Co-operative ownership means you own a proportionate share of a building, like 1/100th of the building for example, and have a lease permitting you to occupy your specific suite. A co-op is run by a board of directors who make decisions on behalf of the building. This has also become a popular ownership model for vacation homes, with 1/52nd ownership being sold such that each owner is entitled to use that vacation home one week a year.
g. Land leases
In Thailand and many other countries it is common to lease land as opposed to owning the underlying land. Some countries never permit ownership of the underlying land. Land lease is a type of ownership that also exists in Canada but is far less common. In some retirement communities the developer maintains ownership of the underlying land and the residents own the houses and lease the land from the developer. In this case, the house owner does not own the underlying land on which the house is built, so when he sells, he is only selling the house, not the land. He leases the land.
h. Trailer parks
In trailer parks, typically the trailer park owner retains ownership to the underlying land and the trailer owners park their trailers on that land and rent their plot from the owner. The theory is that the trailer owner can move their trailer off the land whenever they wish, although in reality people often build porches and lay patio stones and create fixed installations that make this type of ownership far more permanent than originally intended. Parents leave the trailer to their children, with the children taking over the lease of the plot of land.
i. Apartment buildings
An owner owns freehold title to a multi-suite building and tenants rent suites in that building. The owner makes all decisions about the building and typically the rental arrangement is governed by landlord-tenant laws. If a tenant does not pay their rent, there is a fixed process for evicting that tenant.
2. Retail real estate:
a. Retail stores
Retail store real estate is generally freehold title. Often retail store operators purchase the real estate out of which they operate and often live upstairs in the early years of the business. Alternatively a retail store operator will rent from a non-occupying owner for a number of years pursuant to a lease. Retail stores can be part of an urban street front such that walking traffic frequents the store, or they can be a place to which you must drive. They generally have a maximum of one or two retail stores.
b. Strip malls
A strip mall contains multiple retail businesses, all of whom typically lease from the owner of the underlying real estate and buildings. It is generally fronted by a large parking lot and people can park right in front or proximate to the store and pop in.
c. Retail plazas
A retail plaza is generally more upscale than a strip mall, with higher end businesses. They are open to the sky and provide parking, but there are often multiple levels all with different retailers occupying different spaces. The parking requirement is generally significant with huge parking lots and sometimes multi level parking arrangements. There is generally one owner and all of the retailers rent from that owner.
d. Covered malls
Yorkdale Shopping Centre is the fifth largest mall in Canada and the second highest grossing in sales per square foot. It is completely covered and contains over 250 retailers. It sits on a huge tract of land at Highway 401 and Allen Road, providing plenty of surface parking. It is owned by two pension funds and those 250 plus retailers rent from the two pension funds via long term leases at hefty rents. The mall delivers a huge volume of potential buyers.
e. Land leases
Tim Horton’s often leases land on a long term basis from property owners and then builds their own stores at their own cost and amortizes those stores over the 50 year land lease. At the end of the lease, Tim Horton’s is entitled to take down their building or leave it and it becomes the property of the owner of the land. Costco is using this model to build a huge new superstore in one of Toronto’s residential neighbourhoods.
3. Commercial properties
a. Office buildings
Commercial tenants rent suites in commercial properties that are typically owned by non-occupying owners. That being said, sometimes owner-users both own the building and occupy it. The owner typically owns freehold title to the property and tenants sign long term leases to occupy the building.
b. Office condominiums
The same concept as residential condominiums, commercial condominiums provide you with a specific suite on a specific floor, being a defined box within the larger building that you own. In addition, you have a right to use the common areas along with proportional ownership of those spaces. Your building will be run by a Board of Directors of the Condominium Association.
c. Land leases
In Canada, land leases on commercial properties are unusual, but they happen from time to time. At Bloor and Bay in Toronto there was a large building that was owned by one party who leased the underlying land from a second owner. Title was merged in the past few years by the building owner purchasing the underlying land on which its building was located. The challenge with this ownership structure is what to do with the building once the land lease comes up. Typically the building owner either has to “move the building” which is usually impossible or he loses the benefit of the building because it reverts to the land owner.
4. Industrial real estate
a. Stand alone industrial buildings
Industrial buildings are often stand alone properties. They often have multiple plants, shops, corollary buildings, and stores on the property along with plenty of parking and truck docks. There is typically a lot of acreage associated with industrial property. Distribution centers occupy acres and acres of property in Toronto and its immediate area. They often have hundreds of truck loading docks sitting on multiple acres of land with massive buildings thereon. Ownership is freehold and they use a lot of land per person employed.
b. Industrial condominiums
Given the significant cost of buying multiple acres and paying to run massive buildings, a market has developed for industrial condominiums. Here the large industrial building is divided into shops and those shops are sold to individual buyers who typically run their businesses out of that shop. The owner of the condominium owns the box in which the shop is located. There are generally no common areas in the building itself but there is common access to parking lots to facilitate truck loading, parking and access.
5. Vacant Land
Vacant land is purchased by residential developers who are intent on building some sort of residential building on the property. They will have to zone and site plan approve the property for what they want to build. Some builders buy lots and build single family homes. Others buy large acreages and divide them into individual lots for townhouses. Others development-approve acreage for condominium towers. Architects, surveyors, engineers and planners are often needed to obtain the necessary approvals, along with municipal lawyers in some cases.
Vacant commercial land is purchased by commercial developers who wish to build some office properties on it. Site plan approval is generally required and takes significant time to obtain. Architects, surveyors, engineers and planners are needed along with municipal lawyers in some cases.
Vacant retail land is purchased to facilitate the building of individual retail stores, strip malls, plazas or covered malls. Site plan approval is almost always required and takes a significant amount of time. Architects, surveyors, engineers and planners are needed along with municipal lawyers in some cases.
Vacant industrial land is purchased to facilitate the building of plants. Environmental engineers, site planners, surveyors, engineers, architects and municipal lawyers are generally required.
6. Mixed Use Properties
Mixed Use Properties can be in the forms listed above. Their defining characteristic is that they contain more than one type of property. Retail stores on urban streets often have residential rental units above and are a perfect example of mixed use properties.
7. Farmland and Resource Properties
The world is full of farms that grow crops and support livestock to meet the demands for world food. It is also full of mines, oil fields and natural resource properties that provide elements that the world requires. This is a type of business that relies upon land. Although obviously a type of real estate, it is more of a business than a pure real estate investment. I will leave further discussion of farmland and resource properties for later.
8. Hotels and Resorts
These are businesses that deploy real estate as a fundamental part of the business. Although certainly a type of real estate, they require such active operational management of the business in addition to management of the real estate that I will leave further discussion of this type of investment for later.
9. Storage Facilities
These are also businesses that deploy real estate as a fundamental part of the business. Because they require active management in addition to real estate ownership, we can discuss this type of real estate ownership later.
There are an abundance of options if you want to invest in real estate. Each type of real estate has its own challenges and opportunities. All of them, though, rely upon land as a scarce resource and all of them have the potential to return superior profits than other types of investments. Hopefully the extensive menu above has given you a taste for your options.