Investor’s Guide to Special Purpose Real Estate
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Move over, multi-family and step aside office buildings: it’s time to walk on the wild side of commercial real estate. OK, so the idea of special purpose real estate isn’t really wild since it’s been around for a long time.
But it isn’t something that every investor handles on a regular basis, which means that plenty of people become curious about the possibilities.
The Small Business Administration defines special purpose real estate on a very technical level: it is a property that is appropriate for one use or limited use. The building can’t just be converted to another purpose without sinking in a lot of money.
Different Types of Special Purpose Real Estate
Some property types fit this definition, including the following:
- Hotels;
- Bowling Alleys;
- Cold Storage Facilities;
- Golf Courses;
- Museums;
- Quarries;
- Railroads;
- Service Centers (transmission centers, quick lube centers);
- Car Washes;
- Motels;
- Wineries.
There can be a conflict between the way conventional lenders classify property and how the SBA classifies it, but it’s never a bad idea to err on the side of caution and understand your options.
The details can certainly get murky around this type of real estate, but the world is certainly interesting enough.
Below are a few special property types that may interest investors looking for something new.
#1 – Car Washes
Businesses that are easy to explain are easy to get financing for. It doesn’t take much to understand a car wash: dirty cars go in and come out as clean cars on the other side of the tunnel.
It’s a business with staying power, and car wash centers define special purpose real estate.
Picking up a car wash center as part of a commercial property portfolio certainly has its own appeal.
Takeaway question: how much business does the car wash you’re interested in produce, and what are some measures that could improve the business?
#2 – Hotels
Hotels get a lot of attention for the same reason that car washes do: they take very little explanation. Just as some people only invest in individual stocks that they can understand, this type of real estate appeals to people looking for something straightforward.
Yet, hotels do have their own complexities in terms of increasing business and feeding off of the existing business within the area.
Retail and hotel buildings are connected because if people are coming to shop, the chances are good that at least a few of them need a place to stay.
Takeaway question: what future developments within the area of your choice could lead to increased business for a hotel acquisition?
#3 – Gas stations
So, a gas station might not be high on your list as a real estate investor, but hey: everyone has to stop and get gas. In fact, more Americans are on the road than ever before.
The post-pandemic era has made it obvious that while Americans are still concerned about the pandemic, they want to get back to normal.
Road travel is as American as baseball, apple pie, and watching the Super Bowl. However, gas stations struggle with margins, regulations, maintenance, and crime issues in the parking lot.
Thieves will try to steal gas, and panhandling is also a problem around gas stations. Hiring security is an option, but this adds to the overall costs.
Takeaway question: can you handle the increased security concerns inherent to gas stations, where the commodity in question is highly desirable to criminals?
#4 – Swimming Pools
At first glance, it seems like swimming pools wouldn’t be commercial property. However, private swimming pools are a great revenue generator if they are built year-round.
Fitness facilities, in general, do attract plenty of attention, but swimming is an activity that can be enjoyed throughout a person’s entire life.
While swimming pools are a crowd-pleaser, they are a bit of work in terms of maintenance. The public pool can get away with things that the private pool cannot. Cleanliness, amenities, and regular maintenance will all have to be held at a high premium.
Takeaway question: can you handle the increased insurance liability inherent to swimming pools?
#5 – Cemeteries
This one isn’t for the faint of heart. After all, it would be buying land used to bury the dearly departed. But the truth is that there is a demand for new cemeteries as people continue to pass away.
If any part of commercial real estate is passive, having precious land set aside to bury the dead would have to be the most passive real estate around.
Cemeteries wouldn’t have to be managed directly by the investor if there is some discomfort around this type of service. Investors could partner with existing funeral homes in a way that benefits both parties.
The funeral home would delight in the extra land, and the investor wouldn’t have to worry about the upkeep or management.
Takeaway question: is there a space restriction in your current market that makes cemeteries a good idea for investment purposes?
More Considerations to Make for Special Purpose Real Estate
The business plan behind the special purpose commercial property is far more important than just the property itself.
After all, plenty of people put together enough money and resources to pick up ap property, but that doesn’t mean it will automatically become a success. You have to weigh all of the individual factors together.
Special commercial property is more than just the initial acquisition: it’s all of the other steps that have to happen in order to continue getting income out of the property. It’s the upkeep and maintenance and the personnel required to manage the property efficiently.
Building a portfolio of special purpose properties might not be high on your list, but it certainly does add a lot of spice and challenge to an existing commercial portfolio of buildings.
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