Investing in Commercial Real Estate: A Comprehensive How-To Guide
Investing in commercial real estate can reap huge rewards for investors. This sector has a lot of appeal due to its high investment returns and the ability to take advantage of tax benefits.
Due to consistent passive income and growth potential, investing in commercial real estate is becoming an increasingly popular investment. However, knowing how to invest in commercial real estate is crucial to maximizing your investment.
Commercial real estate covers a diverse group of properties. So, what exactly is commercial real estate?
How to Begin Investing in Commercial Real Estate: What is Commercial Real Estate?
Commercial real estate (CRE) investing involves putting money toward buying commercial real estate property. However, commercial properties include a lot of different structure types and uses. This includes…
- Multi-family Apartment Buildings
- Industrial Complexes
- Office Buildings
- Hotels, Motels and Resorts
- Medical Offices
- Shopping Centers
- Storage Facilities
This allows you to invest in various types of properties that suit your interests. However, investing in commercial real estate is generally a long-term game.
Commercial real estate is an illiquid asset. As a result, your investment is tied up for a long-term period. On the other hand, illiquid investments often yield better returns over time. Moreover, they aren’t subject to daily price volatility like other securities. So, find out if this field suits your preferences and financial means. Commercial real estate is not the best investment if you’re looking for more investment liquidity.
Real estate can be a rewarding investment. However, beginners should know the risks involved with real estate property. You can learn more about the pros and cons of investing in real estate here.
Now, let’s get into how you can start investing in commercial real estate…
Investing in Commercial Real Estate: Three Methods
If you don’t have the capital to buy a commercial property outright, there are a few different methods for investing in real estate. This includes crowdfunding, real estate investment trusts (REITs) and direct investment in commercial property. I’ll go into detail on these three methods below.
Real Estate Crowdfunding Platforms
Commercial real estate investing is becoming more accessible to investors with varying levels of experience. New technologies have helped level the playing field…
Applications such as Fundrise, CrowdStreet, RealtyMogul and other platforms offer traditional investors access to commercial real estate investment properties. Before, these kinds of CRE properties were usually reserved exclusively in the private market.
In addition, these platforms provide tools and resources for learning, as well as access to a network of professionals. Be sure to do some research before joining. Crowdfunding investors should consider the track record of the firm they choose to invest with. Moreover, crowdfunding can carry risks including a greater risk of failure, fraud and security threats.
These risks might sound severe. But this is no different from risks with investing in other securities. Furthermore, there’s never been more information out there to make it easier to learn how to avoid mistakes and play your cards right. This is where your research can make all the difference.
Use a Real Estate Investment Trust (REIT)
Real estate investment trusts are similar to a mutual fund. A REIT is a company that owns, operates or finances income-producing real estate. Most REITs trade on major stock exchanges and offer several benefits to investors. Moreover, they helps investors get into the commercial real estate industry without having to spend significant capital.
You can invest in portfolios of real estate assets through REITs as easily as investing in stocks. In addition, you can broaden your portfolio and minimize risk by investing through a commercial real estate focused mutual fund or exchange traded fund (ETF). You can learn more about the advantages of ETFs over mutual funds here.
If you’re still confused, Investment U’s Leanna Kelly helps further simplify REITs…
A real estate investment trust (REIT) is a type of investment vehicle that leverages the profits of real property holdings to return value to shareholders. REITs typically own and/or operate revenue-generating properties. Think of the REIT like a landlord. It owns the building and collects rent; however, it’s also responsible for upkeep and maintenance.
You can learn more about investing in commercial real estate through REITs in this article that further explains investing in REITs and what to expect.
Invest in a Single Commercial Property
Investing in a single commercial property requires more capital than the other two methods. However, it’s the only method in this list that allows investors to directly invest in commercial real estate. It also requires more research and risk tolerance.
Single-family rentals are a common avenue for professionals in the commercial property business to get their foot in the door. This includes Paul Getty, president and CEO at First Guardian Group, who said…
Well over 90% of commercial real estate investors start with single-family rentals and use it as a way to get educated, accumulate wealth and work their way up to investing in other properties.
However, this isn’t a guarantee. Before investing in commercial real estate through a single property, learn the pros and cons of where and what you’re investing in. Identify unique characteristics of the property and the location that could be beneficial or problematic.
Moreover, consider investing in residential real estate. It’s a different game than investing in commercial property. However, the foundation you build in residential real estate can prepare you for investing in commercial property investments.
The Bottom Line on Investing in Commercial Real Estate
Commercial real estate investing may seem intimidating at first, but you should understand that the core skills and competencies required are the same as residential property investing.
Before opening your wallet, be aware of the risks and do thorough research. Investing in commercial real estate has several advantages. However, like any investment, it’s not without its pitfalls.
Whether you’re a first-time CRE investor or an experienced professional, doing your due diligence and following sound investing principles should be your top priorities.
About Aimee Bohn
Aimee Bohn graduated from the College of Business and Economics at Towson University. Her background in marketing research helps her uncover valuable trends. Over the past year, her primary focus has been researching IPOs and other trends.