Investors who are interested in commercial real estate, but unsure where to begin should first understand all of the different types of investment vehicles available to them. There are numerous options that allow commercial real estate investors to be active or passive and offer significant advantages over single family home rentals. Commercial real estate offers the ability to invest with other professionals, diversification, ability to limit losses and asset values tied to operating income. Let’s look at some of the ways to invest in commercial real estate.
Direct Investment
The most straightforward way to invest in commercial real estate is to buy or build a structure. Whether you’re a business owner who want to own their own building or an investor who wants to increase their income potential, commercial real estate is always an enticing opportunity. Direct investments are typically easier to evaluate since income statements, rental rates and other key metrics are easier to obtain and analyze.
Direct investment of commercial property provides significant tax benefits, ability to optimize occupancy and lease rates and personal preferences to capitalize on market trends and targeted locations. The downside to direct investments is that they require a high-degree of personal involvement to ensure the initial due diligence, property acquisition and ongoing management of the property is taken care of. In addition, they require a larger initial investment and the illiquidity of direct investments can force investors to hold a property longer than anticipated.
Tenants In Common (TIC)
Tenants in common is a type of real estate investment where a group of investors “pool” together to purchase a commercial real estate property, or properties. Within TICs, each investor owns a percentage interest which can be equal or proportional to their investment. This is a very direct way to invest in commercial real estate and each person obtains their own interest in the property which can be resold without having to sell the entire property.
While there can be some distinction between the two, crowdfunding is another derivation of TIC where a group of investors pool their money together in order to purchase a property. Crowdfunding offers lower investment minimums, there is typically a sponsor involved and shareholders are more passive.
TICs offer direct commercial real estate investment opportunities, however you are usually tied to just one property. In addition, there are some stringent requirements regarding IRS rules and the timing to liquidate can present some obstacles.
Real Estate Investment Trusts (REITs)
REITs are investment companies that buy real estate or ownership stakes in real estate companies. Effectively, they pool investor money to purchase commercial (and other) real estate assets. Due to their corporate structure, they are required to distribute 90 percent of their earnings to investors. The majority of REITs are publicly traded on a stock exchange and they can be comprised of actual commercial real estate, mortgages or a combination of the two. Some REITs focus on certain types of real estate such as office, retail, industrial or multi-family properties. Once investors purchase shares of REITs, the company then uses these funds to purchase assets and disburses tenant cash flow to the shareholders.
Publicly traded REITs offer good access to select asset classes within real estate and typically provide high-yielding dividend payments to investors. The downside of owning REITs is that there are potentially higher management fees and investors don’t receive the direct benefits of investing in real estate, such as depreciation.
There are many different ways, active and passive to invest in commercial real estate. Liquidity and risk exposure are the primary contributing factors to your overall returns. There are certainly pros and cons to each type of real estate investment, so carefully weigh each of these factors to determine the right one for you and your portfolio.
