Investing in commercial real estate can bring huge profits to investors. This sector has a lot of appeal due to its high returns on investment and the possibility of taking advantage of tax advantages.
Due to consistent passive income and potential for growth, 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 start investing in commercial real estate: what is commercial real estate?
Investing in commercial real estate (CRE) involves investing in the purchase of commercial real estate. However, commercial properties include many different types of structures and uses. This includes…
- Multi-family apartment buildings
- Industrial complexes
- Office buildings
- Hotels, motels and resorts
- Medical practices
- Shopping centers
- Storage facilities
This allows you to invest in different types of properties that match your interests. However, investing in commercial real estate is usually a long-term game.
Commercial real estate is an illiquid asset. As a result, your investment is locked in for a long term period. On the other hand, illiquid investments often yield better returns over time. Additionally, they are not subject to daily price volatility like other securities. So, find out if this field matches your preferences and financial means. Commercial real estate is not the best investment if you are looking for more investment cash.
Real estate can be a rewarding investment. However, beginners should be aware of the risks involved in real estate ownership. You can read more about the pros and cons of investing in real estate here.
Now let’s see 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, there are different methods to invest in real estate. This includes crowdfunding, real estate investment trusts (REITs), and direct investments in commercial real estate. I will detail these three methods below.
Real estate crowdfunding platforms
Commercial real estate investing is increasingly accessible to investors with varying levels of experience. New technologies have helped level the playing field…
Apps like Fundrise, crowd street, Realty Mogul and other platforms provide traditional investors with access to commercial real estate investment properties. Previously, these types of CRE properties were generally reserved exclusively for 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 signing up. Crowdfunding investors should consider the track record of the company they choose to invest with. Additionally, crowdfunding can come with risks, including an increased risk of failure, fraud, and security threats.
These risks may seem serious. But this is no different from the risks associated with investing in other securities. Plus, there’s never been more information to help you 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 help investors get started in the commercial real estate industry without having to expend significant capital.
You can invest in portfolios of real estate assets through REITs as easily as investing in stocks. Additionally, you can broaden your portfolio and minimize risk by investing in a mutual fund focused on commercial real estate or an exchange-traded fund (ETF). You can read more about the advantages of ETFs over mutual funds here.
If you’re still confused, Investment U’s Leanna Kelly helps simplify REITs further…
A real estate investment trust (REIT) is a type of investment vehicle that leverages profits from real estate to return value to shareholders. REITs generally own and/or operate income-generating properties. Think of the REIT as an owner. She owns the building and collects the rents; however, it is also responsible for upkeep and maintenance.
You can read more about investing in commercial real estate through REITs in this article which further explains investing in REITs and what to expect.
Invest in a unique commercial property
Investing in a single commercial property requires more capital than the other two methods. However, this is the only method on this list that allows investors to invest directly in commercial real estate. It also requires more research and risk tolerance.
Over 90% of commercial real estate investors start with single-family rentals and use it as a way to educate themselves, accumulate wealth, and progress to investing in other properties.
However, this is not a guarantee. Before investing in commercial real estate through a single property, learn the pros and cons of where and what you are investing in. Identify unique features of the property and location that could be beneficial or problematic.
Also, consider investing in residential real estate. It’s a different game than investing in commercial real estate. However, the foundation you build in residential real estate can prepare you for investing in commercial real estate investments.
The basics of investing in commercial real estate
Commercial real estate investing can seem daunting at first, but you need to understand that the basic skills required are the same as for residential real estate investing.
Before opening your wallet, be aware of the risks and do your research thoroughly. Investing in commercial real estate has several advantages. However, like any investment, it is not without pitfalls.
Whether you are a first-time CRE investor or a seasoned professional, doing your due diligence and following sound investment principles should be your top priorities.
Aimee Bohn is a graduate of the College of Business and Economics at Towson University. His background in marketing research helps him uncover interesting trends. For the past year, his main focus has been researching IPOs and other trends.