Investing is a game balancing risk and reward. If you are considering investment opportunities in commercial real estate, there are a multitude of resources to help gain the knowledge you’ll need. Despite the claims from investors on late-night TV with programs to “get rich quick,” investing in commercial real estate can be tricky. It takes knowledge, patience and skill.
It’s vital to do your research, consult professionals and reach out to other investors to truly determine if investing in commercial real estate is the right choice for you. Below we will share three ways to invest in commercial real estate.
3 Investment Methods to Consider in Commercial Real Estate
1. Real Estate Investment Trusts
Commonly referred to as REITs, real estate investment trusts are companies that own or finance revenue-producing real estate or related assets. Owning shares of a REIT is just like owning stock in a company, with one major advantage: While most publicly traded companies have to pay corporate income taxes on their earnings, a REIT’s earnings are not taxable as long as they distribute 90 percent of their earnings to their shareholders in the form of dividends. Owning shares in a REIT requires the least amount of personal time. You also have the benefit of diversification, because your risk will be spread out over many different properties and usually in many geographic areas. The downside is you have no control over the investment decisions within the REIT—you are just along for the ride.
2. Limited Partnerships
This investment vehicle is a great choice for an investor who wants a passive investment with the day-to-day decisions being handled by others. The general partner sources the investment, manages the property, obtains financing and makes leasing and other decisions. The limited partner provides equity capital and owns a percentage of the deal. They receive a percentage of the cash flow and also a percentage of the proceeds when the deal is sold. These partnerships are typically structured with two to ten investors, and there is usually a high degree of communication. Sometimes, the partnership is structured in a way to allow the limited partner to vote on major decisions.
A limited partnership is a good choice if you are willing to tolerate more risk but not looking to actively manage the investment yourself.
3. Direct Investment
If you are willing and able to spend more time managing your investments, you may want to consider just purchasing a commercial property yourself. You will usually need an equity contribution of 20 to 30 percent of the purchase price, depending on the property.
Investing in this manner requires the most time, risk tolerance and knowledge. You will need to understand cash flow, financing options and tax implications associated with owning commercial real estate. If you are a first-time investor, we would highly encourage you to do your homework and make sure you have the knowledge you need to minimize your risks as much as possible.
