Investing in CRE and How it Works

November 5, 2020

Commercial Real Estate has potential to be a lucrative investment. Before reaching this stage of income producing real estate, you start with countless risks. In general, equity investments are considered riskier for investors than debt funding. However, you can be strategic about risk by understanding how investing in CRE works and doing your own due diligence. So how does investing in commercial real estate work? Let’s dive in.

Defining Commercial Real Estate

Commercial real estate is a general term for several types of commercial investments. As a rule of thumb, commercial real estate properties are used for business purposes.

Commercial properties may refer to:

  • Multi-family buildings (apartments, condos and mixed-use buildings)
  • Retail buildings (strip malls, banks, restaurants)
  • Office (single tenant or skyscraper)
  • Warehouses & industrial buildings (manufacturing and storage facilities)

There are many paths you can take to start investing in Commercial Real Estate. For many, the objective of investing in commercial real estate is for building future wealth and security while others can utilize it for tax benefits and investment portfolio diversification.

Land Development

Risk/Reward: Very High | Skill Level: Very High | Capital Required: Intensive

This method of investing in commercial real estate requires a deep understanding of all the steps involved in construction, planning, financing, and execution. Real estate development can hold the highest risk for the potential of a high reward. An example of some land development projects can include building shopping centers, high rise apartments, hospitals, and sports facilities. Some of these projects require years of work. Development projects require a lot of capital for the time, people and materials it takes for project completion. The longer a property is in development, the higher the carrying costs will be. Most real estate developers finance projects with investors, personal or bank loans. Developers are often shooting for a 20%+ rate of return to take on the risks involved.

Acquire commercial properties

Risk/Reward: High | Skill Level: High | Capital Required: Intensive

Buying a single family home is significantly different than acquiring a commercial property. In deciding to purchase a property, a potential owner must consider the risks as well as the potential benefits. Most of the time, individuals cannot finance the purchase of a commercial real estate property on their own. Before you find a commercial property you wish to buy, it’s wise to line up your financing options in advance by applying for loans and pulling in multiple investors. This risk of owning commercial property is magnified if you try to jump into buying a commercial property without a solid plan in place. Investors must complete due diligence, to ensure the property aligns with your investment strategy. Some investors might look for high occupancies and rising rents generally deliver what most investors seek for the potential of a steady cash flow.

Private Equity/LP

Risk/Reward: Moderate | Skill Level: Low/Mid | Capital Required: Moderate

Private equity real estate funds are typically reserved for high net worth individuals. Since there is little regulation over private equity real estate funds, opportunities are traditionally limited to “accredited investors.” This means that the investors must have a net worth of $1million with a significant amount of cash to deploy. Private equity funds are managed by a professional group of portfolio managers and typically charge a 1-2% asset under management fee.

Real Estate Investment Trusts

Risk/Reward: Moderate | Skill Level: Low/Mid | Capital Required: Light

Reit stands for Real Estate Investment Trust. A reit is a company or trust that manages, owns, or operates income producing real estate. REITs can be publicly traded or non-traded. Reits are also known as real estate stock which allow them to be available to many investors and are more liquid when traded in a public market. Qualifying Reits are not taxed at the corporate level so they are sheltered from corporate tax. Because of this, avoiding double taxation can potentially pass through more money to investors. To qualify as a REIT, a company is required to distribute dividends to shareholders each year in an amount at least equal to 90% of the REIT taxable income.

Online Investing

Risk/Reward: Moderate | Skill Level: Low/Mid | Capital Required: Light

This newer type of real estate investing is similar to pooled fund investing for the 21st century. One that aims to perform like traditional diversified investment portfolios with long-term growth. With new advances in technology through the internet or an app, this is an easier way to get into institutional grade real estate investments. You set up an account with an investment platform, fund your account, and choose your investments through the platform. Investors receive updates on their portfolios performance via a dashboard or an email.

There are a couple of different flavors of online real estate investment platforms today:

  • Crowdfunding — accredited investors can pick properties to invest in.
  • eREIT — money is pooled together and invested in multiple deals, generally without an accreditation requirement.
  • Auto-invest/robo-advisor — you pick an investment goal and the platform will decide how and when to deploy your cash.

Real estate investing has fueled growth in some of the world's largest investment portfolios for decades, and now you can tap into that as well. The bottom line to investing in real estate is to have a plan and understand the risk/rewards each investment uniquely holds. How will you get in?