How to Invest in Commercial Real Estate Without Buying Property
Today’s real estate market is booming, to put it mildly. It’s a great time to build up a portfolio of properties and ramp up your wealth factor. Many people are interested in becoming a real estate investor, but may not necessarily have the funds to support that kind of financial leap. Despite that school of thought, there are actually a number of alternate routes you can take to help make your dream a reality.
Believe it or not, it is possible to become a successful real estate investor without buying actual properties through a direct transaction. Read on and see how to invest in commercial real estate via alternative investment strategies.
Avenues such as commercial real estate crowdfunding and real estate investment trusts are two viable options for investing in commercial real estate without purchasing brick-and-mortar properties. Sound risky? Weigh the differences between buying properties and alternate vehicles investing to make the most informed decision for yourself. Let’s explore these paths to profitability.
Option 1: Real Estate Investment Trusts
An REIT, or Real Estate Investment Trust, is a type of company that owns, operates, or finances income-generating real estate. As part of an REIT, you buy shares of companies that own real estate, instead of buying the properties yourself. In this situation, you’re adding the middle man instead of cutting him out, but to your monetary benefit. Sounds like a great plan, right? So how does it really work? Here’s the deal—a REIT leases properties and collects rent from the tenants. In turn, the REIT pays its shareholders from those profits via dividends. To protect your interests, REITs are required by law to disperse at least 90% of their taxable income to their shareholders. This regulation can increase your feeling of security with taking part in an REIT. Of course, you would then be responsible for paying taxes on the payments you receive from the REIT.
If you like the idea of being part of a REIT, but feel like it may be out of your league, fear not. REITs are accessible because most of them are publicly traded, although some are not traded on national stock exchanges. All you need to be able to take part is a brokerage account and a sum of money to begin investing by purchasing shares of a REIT. If you feel like this is a smart route for you to take, get started by doing your research on REITs. You can search for them by name or sector.
Option 2: Real Estate Crowdfunding
Crowdfunding has taken off at an astounding rate over the past decade. Due to social media, you can reach supporters virtually all across the globe in an instant. An innovative and unprecedented way to rally large masses of people to a particular cause or opportunity, crowdfunding can also help you to enhance your commercial real estate investment prowess.
A few crowdfunding sites that can help your jumpstart your plans are Small Change, Fundrise, and Crowdstreet. You’ve probably visited crowdfunding sites before to help support various causes, but real estate crowdfunding sites are a bit different—coming into play through the JOBS Act of 2012. These types of sites allow investors to choose which real estate projects to fund to help them build up their property portfolios.
How are real estate crowdfunding sites similar to REITs? For starters, they give you the option to choose between spending your hard-earned dollars investing in either commercial or residential properties. You also receive cash flow payments with both. However, there is a key difference—REITs afford you the chance to invest in a whole portfolio of commercial or residential listings. Crowdfunding networks provide the option for investing in single properties.
What are the risks?
While it may appear that utilizing real estate crowdfunding sites and/or REITs can be very lucrative avenues to embark upon (and they most assuredly can be), that doesn’t mean there aren’t potential risks. As with any major financial endeavor, you must explore the potential outcomes of each.
Capital and Leverage—Obviously, you need more capital to directly purchase property. The typical amount of funds needed to do so is 20% of the property’s value. Depending on the total price of the property, this number can quickly rise exponentially.
On the other side, REITs often have shares available to purchase at the low price of $10 or less per share. This would give you the opportunity to disperse your money across several properties, instead of one. On real estate crowdfunding sites, you can start investing with as little as $500.
Another point to consider is that direct real estate investments allow you to borrow funds to cover more of the purchase initially. You can usually borrow up to 80% of the property’s value. Once the financing, and thus the property, are acquired, you can let the asset appreciate in value over time.
Time and Effort vs. Control— When it comes to effort and day-to-day management of owning actual physical properties, like collecting rent and interacting with tenants, participants in REITs and crowdfunding real estate investment platforms have it easy. Much of the managerial responsibilities are doled out to other service providers. On the other hand, less responsibility often also means less control over the situation, which isn’t always a good thing.
Dividends and Predictability—The money you’re going to receive from indirect investment opportunities is not going to be the same as the profit you’ll reap from owning properties directly. If predictability is of more importance to you, REITs and crowdfunding sites can be more dependable for a steady return on your investment.
The consensus? In order to make the best choice, you’ll need to weigh the advantages and disadvantages of each option carefully. Examine your finances, check out the various crowdfunding platforms, and explore the REITs available for you to research. Conducting a bit of research before committing to any one venue will assure comfortability and confidence in your decision.