Are you curious about investing in commercial real estate? This article will explain two ways you can get started.
Brick and Mortar Investing
This method is the traditional way to invest in commercial property – to purchase a property that will generate income for you, whether you conduct business in it, rent or lease it out to others, or both. What sort of properties qualify as commercial real estate? These, among others:
- Strip malls
- Movie theaters
- Convenience stores
- Storage facilities
- Machine shops
- Car dealerships
- Grocery stores
- Mobile home parks
- Office buildings
- Multi-tenant residential housing
- Mixed-use buildings
- Parking garages
- Parking lots
Any property that you can purchase and lease or rent to others can be considered commercial property because you derive an income stream from it.
Although collecting rent is considered “passive income,” in truth, you will be active in selecting and maintaining the property as well as vetting tenants.
The Pros of Brick and Mortar Investing
- You control what sort of property you purchase
- You control who becomes your tenant
- You set the rent and lease terms within the laws in your state
- You take write-offs for all expenses, such as insurances, maintenance, renovation, etc
- You benefit from the property’s depreciation
The Cons of Brick and Mortar Investing
- You must obtain financing
- You must carry premises liability insurance (unless the tenant must carry insurance per the lease terms)
- You must maintain the property (unless the tenant must maintain the property per the lease terms)
- You must respond to tenant’s complaints
- You alone take the loss if a tenant does not pay
- You alone take the loss if the property is not fully occupied
- You alone take the loss if the property becomes damaged or uninhabitable
- You own perhaps one or a few commercial properties, no diversification, high risk
For most investors, purchasing a commercial property on their own is out-of-reach either because they cannot obtain the necessary financing or because they do not have the capital to weather the ups and downs of leasing. Fortunately, there is a way for individual investors of even modest means to get into the commercial property market.
Investing in Commercial Property Online
Until recently, investing in commercial real estate online was available only to accredited (high-worth) investors. Today, multiple online platforms allow users to pool their individual investments to purchase or finance a commercial property, some with as little as $10. Rather than invest in individual properties, investors can purchase shares in Real Estate Investment Trusts.
Real Estate Investment Trusts (REITs)
A REIT is a company that owns, operates, manages, or finances commercial property. In order to qualify as a REIT, a company must
- Pay at least 90% of its taxable income to shareholders.
- Invest at least 75% of its assets in real estate investments.
- Have at least 100 shareholders
If a company meets these criteria, it is treated as a pass-through entity for income tax purposes, and profits are taxed at the individual shareholder level only.
There are Publicly-traded REITs that trade on major stock exchanges and can be readily bought and sold on the open market by anyone; Public non-listed REITs that are open to any qualified investor but don’t trade on major stock exchanges; Private REITs that are not open to public investment and do not trade on the stock exchange.
Publicly traded REITs are available for investment through online platforms. One platform, Fundrise, calls its REITs eREITS, which are not publicly traded and only available to Fundrise members.
The Pros of Investing in Commercial Real Property Online
- Your minimum investment is quite low
- Most platforms are open to all investors, not just accredited investors
- Most platforms are easy to use
- Some platforms offer IRA accounts
- It has built-in diversification
- No sales commissions
The Cons of Investing in Commercial Real Property Online
- Real estate is a highly illiquid investment – don’t invest money you will need soon because there may be no buyer for what you are selling
- The fee structure can be complex and not easily understandable for the layperson
- Some choices require an investor’s due diligence to assess the risk of loss
As with any type of investment, you will want to research the platforms you are interested in. Take a look at members’ reviews and historic returns. Then, read the fine print so that you know what fees and other charges you may incur.
About the Author
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She frequently works with FNRP, which is in the business of investing in commercial real estate.