Seeking returns that meet individual targets without introducing risk and volatility can be challenging in today’s market. One way this can be done successfully is by investing in commercial real estate, which can often offer more financial rewards than residential properties while usually remaining more stable over time. Commercial properties offer more financial rewards compared to residential properties and are usually one of the following:
- Office buildings
- Warehouses
- Retail buildings
- Apartment buildings
- Industrial buildings
- Mixed-use buildings
Some reasons why you should consider a commercial real estate investment are higher income potential, increased objective price negotiations, and flexible lease terms among many other benefits.
For most investors, the challenge with getting involved in the commercial space is often where to get started. Well, there are four solid ways that we will take you through that can help you can launch your commercial real estate investment venture.
Invest with a Real Estate Investment Trust (REIT)
A Real Estate Investment Trust, also called REIT, is a company that owns, finances, and operates profitable real estate. The pooled capital of the REIT is from different investors which makes it possible for you as an investor to earn your dividends.
You’ll earn these dividends without having to buy, finance, or manage the property as an individual.
REITs make it possible for everyday folks to buy shares in a commercial real estate portfolio, which was previously reserved strictly for the wealthy. Properties that REITs deal with may include hotels, apartment complexes, energy pipelines, data centers, self-storage, warehouses, infrastructure such as cell towers and much more.
Some REITs are traded on major securities exchanges where investors can buy and sell them like stocks. The trading is done at a substantial volume which makes them very liquid. REIT dividends are normally on the higher side, as compared to average stock on the S&P 500.
For a REIT to qualify as one, it should have a straightforward operating model. There are specific provisions by the Internal Revenue Code (IRC) that should be adhered to and some of them are:
- Be the primary owner of real estate for the long term
- Distribute income to shareholders
- Be managed by a board of trustees or directors
- Should be a taxable entity as a corporation
- Invest at least 75% of its total assets in real estate, US Treasuries, or cash
- Minimum payout of 90% of taxable income annually as shareholder dividends
Invest with a Syndication
When it comes to real estate investing, a syndicate refers to a group of investors who have pooled their capital to purchase real estate property. Real estate syndications allow investors to own property without incurring the responsibilities of a landlord.
There are two parties in a real estate syndication. There are the syndicators and the passive investors. The syndicators are the general partners and they ensure everything is handled. They find the investment property and even work and execute a business plan so that passive investors get strong returns. Passive investors on the other hand provide a portion of the capital needed to purchase the investment property. They get ownership shares.
In our experience, you must be accredited to be able to invest in a real estate syndicate. What are the figures? Well, an accredited investor should have a minimum, annual income of $200,000 and individual net worth of over $1 million. This should exclude their primary residence. If they have a spouse then the annual income should not be less than $300,000 and a joint net worth of over $1 million.
Some of the potential benefits of syndicated real estate are:
- Tax benefits are passed on to contributing investors
- Passive income
- Higher value investment opportunities
- Owning property with zero landlord duties
- Capital can be spread across several syndicated real estate investments. You do not just work with a single property
Partner with a private equity firm
Most of our clients are busy doing life and it’s in your best interest to work with professionals. This allows you to focus on other important things and partnering with a private equity firm helps do just that. A private equity firm is comprised of pooled public and private investments that are professionally managed. When we invest in private equity real estate, it means that we acquire, finance, and own property or properties through an investment fund. Property ownership can be directly or indirectly.
To be clear, private equity real estate is not an equity real estate investment trust and neither is it an equity REIT.
Private equity real estate funds permit institutions such as pension funds and high-net individuals to invest in real estate assets via equity and debt holdings. With private equity real estate, there is a diversified approach when it comes to property ownership.
What do we stand to gain when we partner with private equity real estate?
Our wealth will be protected in three ways:
- We get to own physical assets that produce revenue every month. This is responsible for the lower price volatility and stabilizes values.
- Tax efficiency
- Portfolio diversification
Rental arbitrage/subleasing
At CLT Buyers, nothing gives us greater joy than knowing that no one is locked out of real estate investment. There is a niche for every person. Did you know that rental arbitrage makes it easier for you to start earning passive income? A rental unit can now be a great way to dip your feet into the world of commercial real estate.
Rental arbitrage allows a renter to sublet their rented space for profit. If you are always on the road or just got a transfer, there is no need to break your tenant lease, you can instead sublet the space. Airbnb has made it possible for rental homes to offer homely experiences away from home. You can charge a reasonable amount that covers your rent while keeping a net profit.
Now we know you love the idea but there is one question that seems to burst the bubble. Yes, it is very legal to rent someone else’s property and list it on Airbnb. Now the other thing is that yes, it is legal but the landlord has to agree to it. Check the clauses in your leasing contract carefully before approaching your landlord to discuss the possibilities.
While your landlord will still be making money from your lease, they may want to protect their property from damage by an unvetted third party.
At CLTBuyers, we help individuals know their commercial real estate options. You don’t have to invest in a property quickly but you need to start with proper information. Sign up for our newsletter for regular updates. We are also happy to discuss commercial real estate investing with you so join the Thursday Office Hours Group to make connections and get free tips