Commercial Real Estate Investing: 4 Ways to Get Started | Woodbridge
01 16 2017
Interest rates are low. Commercial property values are on the rise. And there's strong demand within the commercial real estate market. Everyone is buzzing about commercial real estate investing, but how do you get started?
Before we go there, let's talk about why there is so much momentum in this industry.
Commercial real estate volume reached record breaking totals last year.And today, there are not enough loans to keep up with the demand - creating a game changing opportunity for private lenders. That started when federal regulators capped the number of loans that were issuable in 2006, and again in 2015. On the heels of the most recent federally imposed restriction is an ongoing surge in the market.
Non-bank loan maturities peaked in 2016 and a repeat performance is projected in 2017. This year alone, maturities are 51 percent higher than they were last year, which means borrowers will be forced to refinance and require alternative loan solutions.
That's where you come in. Here are four ways to get started in the commercial real estate market. And since the best investor is an informed investor, we've also featured accompanying books that discuss the process.
Get Started in Commercial Real Estate Investing:
1) Commercial Real Estate Investment Trusts (REITs): Owning a share of a REIT is just like owning stock in a company, but you're investing in a pool of properties. REITs provide the benefit of diversification and enable investors to dabble in a wide array of options. After all, it would require tremendous capital and skill to independently purchase a shopping mall, grocery store, and industrial park. REIT firms utilize grouped investor funding to purchase buildings or land, and then allocate at least 90 percent of rental incomes to shareholders through dividends. The goal is to earn a profit on rising real estate values over time.
REITs are an effective vehicle for inexperienced investors because they eliminate the commitment of purchasing property. And novice shareholders can advantageously rely on seasoned professionals for high-level transactions, vetting commercial tenants, and managing the taxes, government regulations, and other financial aspects. The downside is that you do not have autonomy over the investment strategy; it's out of your hands.
Recommended Read: The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts by Stephanie Krewson-Kelly and R. Brad Thomas This "REIT Bible" provides a start to finish map for individual investors, financial planners, analysts, and everybody else. Kelly and Thomas provide prospective participants with the information that they need to invest wisely and manage risk effectively. And they accomplish that through straightforward language and relatable examples. 2) Real Estate Crowdfunding: Chances are you've already had some level of exposure to crowdfunding. Maybe a friend or neighbor asked you to donate to their GoFundMe Page or perhaps you watched the next big idea unveil on Shark Tank. Real estate crowdfunding has shaken up the commercial real estate market and opened the floodgates. Before this nouveau trend entered the picture, you needed upwards of six figures and the perks of exclusive contacts to participate.
But recent legislative and regulatory action has disrupted commercial lending. For the first time, investors with modest amounts of capital have access through online channels. If you have as little as $1,000, the wherewithal, and entrenched market knowledge, this could be your ticket. As you know, great opportunity is not insulated from risk. Real estate crowdfunding should not be entered into blindly. It is crucial that you vet your investment thoroughly, and actively communicate with the fund manager.
Recommended Read: Real Estate Crowdfunding Explained by Salvador Briggman and Krystine Therriault
Therriault and Briggman make real estate crowdfunding approachable in this clear cut "how to." The authors provide critical insight into successfully recruiting and lending capital online. Briggman, a leading expert in this space, also regularly opines on crowdfunding on his popular blog CrowdCrux.com.
3) Real Estate Limited Partnership (RELP): If you have significant capital, but are lacking time or experience, this could be your sweet spot. RELPs were created for those who want to tap into the benefits of commercial real estate, but prefer a hands off approach. The general partner - typically an experienced property manager or real estate development firm - sources the investment and manages it fully. The limited partner - that's you - provides equity capital and owns a percentage of the deal.
You receive some of the cash flow and the proceeds when and if the property is sold. You also have limited liability, so if the RELP faces losses, you're only liable for your capital investment. RELPs can be a timesaver, but it is critical that you know, trust, and understand the investment and the general partner.
Recommended Read: Commercial Real Estate for Beginners: The Basics of Commercial Real Estate Investing by Peter Harris
A former engineer, Harris used commercial real estate to secure his financial future. In his book, he helps you decide if commercial real estate is the right fit for you. He provides guiding principles to navigate the industry and explains potential pitfalls to avoid when investing.
4) Direct Investment (DI): Are you prepared to call the shots? If you are a savvy and informed investor with significant capital, purchasing a commercial property is worth considering. Owning office space, a mall, or a retail super center delivers a steady stream of rental income, while simultaneously diversifying your portfolio. A direct investment will typically require an equity contribution of 20 to 30 percent of the purchase price, and this of course, is contingent upon the specific property. Ask yourself. Do you truly have the capacity to make financial planning decisions, navigate the tax repercussions, and absorb the risk? If the answer is yes, consider a direct investment. A DI has the potential to provide significant returns.
Recommended Read: The Due Diligence Handbook for Commercial Real Estate: A Proven System to Save Time, Money, Headaches and Create Value When Buying Commercial Real Estate by Brian Hennessey
Hennessey has spent 31 years helping investors buy and sell properties. His "go to" reference book provides a roadmap that real estate professionals around the world have used to conduct due diligence on potential opportunities. It removes the "guess work" from the process, so that readers can make informed decisions.
Make Sure Your Returns Match Your RiskWhether you're thinking about a REIT, direct investment, or anything in between, it is critical that your desire for returns matches your profile for risk. Do your homework, ask questions, and don't sign up for anything that you don't understand. Any successful real estate investment requires having the right information, so you can make the right decisions at the right time.
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