Planning your investment strategy to the T takes time, money, and research. One of the most profitable avenues you can take is commercial real estate and have your investment focus on this one asset instead of various smaller ones. Your choice of investment avenue also determines the success of your commercial real estate investment portfolio.
5 Types of commercial real estate include:
- Office Buildings
- Retail Spaces
- Industrial Facilities
To get a full and concentrated exposure in commercial real estate, you'll need to understand these different types, get to know your concentrated investment options, and know your risks.
Understand The Types Of Commercial Real Estate
Commercial real estate (CRE) is a property dedicated to business purposes and producing an income. As the investor, you own the property and can run your business or lease it to tenants. Leasing is the common way to earn a steady passive income while benefiting from tax deductions – which is also why CRE is a top choice for many investors, along with its portfolio diversification advantage. The types of commercial real estate include:
1. Office Buildings
Office buildings include CBD buildings, commercially zoned houses, medical offices, and suburban offices. You typically require a large capital to purchase office buildings, but the rewards are worth it.
2. Retail Spaces
These buildings can vary from standalone units to entire massive structures, and include community retail centers, outparcels, power centers like Walmart, malls, and shopping centers.
3. Industrial Facilities
Industrial facilities include warehouses, heavy manufacturing, cold storage, and storage facilities. These units are highly profitable and can be quite large compared to other CRE.
Hospitality real estate include hotels and short-term rentals. These buildings serve the purpose of entertainment and accommodation, and in CRE, you'll own the entirety of the building.
Multifamily property usually houses multiple tenants, generating various income streams. Examples are duplexes, apartments, student housing, and senior living.
The type of commercial real estate you choose depends on your capital and investment goals. Some options require more input than others, and a comprehensive evaluation of your options and future ambitions is needed before you choose one.
Get To Know Concentrated Exposure Investment Options
Concentrated exposure is an approach to an investment whereby your strategy is focused on a specific asset, which means you're basing all your capital on one purchase instead of multiple. The excellent news is that commercial real estate is a safe bet for your future, for it is a highly profitable, low-risk investment compared to general stock markets.
You can earn a passive income and reap other benefits simply for renting out a commercial property, but there are multiple ways to invest in real estate. So, what are the different methods to invest in CRE?
ETFs (Exchange-Traded Funds)
An EFT is a pooled investment purchased on the stock exchange that gives you equity in a particular asset. CRE EFTs are a possibility that allows you to have a stake in multiple commercial properties instead of one. This lessens your investment risk by putting your eggs in many baskets, but you can explore the stock options only if you want to concentrate on one concrete investment.
Some examples include:
- iShares U.S. Real Estate ETF for office buildings.
- Vanguard Real Estate Index Fund ETF for retail establishments.
- Industrial Select Sector SPDR Fund (XLI) for industrial CRE.
- Invesco Dynamic Leisure and Entertainment ETF for hotels.
Real Estate Investment Trust (REIT)
If you're a fan of the EFT idea, REITs are a similar option where you invest in a company that owns, manages, or funds CRE that generates an income.
Some REIT options include:
- Kilroy Realty Corporation (KRC) for the office sector.
- Regency Centers Corporation (REG) for retail.
- Prologis Inc. (PLD) for the industrial sector.
- Pebblebrook Hotel Trust (PEB) for hospitality CRE.
CRE stocks give you ownership in a company that owns actual real estate. You can avoid shopping on the stock market and invest in a local company of your choice instead.
Some examples are:
- Boston Properties (BXP) for office buildings.
- Simon Property Group Inc. (SPG) for retail.
- Duke Realty Corp. (DRE) for industrial.
- Marriott International Inc. (MAR) for hospitality.
Crowdfunding is rising in popularity in the CRE world, which is where multiple investors pool their money together to invest in commercial property and receive dividends like stocks. You don't need to be credited as an investor to crowdfunding property. Most crowdfunding happens on Fintech platforms.
Fintech stands for Financial Technology which is where technology delivers financial services. In the CRE world, Fintech is available as an investment platform for CRE that connects potential investors with crowdfunding and online CRE marketplaces.
Some Fintech platforms for CRE investors include:
- Fundrise and RealtyMogul for crowdfunding for office properties.
- EquityMultiple for industrial CRE.
- RealtyShares for hotels.
You can invest in your own real estate by purchasing CRE and managing it on your terms, whereby you are the sole owner and receive all profits. You can employ a commercial property manager to handle your property and deal with the nitty gritty.
Know Your Risks And Considerations
Each investment option has advantages and disadvantages to weigh before you can get your ducks lined in a row. You can either invest directly into a physical property or indirectly through EFTs, Crowdfunding, REITs, and stocks – each should take careful evaluation.
Some tips before investing include:
- Research the geographical area in which you're investing to determine ROI.
- Evaluate risk vs. reward.
- Predetermine your desired level of control on the investment and who controls the management of your real estate.
- Speak to a adept financial advisor about your CRE investment options.
- Investigate your desired investment option's history as much as possible.
- Compare different companies before choosing one to invest in.
- Weigh your loan-to-debt ratio if you plan on taking out a loan.
Concentrating your investment on commercial real estate is a promising option for a worthwhile return. There are multiple CRE options and avenues you can take on the type of investment. Be careful and meticulous in your planning. May your investment flourish!