Commercial real estate is a logical next step for small investors who want to move up from single-family homes. Or for anyone who wants the potential for big gains. Why? Commercial properties can give you more bang for your buck due to economies of scale.
Commercial real estate covers a diverse group of structure types and uses:
- Multi-family residential buildings
- Retail shopping centers
- Industrial complexes
- Mobile home parks
- Medical offices
- Self-storage facilities
- Hotels, motels and resorts
- Office buildings and complexes
The Unique Benefits of Commercial Real Estate Investing
Some of the unique and beneficial aspects of commercial real estate investing (over residential real estate investing) include:
Higher Income: The hallmark benefit of investing in commercial real estate is higher potential income. Most commercial properties bring in a higher rent per square foot of space. Plus you have multiple spaces generating rental income all under one roof. So, many of the maintenance and repair costs are “fix once and done” and spread across many leases. Higher rental income and lower maintenance costs lead to a more profitable investment.
Multiple Streams of Cash Flow: Commercial leases provide a relatively consistent and reliable stream of rental income. And the properties also generally provide multiple streams of income. You can charge for parking spaces separate from leased office space, for example. You can provide vending machines and a workout room in office buildings. You can install coin-operated washing machines in apartment buildings. Often, tenants will pay operating expenses, real estate taxes and property insurance in addition to monthly rent. This is known as a “triple net lease.” It is industry standard in certain types of commercial real estate.
Less Competition: Another advantage of commercial real estate is less competition. Investing in office buildings and shopping centers is an overwhelming endeavor for many investors. A bidding war for single-family homes in my area is not uncommon. This drives up the cost of doing business. But buying a commercial property is out of the comfort zone for most investors. So there’s much less competition.
Longer Leases Reduce Risk: Commercial buildings generally have longer tenant lease agreements than residential properties. Agreements are often for 24–36 months and notice to vacate is typically longer than 30 days. A more predictable cash flow and less vacancy reduce the risk for investors.
Risk Diversification: If you own an apartment building and you lose one of your 10 tenants, you lose only one-tenth of the income for that property. If you lose a tenant in a single-family house, you’ve lost your entire income.
Too Expensive and Time Consuming for the Average Investor
However, for the average small real estate investor, outright ownership of an office building or an apartment complex is not feasible. It requires a lot of initial capital (30% down payment typically), real estate know-how and hands-on personal involvement. It is not passive, and it’s not cheap! Plus, it involves a significant amount of risk. It’s much harder to recover from a mistake when you buy a commercial property than, say, 10 single-family homes.
Luckily, there are a few ways to take advantage of this potentially lucrative market for far less money and time.
Real Estate Crowdfunding Platforms
Thanks to online real estate crowdfunding platforms, you can buy property with less know-how, less work and less risk. Minimum required investments can be as low as $1,000. With these sites, you can purchase a “share” of a real estate mortgage or loan. But in order to take advantage of many of these opportunities, you must be an accredited investor.
Crowdfunding is not new, but the 2012 Jumpstart Our Business Startups (JOBS) Act kicked this industry into high gear here in the U.S. There are many platforms that offer commercial deals to choose from.
Here are some of the most popular real estate crowdfunding platforms with commercial opportunities, along with links to our reviews of each service:
Of course, on any of these crowdfunding platforms, you need to perform due diligence. However all the documents allowing you to do so are often at your fingertips on each website.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are a good solution for small investors who don’t want the hassle of finding, buying and managing properties themselves. Or doing all the due diligence of investing in a specific property on a crowdfunding site. And that’s not the only advantages they have. By law, REITs are required to pay out 90% of their earnings in the form of dividends. And you are not required to be an accredited investor.
REITs are an easy way to add real estate to diversify a portfolio. And they can provide passive income. The downside is that there’s less upside when investing in REITs, because someone else is doing the work for you. And you need to watch out for high fees. REITs can have upfront sales “loads” (fees) that are much higher than with mutual funds and exchange traded funds (ETFs).
REITs invest in all types of commercial real estate, from hotels to apartments to assisted living facilities, storage facilities, office buildings, industrial space, retail space and more. They are mandated by law to be widely held and to distribute 90% of their income as dividends to shareholders. And because investors can purchase shares on the stock market, REITs are a very liquid asset.
You can purchase shares of publicly traded REITs through any discount or full service broker. You can buy them as common stock, preferred stock or debt securities. You can also find REITs in ETFs.
You can also buy REIT shares through several online platforms:
- CrowdStreet’s Medalist Diversified REIT allows users to invest in retail, hospitality, industrial and multi-family properties in the Southeast.
- Fundrise’s eREITs allow investors to take advantage of a variety of commercial real estate properties for as low as $500.
- Realty Mogul’s MogulREIT products provide exposure to multi-family, office, industrial, retail, self-storage, medical and hospitality properties.
- Rich Uncles’s NNN REIT is invested in property leased by retail companies.
As you can see, there are plenty of ways for the savvy investor to take advantage of lucrative opportunities in commercial real estate without having to shell out huge sums of money. However, remember that no matter which method you use — be it through crowdfunding, REITs or rehabbing properties yourself — make sure to do your due diligence every step of the way.