Most financial advisors will tell you that you need a diverse portfolio, which includes real estate, to weather the ups and downs of the stock market. However, buying, owning and managing property is not how most investors achieve this goal.
Instead, savvy investors use a passive strategy to invest in a type of real estate investment fund called a Real Estate Investment Trust (REIT). A Commercial REIT is a specialized investment company set up to own, operate and finance commercial real estate.
This type of REIT pools money from many investors. It invests in properties primarily used for business, such as hotels, retail stores, offices, healthcare facilities, self-storage, industrial buildings and warehouses. Through the distribution of rent payments from property leases, the REIT generates a steady and reliable income stream for investors.
While many REITs specialize in one form of commercial real estate, you can achieve broader diversification by purchasing shares of REIT mutual funds and ETFs instead of investing in individual REITs.
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The Short Version
- Commercial REITs are a type of real estate investment fund that allow investors to invest in commercial real estate that may otherwise have been too expensive.
- There are several pros (such as steady dividends) and cons (such as you may not make money from the appreciation) to this type of investment.
- If you want to invest in commercial real estate, but don't want to buy a property directly, a commercial REIT may provide faster diversification with lower capital requirements.
How REITs Work
REITs might hold office, retail, industrial, and multi-family (residential complexes such as apartment buildings) properties. Investors purchase and hold commercial investment properties for two primary purposes: to earn a return through rental income and to make money from property appreciation over the time the asset is held.
Congress created REITs in 1960. These special investment vehicles made commercial real estate more accessible to everyday investors. Before that, investing in commercial real estate was limited to institutions and wealthy individuals because so much capital was needed to own and manage these properties.
As a particular class of regulated securities, REITs must meet certain IRS standards that help mitigate investor risk. Below are some of the requirements:
- Return a minimum of 90% of taxable income in the form of shareholder dividends each year
- Receive at least 75% of gross income from real estate activities within the REIT, such as rent collection and interest payments on mortgages financing the properties held in the REIT
- Invest at least 75% of total assets in real estate
- Have a minimum of 100 shareholders after the first year of inception
- Have no more than 50% of the shares owned by five or fewer individuals during the last half of the taxable year
How To Invest in Commercial REITs
Commercial REITs fall into main categories: traded and non-traded. Here's a quick look at how to invest in both types:
Traded Commercial REITs
Purchasing shares in publicly-traded REITs is as straightforward as buying shares of a mutual fund. All you need is a brokerage account and enough money to purchase at least one share. As such, they are very accessible to any investor, are very liquid and require a relatively low minimum investment.
Non-Traded Commercial REITS
Non-traded REITs are also attractive investments that are often more specialized by the asset's location and type and require a higher minimum investment. Here are a few of the larger commercial REITs:
- Orion Office REIT (ONL) owns and manages a diversified portfolio of office buildings and company headquarters. There are leased primarily on a single-tenant net lease basis and are located in suburban markets across the U.S.
- Public Storage (PSA) owns and operates more than 2,700 self-storage facilities in 39 states, with more than 190 million net rentable square feet of storage space. Through equity interests, it also has exposure to the European self-storage market and an additional 29 million net rentable square feet of commercial space in the U.S. through PS Business Parks.
- Equity Residential Properties (EQR) is the largest apartment REIT in the U.S. At the end of 2021, EQR owned or had investments in 310 properties with about 80,407 apartment units.
Several real estate crowdfunding platforms now offer non-traded commercial REITs as well. Here are a few examples:
- Fundrise now has a dozen REITs, each of which include a significant portion of commercial real estate. The minimum investment with Fundrise is $10 and the annual management fee is 1%.
- Realty Mogul has two REITS, both of which exclusively invest in commercial properties. The minimum investment for Realty Mogul's REITS is $5,000 and fees range from 1% – 1.25%.
- In 2022, CrowdStreet announced the launch of its own commercial REIT, called C-REIT. The minimum investment for C-REIT is $25,000 and it appears that investors will be subject to a 1.50% management fee as well as a 0.50% servicing fee.
Pros & Cons of Commercial REITs
The Bottom Line
Commercial real estate properties require a large amount of capital to purchase and maintain. This used to limit the asset class to high-net-worth individuals and large institutional investors. But REITS provide a way for smaller individual investors to add real estate holdings to their overall investment portfolio without purchasing, maintaining or managing real property.
REITs must adhere to specific IRS regulations and business practices that protect investors from being taken advantage of. Like many investing options that are traded on the major exchanges, commercial REITs offer the benefits of liquidity, dividends, diversification and low minimum investment. To determine if commercial REIT investing is right for you consider your overall investment strategy and your specific portfolio of investments.
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