Getting started investing in commercial real estate: what you need to know

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Editorial credit: zhekoss

If you have extra savings, you might want to consider investing as another way to store your wealth. But where to start ?

The investment world is a vast network strongly interdependent of many different markets. There are traditional assets like gold, silver, art and the stock market, then there are newer and more volatile asset classes like the (very) many cryptocurrencies available. Finally, there is real estate.

Investing in real estate helps build equity, generate passive income through rent, allows for tax deductions and hedges against inflation. Another underrated benefit of real estate investing is that you can help shape and grow the industries you care about by investing in industry-specific properties.

Real estate investors love to help shape the world around them.

If you want to grow your wealth in any industry (aside from single-family homes), you’ll need to learn how to invest in commercial real estate.

Getting started investing in commercial real estate: what you need to know 1

What is business real estate?

Commercial real estate is property that an individual, group of individuals, single company or group of companies buys, develops and leases to tenants to store and grow their wealth and generate income.

Obviously, this describes a wide range of options.

Types of commercial real estate investment properties

Generally, there are four main types of commercial real estate, but these categories are broad in themselves.

Retail

Commercial properties include all of the shops, malls, malls, restaurants, and grocery stores that dot the landscape. These are called “consumer-facing businesses” because consumers arrive to do their business in person at the property.

Office

Office buildings provide a location for businesses. These are business parks, accounting firms or marketing agencies that need a physical location to operate but are not “customer oriented”. Exceptions are doctor’s offices, where the patient comes in person.

Several families

If a property has five or more residential units, it is technically considered a commercial property and not a residential one. Giant apartment complexes, townhouses, and villages of small houses are all examples of multi-family properties.

Industrial

Finally, we have all the properties that house utilities, manufacturing facilities, warehouses and research facilities.

Active and passive real estate investment:

An investor can take two paths when investing in commercial real estate. The most significant difference between the two is the level of investor involvement in the selection, development and maintenance of a property.

Active real estate investment

Active real estate investing requires a full-time dedication to researching, developing, and maintaining commercial properties. This road takes a lot of time and resources, even for a seasoned investor. Although some individual investors choose this route, active investing generally requires the resources of an entire company with specialized staff members who can handle risk management, finances and business relationships.

Active investors have a direct role in shaping the properties they manage, but active investing requires full-time devotion to the required tasks. This is why new investors, or investors who are simply looking to store and grow their wealth, might choose to become passive real estate investors instead.

Passive real estate investment

Passive real estate investing is the route most real estate investors choose because most people have other jobs or obligations that make it impossible to complete all the research, development, and maintenance of commercial properties. Fortunately, passive real estate investors have a handful of options when trying to enter the market.

Passive investors can instead choose to invest in platforms, companies, funds, and trusts that perform all the different tasks required of active investors. Each option has various advantages and risks, but it is easier to divide them into two main categories: private companies and publicly traded companies.

Listed companies

REITs (Real Estate Investment Trusts) and Private Equity Firms are only open to accredited investors who meet minimum net worth and investment requirements. Private companies are often highly specialized, focused on one type of ownership, and rely heavily on relationships between networks of wealthy investors.

Listed companies

These companies are publicly traded and open to anyone with a brokerage or Robinhood account. You don’t need a minimum investment amount (maybe $10) or minimum net worth to invest in publicly traded commercial real estate investment companies.

What type of investor do you want to be?

We’ve broken down the basics of commercial real estate investing to help paint a clearer picture of this lucrative investment option. Being an active investor takes time and basically requires the dedication of a full-time job. This path is labor intensive, but allows investors to shape the industries they care about.

Passive investing is for people who want to grow their wealth but don’t have the time or resources to spend on property research, lease negotiations and contract developers. If you’d rather leave that job to someone else, you can grow your wealth by investing in REITs, private equity firms, or through platforms like Robinhood or Fundrise.


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