Commercial real estate is the logical next step for small investors looking to move out of single-family homes or anyone looking to generate large returns. Why? Commercial properties can give you more money because of economies of scale.
What is Commercial Real Estate?
Commercial real estate is typically any building used for business purposes or for profit (such as an apartment complex). It covers different groups of structure types and uses, including:
- Multi-family residential buildings
- retail centers
- industrial complexes
- mobile home parks
- medical consultants
- self storage facilities
- Hotels, motels and resorts
- Office buildings and complexes
Investing in Commercial Real Estate With Little Money
If you want to invest in commercial real estate but don't have the capital to purchase real estate, there are several options.
1. Real Estate Crowdfunding Platforms
With online real estate crowdfunding platforms, you can buy property with less knowledge, less work, and less risk. Minimum investment required can be as low as $1,000. Through these sites, you can buy a “share” of a mortgage or real estate loan. But to take advantage of many of these opportunities, you must be an accredited investor.
Crowdfunding isn't new, but the Jumpstart Our Business Startups (JOBS) Act of 2012 jumpstarted the industry here in the US. Many platforms offer business deals to choose from.
Here are some of the most popular real estate crowdfunding platforms with business opportunities, along with links to our reviews of each service:
|Account Fees||1%/year||None||1-1.25%/year asset management fee|
Of course, you should do your due diligence on any of these crowdfunding platforms. However, all the documentation that allows you to do this is often at your fingertips on every site.
2. 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. Or all the due diligence of investing in a certain property on a crowdfunding site. And that is not their only advantage. By law, REITs are required to pay out 90% of their earnings as dividends. And you don't have 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 are fewer advantages to investing in REITs because someone else is doing the work for you. And you should be careful about high fees. REITs can have initial sales “loads” (fees) that are much higher than mutual funds and exchange-traded funds (ETFs).
REITs invest in all types of commercial real estate, from hotels and apartments to assisted living facilities, warehouses, office buildings, industrial space, retail space, and more. They are required by law to have broad participation and distribute 90% of their earnings to shareholders. And because investors can buy shares in the stock market, REITs are a highly liquid asset.
You can buy publicly traded REIT shares through any full service or discount broker. You can buy them as common stock, preferred stock or debt securities. It is also possible to find REITs in ETFs.
There are also several online platforms where you can buy REIT shares.
- Streitwise lets you invest in the lucrative commercial real estate market for as little as $5,000.
- CrowdStreet new C-REIT allows you to invest in a diverse portfolio of commercial real estate.
- Fundrise eREITs give investors access to a variety of commercial real estate for as little as $500.
- RealtyMogul REIT products provide multi-family, office, industrial, retail, self-storage, medical and hospitality properties.
- Rich Uncles' NNN REIT invests in properties leased by retail companies.
How to finance real estate transactions
The Unique Benefits of Commercial Real Estate Investing
Some of the unique and beneficial aspects of commercial real estate investing (versus residential real estate investing) include:
A clear advantage of investing in commercial real estate is increased potential income. Most commercial real estate generates a higher rent per square foot. In addition, it has several premises that generate rental income, all under one roof. Therefore, many maintenance and repair costs are “fixed once and done” and spread over multiple leases. Higher rental income and lower maintenance costs result in more profitable investments.
Multiple Streams of Cash Flow
Commercial leases provide a relatively consistent and reliable stream of rental income. And property also typically provides multiple streams of income. For example, you can charge for parking spaces separate from the leased office space, for example. You can also provide vending machines and a gym in office buildings. Coin-operated washing machines can be installed in apartment buildings. Tenants will often pay for operating expenses, property taxes and property insurance in addition to the monthly rent. This is known as a “triple net lease”. This is the industry standard for certain types of commercial real estate.
Another advantage of commercial real estate is less competition. Investing in office buildings and shopping centers is a difficult task for many investors. Bidding wars for single family homes in my area are not uncommon. This increases the cost of doing business. But buying commercial property is out of the comfort zone for most investors. So the competition is much less.
Longer Leases Reduce Risk
Commercial buildings generally have longer leases than residential buildings. Agreements typically run for 24 to 36 months, with vacancy notices typically lasting more than 30 days. More predictable cash flows and fewer vacancies reduce risk for investors.
If you own an apartment building and lose one of your 10 tenants, you only lose one-tenth of the income from that property. If you lose a tenant in a single-family home, you've lost all of your income.
Is It Too Expensive and Time-Consuming for the Average Investor?
Outright ownership of an office building or apartment complex is not possible for the average small real estate investor. It requires a large amount of start-up capital (usually a 30% down payment), real estate knowledge, and hands-on personal involvement. It's not passive and it's not cheap. In addition, it carries considerable risk. Recovering from a mistake when buying commercial real estate is much more difficult than, say, 10 single-family homes.
Fortunately, you can invest through crowdfunding companies or REITs and tap into this potentially lucrative market for much less money and time. And if you're interested in commercial real estate but don't have the capital to invest, you might want to consider a service like Hometap. Hometap invests in the equity in your home for a portion of the proceeds when you sell it.
Is Now a Good Time To Invest in Commercial Real Estate?
With the current unemployment rate at 23% and GDP at 38% due to the Covid pandemic and related lockdowns, commercial real estate is taking a hit. The biggest drop in demand is felt in two areas: office and commercial spaces.
The Green Street Commercial Property Price Index found that office occupancy fell by 41 million square feet and retail occupancy by 13.6 million square feet in the first quarter of 2020. Areas of hotels and guesthouses are also feeling the crisis.
In fact, commercial real estate prices and sales are low for all commercial real estate except industrial properties. Industrial occupancy increased by 62 million square feet, so we're seeing an understandable shift in commercial property use.
A few years ago, the transformation of commercial space became popular when retail centers became vacant due to the rise of online shopping by retailers like Amazon. Pandemic shutdowns are understandably accelerating that trend, as free-standing malls near major metropolitan areas are repurposed as warehouses and logistics distribution centers.
The October 2020 National Association of Realtors Commercial Real Estate Trends and Outlook report revealed some surprising trends.
- 54% of respondents reported missed, late or partial rent increases for office, retail and manufacturing space.
- 83% reported a staggering increase in office hours.
- 43% reported an increase in leasing transactions in suburbs compared to cities.
52% reported increased reuse of vacant shopping centers for industrial use, warehouses, healthcare/hospital use, or for use as a church.
Should You Invest in Commercial Real Estate?
What does this mean for investors? Some sectors, such as retail, office space and hotels, are experiencing painful uncertainty due to an understandable decline in income. But there has been no shock wave in all kinds of commercial areas. With most leases of two years or more, many office buildings and commercial spaces are in disrepair.
The lease is not up, and the feeling seems to be that things will be back to normal, or close to normal, once the pandemic lockdowns are eased. And while the volume and prices of commercial real estate sales have dipped slightly, there's been no fire sale of existing commercial space (at least not yet). However, now does not seem to be the best time to get into commercial real estate.