Contrary to popular belief, commercial real estate (CRE) investing does not necessarily mean buying a commercial property.
In fact, the sector provides various unconventional investment avenues that offer unique advantages, diversification, and possibly higher returns.
These range from private equity pools and real estate partnerships to crowdfunding and debt investment in real estate. Ready to explore your options beyond the mainstream? Let’s discuss each one.
Private equity pools allow investors to come together to buy into commercial real estate. This often includes properties that are underutilized or underperforming but have the potential for significant value addition.
By pooling resources, investors can tap into opportunities that may be financially out of reach individually.
The collective structure also often results in more informed decision-making as each investor brings unique insights and expertise to the table.
Lastly, pooled financial resources give the group stronger bargaining power in negotiations, which may result in more favorable terms or purchase prices.
Real estate partnerships often involve two types of participants: general partners and limited partners.
The general partner typically assumes the role of managing the property and the day-to-day operations, including any refurbishments or leasing activities.
Limited partners, on the other hand, provide the necessary capital but do not engage in the active management of the property.
This setup allows people with different skill sets and resources to come together to achieve a common investment goal. It also distributes the financial and operational risks involved, making it a balanced way to invest in CRE.
Crowdfunding has revolutionized how people invest in commercial properties. Previously, investing in this sector often required significant financial resources, making it difficult for smaller investors to get a foot in the door.
How exactly does it work? Simply put, crowdfunding platforms to raise money to invest in real estate. This allows individuals to invest with a much lower initial financial commitment.
Furthermore, crowdfunding platforms often curate and vet investment opportunities, reducing some of the research and due diligence burdens on individual investors.
However, it's important to thoroughly understand the platform's fee structure and the risk profile of the investment.
An alternative to direct property ownership is to become the lender in a real estate deal. In real estate debt investment, an investor lends money to a property owner or developer, and the loan is secured by the property itself.
This approach often provides a more predictable revenue stream in the form of interest payments. Since the loan is secured by the property, there's an added layer of security for the investor.
That said, the returns are often lower than what might be achieved through property ownership and value appreciation.
REITs offer a compelling way to invest in real estate without the complexities of direct property ownership. Structured much like mutual funds, REITs are publicly traded entities that own, operate, or finance income-producing properties.
They offer the liquidity of stocks, as they can be easily bought and sold on public stock exchanges. This means you can invest or divest quickly, a feature not commonly associated with real estate investments.
By law, REITs are required to distribute at least 90% of their taxable income to shareholders (usually in the form of dividends). This ensures a relatively consistent income stream for investors.
Moreover, since REITs often focus on specific types of properties (such as shopping malls, office buildings, or hotels), they offer a way to diversify within the broader real estate sector.
However, it's essential to understand that like stocks, REITs are subject to market volatility and therefore can fluctuate in value.
REIGs are more like private partnerships but often have a corporate structure. They pool money from investors to buy properties—typically rental apartments or similar multifamily units.
Unlike REITs, they don't trade on public exchanges, so they are less liquid but also less subject to market volatility.
One of the key attractions of REIGs is that they offer investors a share in property ownership without requiring them to manage the property.
The REIG usually takes on all the responsibilities of management, including maintenance, tenant interactions, and rent collection.
This allows investors to own real estate and collect a share of the income generated without getting involved in the day-to-day hassles of property management.
Each of these alternative commercial real estate investment options offers a unique set of advantages and disadvantages.
By understanding these nuances, you can make more informed choices that align with your financial goals and risk tolerance.
As you explore alternative CRE investments, it's worth considering even more diverse assets to bolster your portfolio.
In addition to the commercial real estate opportunities already discussed, here are three more avenues that might be worth exploring:
Wireless communication isn't going anywhere but up. As our lives continue to digitize, the infrastructure supporting our devices becomes increasingly critical.
Investing in these towers offers several perks, such as stable cash flows and long-lasting different types of CRE lease contracts.
Top performers in this industry have showcased not only substantial historical returns but also promising prospects for future growth.
With the surge in cloud computing, artificial intelligence, and the Internet of Things, there's an ever-growing need for robust data storage solutions.
Forecasts indicate that the worldwide market for data centers will grow at an annual rate of 8.2% from 2021 to 2026.
Investment opportunities are abundant in this fast-evolving sector, especially with companies that maintain expansive, international data center holdings.
Amid increasing concerns over climate change and environmental sustainability, solar farms and energy storage facilities are drawing significant investment interest. Projections indicate that solar energy is likely to become the planet's primary electricity source by the year 2030.
Besides the appeal of eco-friendly investment, solar projects are revealing both high returns and substantial growth, spurred on by considerable investment from industry giants.
These alternative commercial real estate assets come with their own risk and reward profiles, but their rising relevance in today's investment landscape makes them worthy of consideration.
Combining these with your real estate investments could provide a robust and diverse portfolio designed to weather various market conditions.
After examining the diverse and intriguing avenues for investing in commercial real estate, it's crucial to dig deeper into the facets that can affect your financial well-being over the long term.
Many alternative routes in commercial real estate investment come with tax benefits.
For example, a 1031 exchange allows investors to reinvest proceeds from property sales without immediate tax implications.
You can also shift some of your retirement funds into a self-directed IRA dedicated to real estate, which could offer tax deferments.
The structure of your investment could vary depending on your needs, whether it be sole ownership, partnerships, or other formats.
Private equity pools or funds are often established to invest in commercial properties, particularly those that are underperforming. These structures give investors the benefit of collective wisdom and bargaining power.
Some investors opt for general and limited partnerships, where the general partner typically takes the managerial role while limited partners contribute capital.
Crowdfunding platforms offer yet another alternative, allowing smaller investors to take a slice of larger commercial real estate pies. These platforms have democratized access to what was once a high-barrier investment realm.
Like any investment, alternative commercial real estate investments are not without hazards. These can range from market volatility to legal complications and liquidity issues.
For instance, the inability to quickly convert your investment into cash can be a significant disadvantage, especially if you wish to capitalize on new opportunities quickly.
Mitigating these risks involves a combination of diversification, thorough research, and consultation with professionals in the field.
A diversified portfolio that includes different types of properties or investment routes can cushion against market downturns. Knowledge and professional advice can help you navigate through the various complexities and potential pitfalls of each investment type.
Alternative commercial real estate investments offer a plethora of opportunities for diversification, higher returns, and risk mitigation.
However, they require due diligence, a clear understanding of your financial goals, and sometimes the counsel of experts to navigate successfully.
Do you like this type of content? To keep tabs on opportunities in the CRE landscape, read our industry insights.
And if you’re looking for commercial real estate loan don’t hesitate to get in touch with us here at Capital Investors Direct.
We offer custom funding solutions for all kinds of commercial property investments. These solutions are excellent alternatives to traditional bank loans because they are quicker, allowing you to take full advantage of time-sensitive deals.
Call us at 800.348.8120 or use our contact page to get in touch.
