Many investors are curious about real estate as a way of diversifying their portfolio and receiving passive income. While acquiring a rental property is often recommended, this typically requires a lot of time and money. Fortunately, it’s never been easier to invest in commercial real estate, which has unique and attractive benefits for investors of all experience levels.
This article will give a broad overview of commercial real estate for beginners, plus opportunities for investors looking to easily add commercial real estate to their portfolios.
Commercial Real Estate for Beginners Overview
Even if targeted to beginners, a commercial real estate (CRE) overview could easily be an entire book. To keep things short and sweet, this overview will focus on defining CRE investing, who it’s best suited for, as well as its unique pros and cons.
What Is Commercial Real Estate Investing?
Residential properties refer to single-family homes or those with up to four units. Typically, only individuals or families rent them.
On the other hand, commercial real estate (CRE) is used for commercial reasons, that is, for business, including residential housing with more than four units.
Here are the five main categories of commercial real estate:
Multifamily– These properties can be residential complexes with more than four units. They could also be assisted-living facilities. Due to the larger size, these are considered under the label of CRE rather than residential.
Retail – Businesses selling any kind of goods or services directly to consumers generally fall under the banner of retail. These businesses are often located close to consumers, for example in strip malls and large shopping centers.
Office – There are three categories of office size (low-, mid-, and high-rise) and they may have many different tenants paying the lease. These can include any sort of professional offices, including medical offices. Commercial office properties are also graded A, B, or C, with A being highest quality and C being lowest.
Industrial – Industrial properties vary greatly in size and they are the site of any kind of industrial work, whether that’s basic light assembly or intensive manufacturing.
Hospitality – Hospitality covers any kind of business that provides hospitality services, whether food, lodging, or entertainment.
Depending on your preferences or the particular strengths or weaknesses of a given sector, you may be particularly bullish or bearish on a specific type of CRE.
For example, certain types of CRE have suffered more than others due to the pandemic, while others have thrived. Some investors are particularly bullish on medical offices and assisted-living centers given the aging baby boomer population.
There are tons of different kinds of CRE out there, so investors should have no problem finding a CRE opportunity that aligns with their portfolio needs and goals.
Who Is Commercial Real Estate For?
Commercial real estate is really for anyone who wants to invest in one of these five categories. Now that there are many crowdfunded real estate platforms as well as REITs (real estate investment trusts) focusing on commercial real estate, it’s never been easier for investors to get started.
It’s important to note that there is both direct and indirect CRE investment. Direct means that you want to buy and manage the property yourself, or work with a property manager to serve as an intermediary and handle day-to-day issues. Indirect investment is better for investors who lack the money and/or time and/or energy to invest directly.
Pros to CRE Investing
There are many potential benefits to investing in commercial real estate. Here are just a few:
Higher-income potential and less competition than residential properties
More accessible than ever with low investment minimums (covered more below)
Many options now that are highly liquid
Limited hours of operation
Potential tax benefits
Longer leasing contracts
Cons to CRE Investing
As with just about anything in life, there are pros and cons when it comes to CRE investing. Here are a few to keep in mind:
Direct investment takes considerable time and energy.
Licensing and/or professional help is required (e.g. maintenance)
Oftentimes a bigger initial investment than with residential real estate
CRE involves public-facing properties that may experience more accidental and intentional damage
How Can Beginners Start Investing in Commercial Real Estate?
Before assuming commercial real estate is right for you, it’s good to weigh the pros and cons posted above. You should also decide whether direct or indirect investment might make more sense for you.
Direct investment is generally reserved for accredited investors and other high-net-worth individuals or institutions. Fortunately, indirect investment can suit traders of all income and experience levels. There are many platforms with low investment minimums, although others require investors to be accredited investors.
Let’s take a look now at some investment opportunities for people who are new to commercial real estate. Note that some of them require you to be an accredited investor, which may not be possible for many working-class investors.
Beginner Investment Opportunities in Commercial Real Estate
Commercial real estate may seem like something that would only be for wealthy individuals and institutions, but crowdfunding platforms have democratized the process.
Here are four crowdfunding platforms that are great options to consider for people who want to start investing in commercial real estate.
EquityMultiple has a unique platform that offers investors a great deal of flexibility. For example, investors can choose between pooled investment, individual commercial property investment, or investment in notes, all for as little as $5,000. This makes EquityMultiple a great option for beginner investors who may not have hundreds of thousands of dollars to invest.
EquityMultiple has a strong portfolio of investments available, including a track record of strong risk-adjusted returns. It’s also backed by Mission Capital Advisors and co-founders with more than 30 years in commercial real estate investing.
Investors can start with $5,000 for notes, $10,000 for Direct Investment, and $20,000 for Fund Investment. So far, EquityMultiple boasts a rate of return of 17.4% annualized. Those aren’t just market-beating returns; those are market-crushing.
CRE investment is already a great way to diversify a traditional portfolio, and it’s even easier with EquityMultiple as they offer multiple kinds of CRE investment.
Next up is Mainvest, which allows investors to get in on local, brick-and-mortar businesses for just $100. This is an exciting platform that truly democratizes CRE investing. On Mainvest, you don’t have to be an accredited investor or have millions of dollars. For the cost of about twenty lattés, you can get invested in CRE then sit back and expect returns of around 8-10%.
There are two main types of investment available: equity investment security, and revenue-sharing notes. The first is tied directly to the success of the business, whereas the second is basically a normal loan (you get back your capital plus interest over time).
Plus, since Mainvest charges the businesses seeking investment, there are no investment fees. It also runs a great platform that provides ample data to help you assess the pros and cons of a given business.
Another neat feature is the ability to filter investment opportunities by category, such as gaming, spa, food truck, cannabis, etc. This allows investors to contribute directly to local businesses of their choice.
First National Realty Partners
First National Realty Partners provides investors with the ability to invest in institutional-quality CRE. FNRP mainly focuses on retail spaces with national brands anchoring them, such as Dollar Tree, Walmart, or Aldi (among others). These premier properties are about as secure as you can get in the CRE world.
One big caveat is that FNRP is currently only available to accredited investors, which means many beginning investors may not be able to access their CRE opportunities. That said, investors who do meet the requirements can benefit from one of the top fractional real estate platforms out there.
Investors can expect both quarterly distributions and capital appreciation. There’s also the ability to choose one specific CRE investment or buy into a diversified fund. Like EquityMultiple, FNRP makes it easy to quickly diversify into CRE.
FNRP has a $50,000 minimum per deal, and since 2015 it has established a strong track record, providing its investors with annual returns between 12% and 18%.
Last but not least, CrowdStreet is another platform that allows accredited investors to easily invest in CRE properties. Again, this means it is not for beginners who lack a significant amount of capital. The account minimum is at least $25,000, which generally poses no problem to accredited investors.
In addition to private equity investments, CrowdStreet offers single-asset projects as well as funds. One of the fastest-growing crowdfunding platforms out there, Crowdstreet has a sleek interface and also offers great educational resources.
Investors may appreciate how thoroughly CrowdStreet vets its projects, meaning you can relax and save your time and energy for other things. That said, it’s always a good idea to do your own due diligence (which is especially the case with higher-risk opportunities available only to accredited investors).
Investors with CrowdStreet should understand that their investment will be locked in a long-term hold. This is true of many fractional real estate platforms, as the business depends on access to the invested capital.
Commercial real estate is a unique beast, and it’s important to realize it’s not all created equal. For example, investing in CRE may have resulted in significant losses during the early days of the pandemic. This form of investment requires due diligence and a long-term mentality.
Thanks to many great platforms (like those covered above), investors can start investing in CRE with just a few hundred dollars (or even less). It’s truly never been easier for beginners to get into commercial real estate and diversify their portfolios.
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