How to Invest in Commercial Real Estate — A Startup Guide
Let’s face it. If you want to learn how to invest in commercial real estate, there’s a lot of information out there. Even when you have clear financial goals, you might not have a clear path. If you want to…
- understand your investment options
- learn the pros and cons of each investment type
- figure out who to trust
It can become overwhelming pretty quickly, but I’m here to guide you through and let you know it might be easier than you think.
How to Get Started Investing in Commercial Real Estate — A Startup Guide
1. Get Educated
When you decide to invest in commercial real estate, you’re investing your money (capital) in a commercial property so that you can generate income. Income is generated through passive income (such as rental income), active income (like a profitable sale), and tax benefits that are unique to real estate.
Commercial real estate investments include a number of asset classes such as:
- multi-family residential properties (apartment complexes, etc)
- office buildings and business parks
- shopping malls and retail spaces
- mobile home parks
- storage unit facilities
When you decide to invest in commercial real estate, two of the most common investment opportunities are REITs and Real Estate Syndications.
When you decide to invest in commercial real estate, you’re investing your money (capital) so that you can generate income. Income is generated through passive income (such as rental income), active income (like a profitable sale), and tax benefits that are unique to real estate.
Commercial real estate investments include a number of asset classes such as:
- multi-family residential properties (apartment complexes, etc)
- office buildings and business parks
- shopping malls and retail spaces
- mobile home parks
- storage unit facilities
Related: Investing in Commercial Real Estate, How it Works
2. Commercial Investment Types
When you decide to invest in commercial real estate, two of the most common investment opportunities are REITs and Real Estate Syndications.
Both real estate investment opportunities will bring diversity to your investment portfolio, and each type has different benefits.
A REIT is an investment portfolio fund that includes multiple commercial properties across several real estate sectors. When you invest, you buy shares of that particular fund. To get started, you can research REITs currently available on standard market exchanges, buy some shares and you’re in! With a REIT, you buy and sell shares on the market exchange, so you can start with a small investment, and you can also sell your shares anytime during standard market hours.
Real Estate Syndications are different. When you invest in a Real Estate Syndication, you invest in a select set of commercial properties with other buyers (as a group). Together, you invest as a partner with an experienced sponsor for an estimated time period, typically 5-7 years. During that time, you own a percentage of the property, receive passive income, and receive any additional profits when the property is sold. During the length of your investment, all costs (maintenance, renovations, permits, etc) are handled by the syndication which is typically structured as an LLC or LP. Real Estate Syndications have some of the highest returns in the industry and are a great investment strategy to check out.
Buying a commercial property directly as a private investment is another option, though less common. This might be a friend or colleague who decides to purchase a property and is looking for business partners. This is a unique situation that requires extreme due diligence as well as a lot of expertise. Investing in a venture of this type can require extensive time, energy, and attention since you are an active investor owner, and business partner when it comes to every aspect of the property.
Related: The 5 big differences between REITs and Real Estate Syndications
3. Know Yourself – Trust Yourself!
Real estate investments are just that: investments. It means they involve risk, but they also offer great returns, a solid path for diversification, and a great opportunity to build wealth.
You can stop trading your time for money, and stop waiting for the day when you can cash in on your retirement funds.
You’re the only person who can decide how much risk is too much, and how much is too little.
- If you take risks pretty easily, then slow down when it comes to real estate! Investing in commercial real estate means you will have access to some very strong deals, and some very poor deals.
- If a deal sounds too good to be true, it probably is. Take time to ask questions, and don’t ever feel pressured to move fast. A good opportunity will always have strong financials and the investors will have done their due diligence. This means that the risks will be accounted for, and you’ll have an opportunity to review the deal in detail.
- If you don’t have enough capital, press pause. There will always be another opportunity or a better deal that fits with your long-term goals. Say no if needed, to allow yourself time to say yes when the right opportunity presents itself.
- If you want your investments to stay liquid, then REITs offer flexibility. REITs are bought and sold as shares on standard market exchanges, so you can sell your shares at any time.
- If you want the highest returns in the industry, then commercial Real Estate Syndications have a strong history with great returns, big tax benefits, and multiple income streams.
Related: The 10 Top Questions about Real Estate Syndications
4. Know Your Assets – Take Inventory
Take inventory of your current financial assets. Diversification is key.
For many investors, when they are ready to step into commercial real estate, they have typically built wealth through various investments such as stocks, mutual funds, selling a business, or other non-commercial real estate investments.
While it’s not necessary to have these investments, it’s important to think about how much of your wealth you’re prepared to invest in commercial real estate.
With most Real Estate Syndications, the opportunities are offered exclusively to accredited investors.
Take inventory of your current assets, including stocks and bonds, other liquid assets, long-term investments, short-term investments, personal property, and retirement accounts. Once you have a clear idea of your assets, think about how much you would like to invest in commercial real estate.
Real Estate Syndications are typically held for 5-7 years. This means that your investment capital won’t be considered liquid during the investment period. This is designed to yield to highest returns along with passive income for the life of the investment.
Related: The SEC is changing the rules on Accreditation and how it could affect you
5. Financial Freedom – What Does it Look Like for You
Everyone has a different picture of what financial freedom looks like. So take a moment and think about what it looks like for you and the people you care about the most.
Investing in commercial property offers a fresh opportunity for investors who want to diversify their portfolio and get started in the real estate market, but don’t want to be a landlord.
Let’s face it, managing tenants and property maintenance can add a lot of stress!
Investing in commercial real estate syndications offers some great benefits:
- passive income streams
- multiple tax benefits
- high investment returns
- generating cash flow
- ability to leverage equity
Financial freedom looks different for everyone:
- never having to work again
- starting a new business venture
- traveling to exotic locations
- taking care of those you love
- stability and not having to worry about finances
Think about your financial goals, and maybe even write down a few things that define financial freedom for you at this stage in your life and your career.
Related: Top 10 Questions about Real Estate Syndications for 2020
5. Get Connected — Build the Right Relationships
When you are getting started with commercial real estate investments, relationships really matter!
Doing your due diligence and researching every potential investment opportunity takes a lot of time and energy and knowledge, and it’s definitely an area that requires expertise.
Talk to people you trust, ask for personal recommendations and referrals, read reviews and start the conversations that will help you move forward.
If you’re thinking about making an investment, take your time and make sure you have all your questions answered before you move forward. A professional sponsor with expertise will take the time to explain the investment and will have the details accessible so you can evaluate if it’s a good fit for your financial goals.
I remember what it was like when I was first getting started, and I’m here to help. Making the jump into commercial real estate doesn’t need to be complicated or difficult, and when you’ve got someone helpful by your side, it’s a lot easier to gain confidence.
The Big Takeaway
When it comes to investing in commercial real estate, it can be easy to get overwhelmed by the amount of information available.
- Take your time
- Trust yourself
- Take inventory of your current assets
- Decide what financial freedom looks like for you.
When you’re ready to take the next step, talk with someone you trust and follow up on their referrals. Investing in commercial real estate syndications could be the next step on your journey to financial freedom.
