3 Ways to Invest in Commercial Real Estate

Written By: Scott Costello

Benjamin Franklin said, “An investment in knowledge pays the best interest.” If you are considering investment opportunities in commercial real estate, there are a multitude of resources to help gain the knowledge you’ll need. Despite the claims from investors on late-night TV with programs to “get rich quick,” investing in commercial real estate can be tricky.  It takes knowledge, patience and skill. I encourage you to read books, consult professionals and reach out to other investors to truly determine if investing in commercial real estate is the right choice for you.

Here are three investment methods to consider:

1.  Real Estate Investment Trusts: Commonly referred to as REIT, a real estate investment trust is basically a mutual fund of real estate assets. REITs typically specialize in one asset class. For example, some REITs only own multi-family projects and others own shopping centers. They usually only purchase high-quality “investment grade” properties.  Most grocery anchored centers are owned by REITs.

Owning shares of a REIT is just like owning stock in a company, with one major advantage: While most publically traded companies have to pay corporate income taxes on their earnings, a REIT’s earnings are not taxable as long as they distribute 90 percent of their earnings to their shareholders in the form of dividends. Owning shares in a REIT requires the least amount of personal time. You also have the benefit of diversification, because your risk will be spread out over many different properties and usually in many geographic areas.  The downside is you have no control over the investment decisions within the REIT—you are just along for the ride.

2.  Limited Partnerships: This investment vehicle is an excellent choice for an investor who wants a passive investment with the day-to-day decisions being handled by others.  The general partner sources the investment, manages the property, obtains financing and makes leasing and other decisions. The limited partner provides equity capital and owns a percentage of the deal. They receive a percentage of the cash flow and also a percentage of the proceeds when the deal is sold. These partnerships are typically structured with two to 10 investors, and there is usually a high degree of communication. Sometimes, the partnership is structured in a way to allow the limited partner to vote on major decisions.

A limited partnership is a good choice if you are willing to tolerate more risk but not looking to actively manage the investment yourself.

3. Direct Investment: If you are willing and able to spend more time managing your investments, you may want to consider just purchasing a commercial property yourself.  You will usually need an equity contribution of 20 to 30 percent of the purchase price, depending on the property. Don’t fool yourself into thinking this type of investment will make you rich overnight. On the whole, the days of flipping for a quick profit are dead, but for an investor – who understands his or her local market, is willing to do the research and is patient – direct investments can be profitable.

Investing in this manner requires the most time, risk tolerance and knowledge. You will need to understand cash flow, financing options and tax implications associated with owning commercial real estate. If you are a first-time investor, I would highly encourage you to do your homework and make sure you have the knowledge you need to minimize your risks as much as possible.

7 tips for successful real estate investing:

  1. Know the market you are investing in
  2. Understand your tolerance for risk
  3. Consult a real estate attorney
  4. Work with an experienced tax consultant
  5. Consider your financing options
  6. Create a single-asset entity to own the property
  7. Choose your partners wisely

Nick Banks is the managing director of Front Street Commercial Real Estate Group located in Gainesville, Florida.  Front Street offers brokerage, management and mortgage banking services to its commercial real estate clients.  Nick is a graduate of the University of Florida where he serves as an advisory board member to the Bergstrom Center for Real Estate Studies.

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