Disadvantages Of Commercial Real Estate
Rules and regulations are the primary deterrents for most people wanting to invest in commercial real estate directly. The taxes, mechanics of purchasing, and maintenance responsibilities for commercial properties are buried in layers of legalese. These requirements shift according to state, county, industry, size, zoning, and many other designations. Most investors in commercial real estate either have specialized knowledge or a payroll of people who do.
Another hurdle is the increased risk brought with tenant turnover, especially relevant in an economy where unexpected retail closures leave properties vacant with little advance notice.
With residences, the facilities requirements of one tenant usually mirror those of previous or future tenants. However, with a commercial property, each tenant may have very different needs that require costly refurbishing. The building owner then has to adapt the space to accommodate each tenant’s specialized trade. A commercial property with a low vacancy but high tenant turnover may still lose money due to the cost of renovations for incoming tenants.
For those looking to invest directly, buying a commercial property is a much more costly proposition than a residential property. Moreover, while real estate, in general, is among the more illiquid of asset classes, transactions for commercial buildings tend to move especially slowly.
Stable cash flows from long-term tenants
Capital appreciation potential
Question #: Can You Get Out Of A Real Estate Fund Early
Again, it depends. Publicly traded funds can be bought or sold at will, so timing is not an issue. For privately held funds, there are stringent rules that dictate whether or not an investor has the ability to exit the fund early. They are outlined in the offering documents and should be studied carefully. In general, investors cannot exit a fund early unless there are extenuating circumstances. Even then, they may only be able to do so if another investor is willing to purchase their shares, which usually comes at a significant discount.
Strip / Neighborhood Shopping Center
Strip centers are smaller retail properties, often serving as neighborhood retail, that may or may not be large enough for anchor tenants.
These neighborhood shopping centers will typically contain a mix of national, regional, and local small shoppes retail.
Hospitality real estate largely exists to serve travelers, both for business and pleasure.
These assets can range from your typical drop-in motel to large resorts.
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Experience You Can Trust
Westbridge manages over $580 million of property assets. Over the last five years, our portfolio of commercial properties has achieved weighted average distributions of 10.3%* p.a plus capital returns where a sale has been realised.
Our residential development portfolio includes over 20 projects at a combined value of $190 million at various stages of development.
*10.3% average distributions relates to commercial funds. Past performance is not a reliable indicator of future performance.
Should You Finance The Deal
Some investors choose to place debt and leverage their land investments.
Others simply pay all cash.
The path you take is completely up to you.
Theres certainly something to be said for owning a piece of dirt outright when it isnt producing any income.
Many land bankers found themselves in trouble in 2008 when they had to continue paying mortgage expenses, taxes, property insurance, and maintenance without any money coming through the doors.
However, if you can leverage and place the remaining capital in a different investment that will pay for your carry costs on this land, that could be a solid option.
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Can You Get Out Of A Fund Early
Although it is harder to pull your money out of a real estate fund than say, simply selling shares in a real estate investment trust, it can still be done. Most funds will have a provision that allows investors to exit a fund early, though it will come at a cost. Typically, early redemption necessitates a 1-3% exit fee. The earlier funds are withdrawn from the fund, the steeper the fee tends to be as a way of motivating investors to stay in the fund for its duration.
Duplex / Triplex / Quadplex
Like their names imply, duplexes, triplexes, and quadplexes are two, three, and four-unit properties, respectively.
These types of units are fairly commonplace in all markets across the United States and may have been originally constructed for multiple tenants or renovated over the years for such accommodations.
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The Benefits And Advantages Of Investing In A Reit
One of the primary reasons investors invest in REITs is because REITS are required to pay out at least 90% of their income as a dividend to shareholders. The higher dividend could equal something better than what someone could do in the stock market alone. The second benefit is that the income is secured by long leases. REITs own physical assets and often have long term lease contracts with their tenants. This leads to a secure and stable income stream over a long period of time.
Another benefit is that REITs are liquid. Since they’re traded on major stock exchanges, this makes buying and selling rather easy. If you don’t like what’s happening, you can sell it and get your money out. REITS are also professionally managed by highly skilled and experienced real estate professional managers. The average investor, might not have the skill to manage large properties on their own.
The next advantage would be transparency. The SEC or the US Security Exchange Commission requires registered REITs to make regular disclosures to the government and this makes REIT operations more transparent to investors. You can keep informed through public disclosures via the SEC.
Hire A Property Manager
If you want to invest in commercial real estate near you but arent interested in having any partners, hiring a property manager may be the way to go.
While youre still technically an active investor, having the right full-service property management company in place will help make any project a passive real estate investment.
Property managers are here to do all the heavy lifting.
Commercial property managers typically charge anywhere from 4% to 10% of gross rents collected, depending on the size of the project. They run the day to day for your investment – any minor repairs, touring and vetting prospective tenants, collecting rents, and so much more.
The strategy here is to ensure that the commercial investments youre making can, of course, afford to pay a property management company. Even if you decide to run your commercial real estate investment yourself, if you dont have enough cash flow to pay for management, you should probably walk from that deal.
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How To Invest In Commercial Real Estate With Reits
Have you ever wanted to learn how to invest in commercial real estate, but are hesitant to leave the single-family home market for fear of biting off more than you can chew? Dont worry, you are not alone. Learning how to invest in commercial real estate takes a lot of commitment and a different skill-set than you are probably accustomed to. However, there is a way to take advantage of the currently hot commercial real estate market without acquiring the properties yourself: buy shares of a commercial REIT .
How To Invest In Commercial Property Reits
Real estate may be categorized into residential, industrial, and commercial properties. Commercial properties provide workspace for business activities, and they include office buildings, hotels, manufacturing buildings, convenience stores, etc. Compared to residential properties, commercial real estate is considered a sound investment since they provide higher returns.
However, it also means that the investor will have to incur huge costs to set up real estate propertiesReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. and customize each unit according to each tenants preferences. An investor interested in investing in commercial properties can choose to make investments either directly through the ownership of a real estate property or indirectly through owning shares in REITs that invest in real estate.
1. Direct investment
Direct investment requires a considerable high amount of capital to finance new construction and acquire existing commercial buildings. Commercial properties are a high-risk, high-return investment. It means that people who invest directly into such properties must possess significant knowledge about the industry and a large amount of capital.
2. Indirect investment
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Real Estate Investment Funds
Financing solutions built for you.
A full range of productsâto meet the full range of your financial needs.
Looking for a comprehensive set of financing solutions to launch a real estate investment fund or just want to simplify and streamline your processes? Weâre here to help. No matter what kind of real estate fund youâre seekingâopen and closed-end funds, equity and debt funds, or separate accountsâitâs our breadth of experience and exceptional service that really set us apart. Weâre committed to finding the financing package that best fits your needs.
REIF Products & Services
- Secured and unsecured lines of credit
- Single asset or portfolio term loans
- Fannie Mae, Freddie Mac and FHA loans
- Cash and treasury management services
- Currency and interest rate derivatives
- Loan syndications
How Much Leverage Will A Fund Give You
One of the benefits to investing in a real estate fund is that the fund, having aggregated capital from a variety of sources, can then leverage the equity investment by combining it with bank debt to build a more robust portfolio. For example, an individual investor may only contribute $50,000 to a real estate investment fund. That fund may have solicited $50,000 investments from another 30 individuals. The fund now has $1.5 million to invest in real estate. Assuming the fund buys properties at a 75% loan-to-value ratio, the fund will be able to invest in $6 million worth of real estate.
What are investment fees?
Most real estate investment funds charge investors fees that go toward services including negotiating the price of assets purchased, creating marketing materials and legal documents, raising equity, managing the day-to-day operations at the property, formulating and executing a business plan, reporting to investors, selling the assets, and distributing the proceeds.
While its tempting to choose funds with low fees, remember that you get what you pay for. On the other hand, excessive fees can eat into distributions, reducing the return on investment something potential investors should consider before deciding on a fund in which to invest.
Is It Too Expensive And Time
For the average small real estate investor, outright ownership of an office building or an apartment complex is not feasible. It requires a lot of initial capital , real estate know-how, and hands-on personal involvement. It is not passive, and it’s not cheap! Plus, it involves a significant amount of risk. It’s much harder to recover from a mistake when you buy a commercial property than, say, 10 single-family homes.
Luckily, you can invest through crowdfunding companies or REITS and take advantage of this potentially lucrative market for far less money and time. And if you’re interested in commercial real estate, but don’t have the capital to invest, you could consider a service like . Hometap invests in the equity of your home in exchange for a portion of the proceeds when you sell.
What Are The Different Types Of Reits
- Equity REITs The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing real estate. The market and Nareit often refer to equity REITs simply as REITs.
- mREITs mREITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
- Public Non-listed REITs Public, non-listed REITs are registered with the SEC but do not trade on national stock exchanges.
- Private REITs Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.
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Question #: What Is The Lifespan Of A Commercial Real Estate Investment Fund
In short, it depends. It is unique to each individual investment. However, publicly traded funds are open-ended, which means they can be bought and sold at will so there is no defined investment period. In privately traded funds, these tend to be closed-end which means that they have a finite expiration date, at which point the funds assets will be liquidated. Again, it varies but it is usually 10-15 years from the completion of the fund raise. Investors should always read the funds offering documents carefully to understand the specific lifespan for that fund.
How To Buy And Sell Reits
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REITs offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
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Why Choose Investing In Commercial Real Estate
An investment in commercial real estate generally entails an investment amount that is a large sum for any single retail investor to provide. The most common ways of investing in commercial real estate are via real estate investment trusts or through fractional ownership.
This mode of investment reduces a load of entry into CRE for retail investors by cutting down the ticket size. But a reduction in ticket size does not necessarily mean an investment option is good.
CRE investment comes with certain benefits over other traditional investment options:
- Being real estate, it is insulated from market fluctuations. As a long-term investment option, it is stable and mostly has a consistent rate of return.
- It comes with a lock-in period that safeguards your investment while assuring returns.
- Any special purpose CRE in a key location can be a literal gold mine as it will be well sought after by a niche segment of tenants, thus also assuring that a renewal of the investment keeps giving returns as a passive income.
Diversyfund Growth Reit Properties:
- Goshen, a small-scale student housing development in Linda Vista, California
- ParkBoulevard, a 59-unit mixed-use building in San Diego , California
- Summerlyn, a 200-unit apartment complex ripe for renovations in Killeen, Texas
- Corsicana, a 211-unit value-add apartment complex under construction in Corsicana, Texas
According to DiversyFund data, the company generated an annualized net return of 18 percent in 2017 and 17.3 percent in 2018 from ventures they controlled before the introduction of the Regulation A Growth REIT.
Individual components’ forecasted internal rates of return , the future rates of return on capital investments inside the Growth REIT, are estimated to be between 15 percent and 21 percent.
And once you’re interested in a project, you will get periodic updates on how the project is progressing. Best of all, DiversyFund does not charge a commission or direct fee for their services like a traditional brokerage account.
DiversyFund holders will feel comfortable understanding that the SEC needs annual audits to be performed. It helps ensure that the finances are being handled responsibly in accordance with the law.
DiversyFund also places investors first before getting paid itself, by giving a 7 percent preferred yield, meaning that investors have priority on fund returns up to 7 percent.
For more data, check out the DiversyFund Growth REIT providing circular and investment supplements for more information.
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Commercial Property Real Estate Company Shares
You might not be aware of this, but there are some companies out there that specialize in buying and managing commercial properties and that accept individual investors in their projects. Depending on your needs, it could make sense to invest in one or more companies like that individually rather than into the pooled money structures of a mutual fund or REIT.
The companies in question often focus on assets like apartments, office buildings, senior housing projects, student housing, etc. As you can appreciate, there can be some downside to such investments. The biggest is probably that while the return on investment is among the highest in the industry, the risk is also commensurately high.
And as there are very few formalized ratings of these kinds of investments, youll need to scrutinize the companys offering yourself before buying any shares. Still, with that said, you have even more flexibility over your investment diversifications than with ETFs, mutual funds, and REITs.
Diversyfund Pricing Fees & Expenses
Diversyfund does not charge a fee when you buy or sell an account. There is also no charge needed when the property is purchased.
And since DiversyFund manages the entire process in-house using an efficient digital platform, its net costs are much lower than when third parties are employed. As the property operates, the organizational and offering costs are expected to be around 1%, subject to change.
Keep in mind that we have not carried out an exhaustive analysis of all possible costs and expenses related to the transaction. Be sure to check the DiversyFund Growth REIT offering circular for more information.
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Real Estate Crowdfunding Platforms
Thanks to online real estate crowdfunding platforms, you can buy a property with less know-how, less work, and less risk. Minimum required investments can be as low as $1,000. With these sites, you can purchase a share of a real estate mortgage or loan. But in order to take advantage of many of these opportunities, you must be an accredited investor.
Crowdfunding is not new, but the 2012 Jumpstart Our Business Startups Act kicked this industry into high gear here in the U.S. many platforms offer commercial deals to choose from.
Here are some of the most popular real estate crowdfunding platforms with commercial opportunities, along with links to our reviews of each service:
Of course, on any of these crowdfunding platforms, you need to perform due diligence. However, all the documents allowing you to do so are often at your fingertips on each website.