Commercial real estate (CRE) can be a great addition to your investment portfolio.
CRE properties offer some of the best opportunities to build wealth today, providing extent returns and diversification that can potentially insulate you from adverse economic conditions such as recessions.
But let's face it—commercial property investing is not for everyone. Developing, renovating, and/or managing CRE assets requires time, effort, and expertise to only be honed through years of experience.
What if you're not interested in all this hard work but still want to grow your money through commercial real estate investing?
The good news is that there are ways to invest in commercial properties passively.
Whether you're interested in creating new sources of passive income or want to run a severe CRE portfolio, here's a list of ideas on how to grow your wealth using commercial real estate the easy and passive way.
The last decade has seen the rise of online fundraising—and it's easy to see why. Crowdfunding platforms allow individual investors to invest in commercial property investments and return and receive cash flow distributions.
Crowdfunding is one of the most affordable ways to put money in CRE assets. You can place as little as $500 or as much as you want.
Your money will be pooled with funds from other investors and used to fund the project. You receive distributions and dividends and benefit from the long-term appreciation of the CRE assets you backed.
Exchange-traded funds or ETFs are essentially bonds and stocks grouped. They offer the benefit of lower costs and high diversification, similar to mutual funds in index funds.
ETFs may be issued by commercial property trusts that own retail, hospitality, office buildings, etc.
The diversification offered by this type of instrument helps lower the risks associated with real estate investing.
If you have a significant amount of cash but don't have the time or the skills to invest in your own commercial real estate deals, perhaps you can act as a hard money lender instead.
CRE investors turn to hard money when they need capital fast and/or do not qualify for loans from traditional banks and lenders.
Many commercial real estate players who want to rehab and flip properties fairly quickly also often use hard money lenders Texas.
As hard money lenders phoenix, you'll get to charge an annual interest on the loan (usually in the 10 to 12% range) plus an upfront fee.
The returns are indeed quite good for a passive investment. That said, it's essential to be careful when getting into such lending scenarios.
It's essential to thoroughly vet both the project and the investor or group receiving the loan, so you don't lose your money and still make a profit even if you have to foreclose on the property.
It's a good idea to work with commercial property financing brokers if you want to be a hard money lender because they can take care of all the vetting and paperwork for you.
This is another low-cost way to invest in commercial real estate passively. What's excellent about mutual funds is that they are managed by seasoned commercial real estate veterans and financial planners, so their success rate over the long term is relatively high.
Buying mutual funds is a great way to put money in real estate, forget about it, and reap the rewards after a few years or when you retire.
Do you know of a new commercial real estate project being developed and would like to invest in it? Ask the contractor and developer if they are accepting outside funding.
You can also keep it local and invest directly with commercial real estate companies in your area—those that run strip malls, office buildings, etc. and have an impressive portfolio of finished projects that make money.
The great thing about this is that you get to choose what projects you want to invest in passively.
Of course, it's important to conduct substantial due diligence before buying shares in any company.
Hiring a full-service property manager is something that successful commercial real estate investors routinely do.
Consider doing this if you want to own an actual building but don't want to do any heavy lifting.
Professional property managers usually charge a percentage of the rents collected—anywhere from 4 to 10%, depending on the property's scale.
They can take care of managing the day-to-day affairs for you, including repairs, collecting rent, vetting prospective tenants, and many more.
This strategy is similar to becoming a hard money lender in that you essentially act as a 'bank' in the commercial real estate investment of an operator.
Many investors who want to build passive income while avoiding hefty taxes use this passive investing method.
You can take 10% to 20% down (just like a bank does) at a pre-agreed interest rate with an amortization schedule of 15 to 30 years.
Many passive investors that do this will have a five-year balloon on the mortgage. You retain your first position as the financier to foreclose on the property and recapture it if the buyer defaults on their mortgage.
Real estate notes are similar to owner financing/debt. They are essentially promissory notes secured by a mortgage loan that already exists on a commercial property.
You can purchase notes through a bank, buying debt at rates below what retail investors typically pay. It's essential to do thorough due diligence when taking this route.
These instruments are similar to mutual funds and ETFs. Buying REITs is an excellent way to add some commercial real estate to your investment portfolio without the burden of owning real property.
Your money will be put in multiple asset classes, so there is less risk. REITs have historically done well even in and certain economic times.
Some investment experts suggest staying away from non-traded REITs and choosing publicly-traded REITs instead. That's because non-traded REITs are notorious for higher fees, lack of transparency, and liquidity.
A commercial real estate syndication is a pool of funds from different investors used for acquiring various kinds of property projects.
It can be as small as a handful of people purchasing a small office building to hundreds of investors buying a shopping center.
The funds raised can be used for construction, development, renovation, acquisition—basically, anything that has to do with the project. As a 'limited partner' in syndication, you can expect to receive preferred returns as well as equity.
There's no rule saying that you need just to pick one of these strategies. In most cases, the best way to passively invest in commercial real estate is to combine a few of these options.
Talk to a commercial property financing expert for more information and guidance in figuring out what investment strategy suits your particular situation and your investment goals.
