Investing in commercial real estate can be an attractive way of generating income. The commercial real estate category covers office, industrial, retail, land, multifamily housing, and other miscellaneous sectors. However, in many cases, commercial property management requires more involvement and time than owning and managing single-family residential property.
CRE is more complex than managing single-family rentals.
The difference may be stark for investors entering the world of commercial real estate (CRE) management or transitioning from single-family rentals (SFRs). CRE is undoubtedly more complex than managing some rental units, but in most sectors (not including multifamily housing like apartment complexes), the tenants often go home at night. This scenario cuts down on the middle-of-the-night calls about overflowing toilets, leaking pipes, or other issues.
While owners of one or more SFR may handle management duties independently, that decision is rare for commercial property owners. It's too time-consuming and can cost more than hiring a property manager.
Professional management is efficient.
Owners who try to personally manage their commercial property may neglect to account for the value of their time when calculating the cost. Consider some of the myriad tasks that property managers perform:
- Market analysis, including the optimal rental price and lease type.
- Preparation of vacant units or spaces for occupancy.
- Marketing of vacancies.
- Screening and qualifying potential tenants.
- Collect rent.
- Manage tenant issues, including repairs and maintenance.
- Keep records of property finances, costs, and growth.
- Manage evictions when necessary.
While professional management isn’t inexpensive, it’s much less stressful than trying to oversee multiple units yourself—especially if you have property in more than one location or sector.
Consider passive investment options.
While investors using property managers have less direct involvement than those doing the property work independently, there are other options for investors to consider if they seek genuinely passive income.
One such investment is a Real Estate Investment Trust (REIT), which enables investors to own fractional shares of commercial investment properties. The participants buy REIT shares on a public market or from private offerings and receive a percentage of any profits without actively managing the assets. REITs must meet these requirements:
- At least 75 percent of assets must be invested in real estate, cash, or US Treasury instruments like bonds.
- At least 75 percent of gross income must derive from real estate activities like rent, mortgage interest, or sales.
- REITs must regularly distribute at least 90 percent of taxable income to their investors.
- REITs must have at least 100 shareholders, but those traded on public exchanges may have far more.
- Ownership concentration must be limited (no more than fifty percent can be held by fewer five or fewer investors).
- REITs are taxable corporations and must have a board of directors or trustees.
REITs typically provide enhanced liquidity compared to direct real estate investment since shareholders can typically sell their holdings on a public exchange. REITs allow investors to seek portfolio diversification by spreading their holdings among sectors, classes, and geographic areas. Investors should consider the impact of management fees and other costs on their overall profit potential if they decide to pursue this alternative to personally managing property.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
