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.
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.
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:
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.
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:
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:
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.