The six key questions that most people ask when gathering information are who, why, when, where, what, and how. When it comes to people interested in investing in commercial real estate, most already know the answers to some of these questions. But the one question I see come up over and over again is how to invest in commercial real estate.
Paper assets like stocks, bonds, and mutual funds are so entrenched in our society that a lot of people really don’t know how to invest in other types of investments.
They understand that investing in commercial real estate has created a lot of wealth for people and that they’d likely benefit from it too. But they dread the thought of having to become a landlord.
It’s kind of like health.
Everybody wants to be healthy. They know the benefits they’d receive from being healthy. But exercising regularly and eating more broccoli is hard to do when there’s a Game of Thrones marathon on T.V. and a box of ice cream sandwiches in the freezer.
They simply don’t want to do the hard work that it takes to be healthier.
Active Vs. Passive Investing
While that analogy is easy to understand, it doesn’t, at all, describe our investors. The accredited investors in our network tend to be highly motivated, successful, high achievers.
Laziness isn’t their problem…time is.
They know that apartment investing has a long track record of success. They know they can receive multisource income in an uncorrelated asset class that is ideal for diversification. And they want to grow their wealth while minimizing their tax burden. It’s really a no-brainer for them.
But they also know that success in anything in life requires expertise, experience, and commitment. Real estate investing isn’t any different. So without the specialized knowledge necessary to be successful in real estate, they’re left with the question, “How do I invest in commercial real estate?”
These are busy people who have spent years developing specialized knowledge in their chosen field. They don’t necessarily want to reinvent the wheel and become real estate professionals themselves.
Instead, they want to partner with a trusted company of real estate professionals. They want to leverage that expertise and track record for their financial benefit without having to get their hands dirty. That allows them to participate in a top-tier asset class while focusing their attention on what they do well.
This is called passive investing.
This article will focus on how to passively invest in apartments since the vast majority of people who contact us are looking for hands-off ways to invest.
For those that prefer active investing, you can get more information at this website.
There are three broad categories of passive investments that answer the question of how to invest in commercial real estate. These are syndication, crowdfunding, and market based securities like REITs.
How To Invest In Commercial Real Estate – Syndication
I’ll start with syndication since it’s the most transparent and direct way to invest. Syndication is a mechanism by which like-minded investors can pool their money together to purchase and own some of the biggest and best properties in the country.
Typically, these are properties that they couldn’t own on their own. Fractional investing opens up these larger, more stable properties that would otherwise only be available to institutional players and the very wealthy.
Syndication has been around for decades and you can read more about it at this link. These investments are typically structured within an LLC with the sponsor acting as the managing member. They bring their experience and expertise to helm the investment throughout its entire holding period.
The investors are passive members who get the bulk share of the profits without having any management duties or responsibilities.
For many, this is the ideal situation as they get direct ownership that affords them passive income, equity growth, tax efficiency, diversification in an uncorrelated asset class, and the freedom to ride along with an expert without having to do any of the work.
How To Invest In Commercial Real Estate – Crowdfunding
Prior to 2012, the syndicated real estate space operated under a federal ban on advertising. Without advertisement, it wasn’t easy for investors to find syndicators. It also wasn’t easy for syndicators to obtain new investors for their projects.
Syndicators had to grow organically through an excellent track record and word of mouth. They lived and died by the quality of their track record. Even one misstep could make it impossible for them to continue on.
Strong syndicators thrived and grew bigger, while marginal ones faded away. So the ban on advertisement was good for investors. It helped them to invest with the very best companies.
Unfortunately, in 2012 Congress passed the Jumpstart Our Business Startups (JOBS) Act. This law deregulated the private real estate industry by lifting the ban on advertisement.
Now newbie and failed sponsors no longer had to live and die by their track record. Instead, they can simply leverage a slick marketer’s platform to raise money for them. Crowdfunders are marketers for hire.
They act as a third-party middleman that raises money for private real estate sponsors. This has added unwanted risk for investors looking to navigate the crowdfunding waters.
Due diligence and transparency is considerably more difficult in this space as the investor typically interacts with the crowdfunder and not the sponsor. There is also an extra layer of fees, since crowdfunding marketers don’t work for free. And lastly, the sponsors utilizing crowdfunding are frequently less experienced.
That doesn’t mean that some of them won’t eventually develop a favorable track record, it’s just harder to separate the wheat from the chaff. And who wants extra risk?
As the existing regulatory bodies tighten their grip on this new industry, the hope is that investors will be protected from some of the aggressive promissory marketing tactics that are rampant in the crowdfunding space.
Publically Traded REITs
There are various market-based securities that dabble within the realm of real estate. Real estate investment trusts (REITs), are the most common. In the right scenario, REITs can be a valuable component of one’s portfolio. But many people fundamentally misunderstand what a public REIT investment is. Some think that REITs are a direct investment in real estate.
Instead, REITs are paper assets. They’re a stock based security in the sector of real estate. In other words, REIT investors aren’t investing directly in properties. Instead, they’re investing in the stock of companies that invest in real estate. It’s a sector play within the broader stock market.
That may sound like a trivial difference to some, but in reality it’s a big deal.
REIT investors get better liquidity than private real estate / syndicated investors, but they pay for it dearly with what they lose. Unfortunately, REIT investors lose the tax benefits that direct investors receive.
They don’t directly receive depreciation or bonus depreciation benefits. Instead, REITs are taxed the same as stock. REIT investors don’t profit from the tax deferral benefits that commercial real estate investors enjoy.
Also, many of those REIT investors are disappointed to learn that REITs are historically much more correlated to the broader market than direct ownership of commercial real estate. So REITs typically don’t give investors the diversification benefit they were looking for with real estate.
How to invest in commercial real estate is a question that so many investors ask themselves. While there certainly are multiple options, private real estate syndication stands out above the rest.
These tend to be long-term relationships, so it’s important to vet the syndicator prior to investing. Some of the things you should know are:
- How long have they been in business?
- What markets do they invest in?
- What is their track record?
- Do they offer a preferred return?
- Do they utilize 1031 exchanges?
- Does their business plans match your investment goals?
With a 100% profitable track record, we welcome any question you might have. If you’re an accredited investor interested in exploring whether commercial multifamily real estate might be right for you, we invite you to schedule a free 15-minute introductory consultation.
Ask us how to invest in commercial multifamily real estate and let us show you the 37th Parallel Properties difference.