Beyond Stocks and Bonds: Discovering the Advantages of Commercial Real Estate Investments
Want to get started with real estate investing for beginners but feel overwhelmed by the complexity? Simplify your journey with this definitive guide. Discover the art of choosing investment properties, securing financing, and making the most of commercial real estate opportunities—your first step towards building lasting wealth starts here.
Key Takeaways
House Hacking is a hands-on entry point for new investors, offering them a chance to learn property management while generating rental income and benefiting from property appreciation.
REITs offer an accessible way to invest in real estate, obliging companies to distribute at least 90% of taxable profits back to investors, diversifying portfolios, and reducing investment risks.
Commercial real estate provides income stability through long-term leases and holds the potential for higher returns and diversification, which can be accessed through avenues like Regulation A.
The Beginner's Pathway to Direct Real Estate Investments
Diving headfirst into the world of real estate investing can be an exhilarating experience. But make no mistake about it, being a successful real estate investor requires more than just a keen eye for good property deals. It also necessitates a fair share of commitment, particularly if you’re considering direct real estate investments.
Have you ever heard of ‘House Hacking’? It’s a nifty strategy adopted by many new investors, where you:
live in one part of your investment property while renting out the others
qualify for residential loans
gain first-hand experience in property management
This approach offers a unique opportunity to both live in your rental property and generate rental income.
This investment strategy can be effective as you’re benefiting from appreciation (the value of your property going up), debt paydown (the amount of your property debt decreasing), and cash flow (the capital left over after paying your mortgage & other expenses each month). Financing and cash flow management are critical aspects of real estate investment. Without a well-structured financial strategy, even the best property deal can turn into a financial nightmare.
One important consideration is the amount of starting capital necessary for real estate investments. It varies widely. For instance, Real Estate Investment Trusts (REITs), or other crowdsourced commercial investment opportunities (like the projects Auor Capital works on) provide a lower-cost entry point into real estate investments.
So, whether you’re considering taking a loan or leveraging your savings, ensure that your financing strategy aligns with your overall financial objectives and risk tolerance.
Getting Started with Real Estate Investment Trusts (REITs)
If the thought of being a landlord doesn’t quite appeal to you, don’t fret! Real Estate Investment Trusts (REITs) could be your ticket to the real estate market. Established by Congress in 1960, REITs are companies that enable indirect investment in real estate by owning and managing income-generating properties.
For a company to qualify as a REIT, it must comply with specific Internal Revenue Code requirements. This includes investing the majority of its assets in real estate and delivering most of its income from real estate operations.
When it comes to REITs, investors are spoiled for choice. You can choose from publicly-traded REITs, public non-traded REITs, and private REITs. Each type offers unique benefits and risks, and the choice depends largely on your financial goals and risk tolerance.
One of the most attractive features of REITs is their financial benefits. Here are some key advantages:
REITs are obligated to distribute a minimum of 90% of their taxable profits as dividends, providing investors with potential steady income streams.
Investing in REITs allows for substantial portfolio diversification, given that they invest in various segments of the real estate market.
REITs are typically lower risk compared to direct property ownership.
Diving into Commercial Real Estate with Reg A
Commercial real estate, zoned for business activities, includes properties such as:
Shopping malls
Office buildings
Warehouses
Manufacturing sites
Investing in commercial real estate involves acquiring properties that can generate income, ranging from office spaces to industrial complexes.
Regulation A (Reg A) offers a distinct pathway for investing in commercial real estate, presenting specific advantages over investing in traditional stocks and bonds. It’s a unique way to tap into the potential of commercial real estate investments.
Commercial real estate investment offers several benefits, including:
Stability, thanks to the nature of the underlying assets and long-term lease agreements
Potential for higher returns, especially with Reg A investments
Portfolio diversification, which helps reduce overall investment risk.
Stability and Lower Volatility
Commercial real estate investments are often considered more stable and less volatile due to their capacity to generate steady rental income from long-term leases with businesses. This stability can enhance the stability of a retirement portfolio due to the reduced risk exposure that comes from diversification across different asset classes, including real estate assets. As a result, real estate investment remains an attractive option for many investors.
Moreover, while commercial real estate prices can be influenced by external economic factors such as interest rate hikes, historically, they have experienced milder losses or retained stability in property prices compared to other investment vehicles.
Potential for Higher Returns
Market trends significantly affect the performance of commercial real estate investments and consequently the returns for investors. For example, the shift towards teleworking has led to a repricing of office spaces as businesses reassess their need for physical office locations. Similarly, growth in the e-commerce sector has reduced the demand for traditional retail spaces, contributing to increased vacancy rates. In this context, it’s essential to monitor not only the real estate market but also the stock market, as both can impact investment decisions.
Adjusting investment strategies to account for these trends is crucial for investors aiming to secure higher returns from commercial real estate. It’s all about being flexible and responsive to market changes.
Diversification Benefits
Adding commercial real estate to an investment portfolio can enhance diversification, which may reduce overall risk by mitigating the impact of market volatility across different asset classes. It’s like the old saying goes - don’t put all your eggs in one basket!
Joining a Real Estate Investment Group
Imagine owning rental properties without the hassles of being a landlord. Sounds like a dream, right? Well, this is precisely what Real Estate Investment Groups (REIGs) offer! A REIG is a business entity that pools together investor funds for the purpose of acquiring multi-unit housing and commercial properties. This allows individual investors to collectively invest in real estate opportunities..
With REIGs, you don’t have to worry about property management. The group’s property manager manages all units, including maintenance, advertising, and finding tenants. This means you can enjoy the returns of the real estate market without the property management responsibilities.
Within REIGs, there are Real Estate Limited Partnerships (RELPs) and real estate syndications. These allow real estate investors to provide capital for projects managed by experienced real estate developers or development firms. Investors are often drawn to Real Estate Investment Groups for the returns of the real estate market without property management responsibilities, relishing a passive role with consistent payment through monthly or quarterly returns. Learn more about some our Auor Capital’s current projects here.
Crafting Your Investment Strategy
Key to real estate investment success is aligning one’s strategy with their long-term financial objectives and considering their individual risk tolerance. Having a comprehensive real estate investment plan provides clarity, focuses on specific objectives, and is essential for monitoring and measuring investment performance.
Your investment strategy should not be set in stone. It should be regularly updated to reflect changes in the market and your financial situation. It’s also crucial to analyze past investment returns and associated risks.
The level of your involvement in real estate should be based on a balance between your availability to commit time and your desired return on investment. So, whether you’re a full-time investor or a part-time enthusiast, make sure you’re comfortable with the time commitment your investment strategy requires.
Identifying a real estate niche can provide direction and purpose to an investment strategy, facilitating a more focused approach. Some popular real estate niches include:
Residential properties
Commercial real estate
Vacation rentals
Fixer-uppers
Luxury properties
Finding your niche can be a game-changer in your real estate investment journey, especially with the help of online real estate platforms.
Summary
As we wrap up, it’s clear that real estate investments, particularly commercial real estate, offer unique advantages over traditional investments. From stability and potential for higher returns to portfolio diversification, the opportunities are vast. Whether you choose to go the direct investment route or opt for REITs or REIGs, ensure your investment strategy aligns with your long-term financial goals and risk tolerance.
The world of real estate investment is full of opportunities for those willing to venture beyond traditional stocks and bonds. If you’d like to learn more about our current investment opportunities or how to join other beginner investors, please request more information here.
