Commercial Real Estate Investments
Commercial real estate (CRE) thrives on investment. From international investors, hard money lenders and REITS they all are involved in operating income-producing real estate and holding real estate related assets. Real estate’s return potential is enticing to most and investors are constantly looking for innovative methods in diversifying portfolios.
Higher yields are always desired, but with those usually come increased risk. Property classifications continue to play a factor in investment decisions as each class is representative of a different level of risk and return. Taking into account a combination of physical characteristics and location a property classification can be made through the most common classes, A, B, and C. Among the property characteristics factored in are the rental income, appreciation, growth prospects, tenant income levels, age and location of property and other amenities. Choosing the right property class will depend primarily on the desired outcome of the investment, for instance if an investor is looking for capital appreciation or capital preservation.
Real Estate Investment Trusts (REITs) allow for an individual investor to gain a portion of the income that is produced through commercial real estate ownership. Except this method doesn’t have the investor go out and purchase commercial real estate. While REIT commercial real estate holdings will vary, it’s not uncommon to see ownership of hotels and resorts, apartments, office buildings, and shopping malls. A REIT is different in that one will typically specialize in a single type of real estate, for example, office REITs. A REIT will acquire, develop and then operate properties specifically for their investment portfolio as opposed to selling a property once it has been developed. A REIT must pay out a minimum of 90 percent of the taxable income annually through shareholder dividends. REITs will either be non-traded or publicly traded, and some will register with the SEC.
Self- directed individual retirement accounts, or IRAs, allow for investors to invest directly in commercial real estate. A self-directed IRA allows for the individual account owner to choose investments and ultimately make the investment decisions. A qualified custodian or trustee must hold the IRA that will allow for overseeing IRS reporting activities and other administrative services. Currently, less than 2 percent of retirement accounts are invested in real estate.
The United States remains as an attractive market for foreign investors and foreign capital remains an essential part of the commercial real estate market. CRE investments in the U.S. are viewed as a ‘safe haven’ for many foreign investors looking for a global presence. Perhaps one of the most sought-after countries to invest in, the United States market provides a large and diverse portfolio to choose from.
A large number of investment consultants are advising their clients to invest in real estate. Since the advent of real estate crowdfunding, a number of new investors have entered the market. Although typically one must be an accredited investor to partake in real estate crowdfunding less money, paperwork and headaches are involved in financing a portion of commercial real estate through this inventive new investment mechanism.
Other types of investing in commercial real estate come from Defined Contribution (DC) funds, Private Equity Real Estate (PERE) funds and Commercial Mortgage-Backed Securities (CMBS) to name a few. The United States is regarded by many as one of the top destinations for investment capital and commercial real estate provides for a tangible and comparatively low-risk investment when compared to other investment mechanisms.