Why commercial real estate?
Commercial real estate can be an excellent investment option for a number of reasons, including:
- Increased cash flow - Commercial real estate investment properties are a great way to achieve a steady stream of income.
- Lower risk - Commercial real estate investments are considered to be “hard assets,” meaning they’re more resilient to micro-fluctuations in the market than other kinds of investments, like stocks. You’ll also likely have more tenants and will be less impacted by vacancies or missed payments.
- Less volatility - Real estate holds value as prices rise, which can often be a fantastic strategy to hedge against inflation. CRE leases also tend to be 5-years or longer in length, meaning you can secure profit for the next half-decade or more regardless of what economic fluctuations occur in the future.
- Tax incentives - As we said earlier, CRE can be complex. And maintaining these types of properties can be hard work. The IRS recognizes this and offers tax incentives to property owners, especially on any expenses related to maintenance and upkeep.
When is the right time to buy or sell investment properties?
Commercial real estate can be complex. And gaining an in-depth understanding of the current market conditions and accurately forecasting future fluctuations is definitely one of the most difficult parts of buying or selling commercial investment properties. No one can perfectly predict the future (ahem, COVID-19) but experienced real estate investment advisors can help you better understand the markets and what kind of investments might be considered low risk versus high risk. This can give you peace of mind that your decisions align with your overall investment strategy.
CRE terms to know
The commercial real estate industry is vast and there are countless CRE terms to know. However, two of the most important terms to know are preferred returns and equity split.
- Preferred returns - A form of return where the sponsor pays the investor a set return. This typically ranges from 5-10% or more. Preferred returns are usually paid quarterly, but monthly or annual options are available.
- Equity split - When part of the property’s equity from appreciation or value-add is split between the sponsor and investor based on a previously agreed-upon percentage.
Types of indirect commercial real estate investments
- Passive real estate investments - In this agreement, you, the investor, don’t actively own or manage the property yourself. Instead, you generate income in the form of a dividend, equity split, preferred return, or a combination.
- Real estate investment trusts (REITs) - REITs are arguably one of the easiest types of commercial real estate investments. A REIT pools money from multiple investors to purchase and professionally manage multiple CRE properties. Investors receive dividends and tax benefits if they pay >90% of their income as dividends to investors.
- Real estate exchange-traded funds (ETFs) - With an ETF, rather than choosing and purchasing a share of each individual REIT, you can simply invest in multiple REITS with a real estate ETF. A fund manager will choose a basket of real estate securities in which to invest, which helps spread your investments across multiple sectors and companies, thus minimizing risk.
- Delaware Statutory Trusts (DSTs) - A Delaware Statutory Trust is a legally recognized trust, similar to a family trust or an LLC, that is used to hold title to a piece of real estate. Generally, a DST is owned by several dozen or more investors who pool their funds into the trust. Depending on the DST's performance, investors expect to receive a portion of the property's rental income on monthly basis. The DST will not allow investors to take an active decision-making role about the property -- the sponsor makes those decisions who is the corporate entity that manages the decisions related to the property.
CRE crowdfunding is becoming an increasingly popular investment option. Accredited investors can join platforms that pair them with a third-party investor or developer who has an investment opportunity that needs funding. This type of investing can have high returns, but also comes with higher risk and less liquidity than other types of investments.
Learn more about Denver investment properties from CRE experts
If you’re interested in learning more about Denver investment opportunities, reach out to us at Fountainhead Commercial. We have more than 40 years of experience in CRE investing and leasing on either the investor’s or seller’s side of real estate transactions.
Contact us today to learn more.