Now more than ever, additional income streams are becoming more and more appealing and common. While you may have considered other income streams, like investing in the stock market, or maybe you’ve started your own business this year, then you know there is a wealth of potential to earn income outside of the 9 to 5. Commercial real estate is a fantastic but complex option for investors to diversify their portfolios. Below we’ll discuss the two most common ways to invest in commercial real estate.
The Facts
Commercial real estate is divided into four main categories: multi-family units, office space, industrial, and retail. According to an article by FNRP, these four categories contributed $1.01 trillion to the U.S GDP, generated $338.1 billion in personal earnings, and supported nearly 8 million jobs. Numbers like these suggest there is plenty of opportunities to pursue additional income streams here.
All things considered, commercial real estate can be very lucrative, with the only prerequisite being the capital to invest. While it is not impossible to invest in commercial real estate alone, most investments are dealt between either a private equity firm or a REIT. Below we’ll cover the difference between the two and how each can work for you to bring in additional income.
Private Equity Firms
A private equity firm works by pooling money from investors similarly to a REIT, but these firms are usually only available to higher net worth investors. In the same vein, investors will receive dividends based on the performance of the investments. While it may take longer to break into, private equity firms will continue to be one of the most prominent players in the commercial real estate industry. In this model, the complexity of managing a property is passed to the firm, which means your income from this will be mostly “passive.”
Here’s what you need to know about private equity firms:
- The firms aren’t as highly regulated, which gives them more versatility in investing in other real estate classes.
- There is an opportunity to reduce your taxable income through depreciation.
- Fees can vary; you can expect to be charged for asset management and administrative duties. However, these fees are mapped out from the start, so you’ll know exactly how much your fees are.
REITs
A REIT or Real Estate Investment Trust is a mutual fund in which investors can purchase shares of the trust, which applies funds toward real estate the trust owns. One of the main draws of this is that for those looking for more passive income streams, this model negates the need for managing a property. If you were to personally invest in commercial real estate, the management of tenants, expenses, and maintenance falls upon you to manage, but in a REIT, this management is passed to another person.
Here’s what you need to know about REITS:
- The trust is designed to pay out 90% of their taxable income as dividends, which means they have less flexibility to jump onto new opportunities, and potential growth is stunted.
- At least 5%, if not more, of your investment, will be used to cover fees at the beginning.
- For shorter investment periods, we recommend using a REIT for its liquidity.
Ultimately, both are solid choices for commercial real estate investing. There are different legal, tax, and payment structures for both, so we recommend taking the time and doing your own research on which model is better for your preferences. Good luck investing!
