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If you have some extra cash in savings, you might want to consider investing as another way of storing your wealth. But, where to start?
The investing world is a vast and heavily interdependent web of many different markets. There are traditional assets like gold, silver, art, and the stock market, and then there are newer, more volatile asset classes like the (very) many cryptocurrencies available. Last but not least, there is real estate.
Investing in real estate helps build equity, generate passive income through rent, allows for tax write-offs, and hedges against inflation. Another underreported benefit of real estate investing is that you can help shape and grow industries you care about by investing in industry-specific properties.
Real estate investors love having a hand in shaping the world around them.
If you are interested in growing your wealth in any industry (outside of single-occupancy residential homes), then you’ll need to learn how to invest in commercial real estate.
What is Commercial Real Estate?
Commercial real estate is a property that either an individual, a group of individuals, a single business, or a group of businesses purchases, develops, and leases out to tenants to store and grow their wealth and generate income.
Obviously, this describes a broad field of options.
Generally, there are four main types of commercial real estate properties, but these categories are in and of themselves broad.
Retail properties consist of all the stores, malls, shopping plazas, restaurants, and grocery stores that dot the landscape. These are called “consumer-facing businesses” because consumers arrive to conduct their business in person on the property.
Office properties provide a location for businesses to operate out of. These are the business parks, the accounting firms, or the marketing agencies that need a physical location to operate but aren’t “consumer-facing.” Doctors’ offices are an exception, as the patient arrives in person.
If a property has five or more residential units, it is technically considered a commercial property and not a residential one. Giant apartment complexes, townhomes, and tiny-home villages are all examples of multifamily properties.
Lastly, we have all of the properties that house utilities, manufacturing facilities, warehouses, and research facilities.
An investor can take two routes when investing in commercial real estate. The most significant difference between the two is the investor’s level of involvement in selecting, developing, and maintaining a property.
Active real estate investing requires full-time devotion to researching, developing, and maintaining commercial properties. This route takes up a lot of time and resources, even for a seasoned investor. Though some individual investors go this route, active investing usually requires the resources of a whole business with specialized staff members who can handle risk management, finances, and business relationships.
Active investors have a direct hand in shaping the properties they manage, but active investing requires full-time devotion to the required tasks. That is why new investors, or investors who are simply looking to store and grow their wealth, might instead choose to become passive real estate investors.
Passive real estate investing is the path most real estate investors choose because most people have other jobs or obligations that make conducting all the research, development, and maintenance of commercial properties impossible. Luckily, passive real estate investors have a handful of options when trying to get in on the market.
Passive investors can instead choose to invest in platforms, companies, funds, and trusts that perform all the different tasks required of active investors. Each option has various benefits and risks, but it’s easiest to break them down into two main categories: privately and publicly traded companies.
Privately traded REITs (real estate investment trusts), and private equity firms are only open to accredited investors who meet minimum net worth and investment requirements. Private companies are often highly specialized—focused on one type of property— and rely extensively on relationships between networks of high-net-worth investors.
These companies are publicly traded on the stock market and open to anyone with a brokerage or Robinhood account. You don’t need a minimum investment amount (maybe $10) or a minimum net worth the get involved in investing in publicly traded commercial real estate investment companies.
We’ve broken down the basics of commercial real estate investing to help paint a clearer picture of this lucrative investment option. Being an active investor is time-consuming and essentially requires the dedication of a full-time job. This path is labor-intensive but allows investors to shape the industries they care about.
Passive investing is for people who want to grow wealth but don’t have the time and resources to devote to scouting out properties, negotiating leases, and contract developers. If you’d instead leave that work for someone else, then you can grow your wealth by investing in REITs, private equity firms, or through platforms like Robinhood or Fundrise.