But don’t fear! This post will break down the different options retail investors have when breaking into the commercial real estate investing market and help clarify which option is best for you.
Before we look at different ways to invest, it’s essential that we clarify some terms.
REIT vs. REIT ETF
When looking at your investment options, you’ll come across the terms REIT and REIT ETF.
A REIT, which stands for real estate investment trust, is a company that purchases, finances, operates, and trades in real estate.
These firms can be either privately or publicly owned. If privately owned, there are usually financial restrictions on who can invest in them. However, anyone with a Robinhood account or other brokerage account can invest in a publicly-traded ETF.
A REIT ETF is very similar to a REIT in that they both aim to generate returns on the capital invested, but there are notable differences. ETF stands for exchange-traded fund.
Real estate ETFs are companies that don’t invest in real estate directly. Instead, ETFs invest in shares of the public REITs available on the stock exchange.
So, a REIT invests in real estate directly and engages in the financing, management, and development of real estate properties. A REIT ETF is strictly an ETF that invests capital into REITs.
What is the Better Option?
That depends! (You probably anticipated this answer.) From the perspective of the retail investor, there isn’t much difference.
If you are trying to limit risk, then ETFs have a slight advantage because they invest across a vast number of diverse REITs. Investing directly in a REIT means your success is directly tied to the success of that specific REIT.
Because REIT ETFs are more diverse, they are probably the safer investment option. But there is little material difference in the ROI between REITs and REIT ETFs.
But how do these options compare to other commercial real estate investing methods?
Crowdfunding Real Estate Investment Platforms
In simplest terms, crowdfunding or crowdsourcing is an investment strategy that pools investor funds together so that smaller investors can get in on larger opportunities. There are a two main ways to crowdfund.
The more challenging way is to structure a deal yourself, which involves you scoping out the opportunity, making a deal with them and courting investors. This – as you might imagine – takes alot of time, effort and work. It is in fact full time operation that involves more work hours than one person can hope to achieve.
Platformization Makes Crowdsourcing Easier
This is where crowdsourcing platforms start to emerge as the most convenient way to get in on commercial real estate investment opportunities. The “platformization” of much of our lives has led to revolutionary disruptions across nearly every industry.
Investing is not immune from the processes of “platformization.”
Platforms like Fundrise, CrowdStreet, and GroundFloor make it far easier for the everyday retail investor to build their wealth in commercial real estate. These platforms all boast a variety of investing tiers that appeal to the greenest investors and seasoned accredited investors alike.
What to Expect With Crowdfunding Investment Platforms
According to NerdWallet, Fundrise’s annualized platform returns were between 7.31% and 16.11% on average. This sounds really promising, but remember there is always risk involved when investing.
Important Investment Warning
The earliest of these crowdfunding platforms go back to 2012. Since the housing market crash in 2008, our economy has been in an uptrend, with the stock market sitting at all time highs.
There is simply no data for how these platforms will perform during an economic downturn.
A Note on the Fees
Platforms are businesses and need to charge fees to continue operation. Many of these fees are really low – Fundrise’s fees are low as 1%, which is broken into a 0.85% asset manage fee and a 0.15% advisory fee.
However, additional fees may apply depending on the circumstances.
What is the Best Way to Invest in Commercial Real Estate?
To determine what investment method is your best bet, you need to consider a few things:
- What is your risk tolerance?
- How hands on do you want to be with managing your investment?
- How much time / energy are you able to devote to finding investment opportunities?
- How much are you willing to lose?
For some investors, the fees are worth paying because a REIT, REIT ETF or crowdfunding platform will be performing the research and analysis. For other investors, they wish to be directly connected to the real estate they invest in.
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Ask yourself – what kind of investor do you wish to be?
Commercial real estate investing requires patience and a five to ten year minimum investment horizon. Remember, it is crucial that you never invest more than you are willing to lose. Best of luck entering the thrilling world of commercial real estate investing!
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