It’s no secret that real estate investing is a fantastic way to generate passive income. When you have tenants, you are guaranteeing a certain monthly income each month. But residential real estate investments can be tricky: tenants could move out abruptly, the property may require maintenance you didn’t budget for (or may even need a complete renovation), and juggling local laws and regulations as a property owner or manager can be overwhelming.
But what about investing in commercial real estate? Commercial real estate is any type of property that is used for business purposes. Hotels, restaurants, offices, shops, and even parking lots are considered commercial real estate properties. The downside of commercial real estate is that it can be tricky to navigate if you’re new to real estate investing. Luckily, you have options.
With commercial real estate, researching, financing, and managing your property doesn’t have to fall entirely on your shoulders alone. Many commercial real estate investors purchase shares through a real estate investment trust (REIT), private equity real estate firms (PERE), or an exchange-traded fund (ETF).
In this article, we will explore ETFs in the context of commercial real estate investing and why it might be the right fit for you.
What Is an ETF?
An ETF is a type of fund that operates much like a mutual fund. It’s a pooled investment security that typically tracks a particular index, commodity, industry, or sector. For example, if you invested in an ETF in the automobile industry, that money is pooled with that of other shareholders, and the money is portioned out among various stocks. This creates a diversified investment portfolio, minimizing your risk of investing.
ETFs vary from mutual funds in that they can be purchased or sold the same way a regular stock can. ETFs can also be structured in a way that tracks anything from the price of an individual commodity to a diverse collection of securities.
Benefits of Investing in a Commercial Real Estate ETF
We’ve already mentioned that ETFs can offer security in that they are a more diversified asset, but let’s explore some of the other benefits of investing through an ETF.
Owning a share in a tangible asset is a major advantage. Unlike with other stocks, investing with an ETF for real estate means you have ownership of a physical commodity, rather than a piece of paper whose value fluctuates from day-to-day. Financing real estate investments typically takes months and sometimes years–but with an ETF, you will generally be charged an expense ratio of less than 1%.
They Yield High Returns
The real estate market is notoriously among the largest markets in the world. With an REIT ETF, you can earn regular payments via dividends, which are distributed to shareholders every month, quarter, or year.
They Have Higher Liquidity
Buying and selling your shares of commercial real estate ETFs is as simple as buying and selling any other stock. Because you are not a landlord or property manager in the traditional sense, you don’t need to manage notifying tenants or selling the property itself. You can easily liquidate your investment to receive emergency funds when needed.
They Provide Diversification
ETFs work by real estate companies pooling money from multiple investors and purchasing more properties regularly. You then own shares in multiple income-generating properties with just a single trade. This allows you to diversify your portfolio at a lower cost than if you directly invested in commercial real estate.
Investing in a commercial real estate ETF can garner many benefits that you may not enjoy if you choose to invest in a PERE or a REIT. ETFs provide investors with diversification of their investment portfolios, have higher liquidity than direct investing, are affordable, and yield higher returns.
Want to learn more about your options with commercial real estate investing, or are you looking for investing tips, such as the 50% rule in commercial real estate investments? Check out our posts for more expert intel!