If you’re interested in investing in commercial real estate, you’re probably realizing this isn’t your grandpa’s real estate market. You don’t need to be the sole owner of a commercial property, managing the building and tenants, shouldering all the risk of your investment. Options such as real estate investment trusts (REITs) allow you to truly enjoy the passive part of “passive income.”
A commercial REIT is a type of real estate investment trust that is specific to business properties. This includes hotels, restaurants, office buildings, shopping centers, and even parking lots. If a property is used for any type of business purpose, it’s a commercial real estate property.
While institutions such as First National Realty Partners (FNRP) are legitimate, there are certain risks tied to them that are either minimized or nonexistent for commercial REITs. Let’s explore REITs in detail to understand if it’s the right investment for you.
How REITs Work
A REIT operates very similarly to the way mutual funds operate. You purchase stock from a REIT (also known as “buying into a fund”), the fund is managed by a professional money manager, and that manager invests the money from the fund on behalf of you and other shareholders. The goal is for those investments to come back with a profit, splitting those profits with you, other shareholders, and the money managers.
For commercial REITs, this looks like money managers investing in commercial real estate. The return on your investments and profits come from the property generating income from tenant rent. The best part is that you don’t need to trouble yourself with managing the tenants and buildings yourself. You put money in, and if the investment is good, you simply get money back. This makes commercial real estate a passive investment.
Is It Easy to Set Up My Own REIT?
There are several restrictions around forming REITs, and the Internal Revenue Service (IRS) determines how REITs are formed. The IRS gives special tax treatments to REITs because they are allowed to deduct all dividends from corporate taxable income.
Here are the qualities necessary to classify as a REIT:
- Be connected to a real estate investment
- Have shares that are fully transferable
- Distribute at least 90% of taxable income to shareholders annually
- Invest at least 75% of assets in real estate
- Have a minimum of 100 shareholders after its first year of establishment as a REIT
- Have a board of trustees or directors
- Have no more than half of its shares held by five or less individuals
All that said, starting your own REIT could reap big rewards, but not without considerable effort on your end.
Benefits of Commercial REITs
All investments require research and strategy on your end, REIT or otherwise. Here are some of the benefits of investing in a REIT:
Hands-Off Work, Money In Hand
When you invest in a REIT, you do not have to manage the property, find tenants, or participate in any building maintenance. Direct real estate investing (such as owning the property yourself and renting it out or flipping a property) requires more time, effort, and management on your end. With a REIT, you put your money in, and more money comes out (ideally).
Easy, High Returns
Because REITs are legally required to distribute that 90% of profits to its shareholders, you’ll see higher returns on your investment. Commercial REITs are also purchased the same way stocks and bonds are, making it easy to invest even if you don’t have a lot of capital to spend.
Diversification
REITs are often invested in dozens (sometimes hundred) properties, meaning success is not dependent on a few concentrated assets. Independent landlords struggle with small portfolios, but REITs allow your money to be spread across a variety or properties and areas.
REITs are also less correlated with the broader market. They are driven by factors that do not affect most stocks and typically have consistent cash flow from rental payments from tenants. All of these factors combined mean your investment can offer diversification benefits.
In Conclusion
Commercial REITs are a method of real estate investing that requires a monetary investment for you, and offer a quick and easy way to invest and receive passive income. Starting your own REIT is more complicated and difficult, though not impossible.
Looking for more information about passive investments or commercial real estate? Want to understand the difference between a REIT and a PERE? Check out our other posts to become an expert investor!
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