Don’t let the headline fool you, this is not a get rich quick scheme. The same way there is no such thing as a free lunch, there is no other way to put it: investing in real estate – status of ownership aside – is still an investment, and with that come the inherent risks of putting your money somewhere other than a bank account. However, if you’re still curious, yes there are a few ways someone can make money from commercial real estate without owning property.
There are a number of factors that may make property ownership not feasible in your current reality. Nothing in life is instantaneous and it’s normal to be working towards these goals; you’ll get there in due time, trust the process. Real estate is a wiser investment than most, so if you happen to agree with this sentiment and are looking to get in the game without putting forward the exponentially larger amount of money on most commercial properties, you can still invest in commercial real estate. But, how? First, let’s get the lay of the land.
If you’ve done any amount of digging into the world of commercial real estate investment, you’ve likely come upon the acronyms REIT and ETF. They’re often used interchangeably, but they’re two remarkably different avenues of investment. An ETF [Exchange Traded Fund] represents an entire group of related stocks, oftentimes tied to an index (the S&P, The Dow, The NASDAQ, The Russell, etc.) and weighted in two ways: market cap or an equal weighting. People may choose them because they are a bundle of stocks that will offer a high level of diversification, or concentration. That all sounds great, but if you’re envisioning your commercial real estate investment portfolio flush with diversified assets, that’s not what you’ll be looking for. We’re looking for properties, not stocks.
Instead, you’ll want to get yourself involved with a REIT [Real Estate Investment Trust]. A REIT is a form of group real estate investing that allows for special tax considerations for the investors. REITs are a tax-advantaged real estate specific investment vehicle that can be focused in a variety of ways such as geographic location, or specific real estate purpose such as warehouses, medical offices, or residential to name a few. REITs can be publicly traded or listed as private, like any other business, and their specific focus in real estate can range anywhere from private prisons to timber. Organized like a trust or other business partnership, this is a company where one can become a singular investor among many with shared commercial property interests. If you’re looking for fractional interest from a diversified group of properties, a REIT is the way to go. If you want to reap the rewards of individual ownership, a REIT is sure to be disappointing for you.
The other way to make money from commercial real estate without directly owning property is to invest in the development or construction of commercial properties. Putting your money towards becoming a partial owner in these companies that are actively involved in commercial real estate is a frequently forgotten avenue of investment. This may be especially appealing to prospective investors who want to bring about an impact in a local market that targets a growing need and capitalize on that need with a new product that will generate sales and revenue from the project in excess of the project costs that will oftentimes offer outsized returns. Thinking and acting locally does have its inherent drawbacks, though. There can be a long entitlement process where you are working with the elected and appointed officials in order to hammer out what can be built as well as what will ultimately be built based on your goal of maximizing the return on investment. The governing body in question will also need to address their needs for stormwater management, traffic loads, accessibility to schools, and shopping, and assess what level of contribution can you make towards the affordable housing fund, among many other factors. This can lead to substantial upfront costs for engineers, civil planners, architects, and designers before you have a proposal to work with even as a starting point. But, if the inspiration to become a commercial real estate investor came from the impetus to have a positive effect on your community at large, this may be a necessary evil worth contending with.
While there are few things that can remove the learning curve of being a novice when it comes to any new venture, this course of investment comes with the familiarity of the group you’re investing with, whether it be via a REIT or construction/development company. So, your likelihood of receiving an above average return is more likely than if you were to go in on a commercial property alone. I don’t recommend full ownership of a piece of commercial real estate for first time investors; syndication is still your best bet.