It is generally known that commercial real estate investing produces increasing returns over time. From homeowners who purchase rental properties to businesses that run investment organizations, real estate has been a popular investment option for people of all income levels.
Investing in a large portfolio of properties is a safer choice than investing in one or two properties, and sharing the investment burden makes things more stable. That’s where commercial REIT investments come into play.
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What is a Commercial Real Estate Investment Trust?
Generally, a commercial real estate investment trust (REIT) invests in properties solely for commercial purposes, including office buildings, restaurants, parking lots and garages, hotels, conference centers, etc.
Commercial real estate investment has the potential to make significant profits—particularly if there are multiple income-generating tenants per building. But the investment threshold is quite high for individual investors.
Shareholders of a commercial REIT pool their resources to acquire profitable, stable properties, then share the profits in return. Rather than holding the title and managing the assets separately, the properties are stored in a trust.
How Does Commercial REIT Work?
In terms of income, a commercial REIT makes money for its shareholders much as a mutual fund does.
Investing in mutual funds, for example, means you’re buying into a fund managed by professionals, and these professionals invest the fund’s money on your behalf. Their goal is to earn money for their investors by investing in a variety of vehicles. The share of profits they take is based on your profits, but in essence, you make money when they do.
Similar principles apply to commercial REITs. An investor purchases shares in the trust, and the trust invests its earnings in commercial real estate. In the case of a commercial property trust, they might buy one or more buildings, then rent them to tenants and distribute profits to shareholders after expenses.
Are Commercial REITs a Good Investment?
Perhaps you are wondering why you should invest in commercial real estate, specifically in REITs.
Diversifying a real estate portfolio with commercial REITs is a great way to gain exposure to the potential profits of real estate without having to do all of the heavy liftings of maintaining the property yourself.
REITs can prove to be great investments over the long run, did you know that REITs have outperformed the stock market over the last 30 years, with returns hovering around 10% to 12%?
Pros and Cons of Commercial REITs
Investing in commercial REITs may be a great investment strategy, but there are a few things to consider before investing in them.
Pros of Commercial REITs
- Higher ROI – REITs are legally obligated to distribute 90% of profits to shareholders, so you’ll see a higher return on your investment.
- Accessible Investment Option – REITs are purchased similarly to stocks and bonds, making it easy for investors to participate in the market.
- No Management Responsibilities – Direct real estate investing can be a lucrative investment, but it comes with a price: It takes time, headaches, and effort to manage and rent out a property. As REIT investors do not have to manage the property, they earn passive income from trust profits.
Cons of Commercial REITs
- Direct Tie to Interest Rates – Interest rates greatly influence the value of REITs. Therefore, REITs rise when interest rates rise. A low-rate environment may signal to the real estate market that now is not the best time to buy or sell, which can negatively impact the performance of REITs as a whole.
- Prone to Yield Fluctuations – Real estate trends fluctuate according to global and local economic conditions, making REITs particularly susceptible to yield fluctuations.
- Dividend Taxation – The IRS treats REIT dividends differently from other investments. Investors do not receive special treatment, but the entity does. REIT dividends are typically taxed like long-term capital gains at the individual level, which is very high in comparison to other investment vehicles.
Work with California Commercial Real Estate Experts
Whatever your purpose for investing in commercial real estate is, doing so is almost always a smart move, provided you choose your investments carefully. When investing in commercial real estate investment trusts performs well, investors don’t have to worry about the specific properties they’re investing in.
Investing in REIT is hassle-free because it handles all the acquisitions and maintenance, and ensures profits for shareholders like you. When you’re ready to take your commercial real estate investment to the next level, you’ll need to work with a team of experts.
We are here to help you. Commercial real estate investing is one of our specialties, and our team of professionals thoroughly inspects each property we select for investment, providing greater security for you as an investor.
Learn how you can leverage the expertise of our commercial real estate team, contact us at 949-881-7128 at Saint Investment Group today!
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.