What are Commercial Properties REITs?
Real estate investment trusts (REITs) that specialize in commercial properties offer investors a way to gain exposure to commercial real estate investments without having to purchase properties on their own. These REITs operate similarly to mutual funds, where investors contribute funds to a central pool which is then used to purchase commercial properties.
Large investment companies and REITs can pay more for commercial properties for several reasons:
- Scale: Large investment companies and REITs have the ability to acquire and manage a large number of properties, which allows them to spread their costs across a larger portfolio and potentially generate higher returns.
- Access to capital: Large investment companies and REITs have access to significant amounts of capital, which allows them to make large investments in commercial properties. They can raise capital through a variety of means, such as issuing shares in the trust or through debt financing.
- Professional management: Large investment companies and REITs have professional management teams with the knowledge and expertise to manage commercial properties effectively, which can lead to higher returns on their investments.
- Tax benefits: REITs are specifically designed to provide tax benefits to investors, REITs are required to pay out at least 90% of their taxable income to shareholders in the form of dividends, which can make them attractive to investors.
- Economic of scale: Large investment companies and REITs can negotiate lower prices with suppliers and negotiate better lease terms and other conditions with tenants because of their size.
How to Invest in Commercial Property REITs?
Overall, commercial real estate is a sound investment that can provide higher returns than residential properties. Investors can choose to invest directly or indirectly in commercial real estate, depending on their financial capabilities and risk appetite.
Real estate may be categorized into residential, industrial, and commercial properties. Commercial properties provide workspace for business activities, and they include office buildings, hotels, manufacturing buildings, convenience stores, etc. Compared to residential properties, commercial real estate is considered a sound investment since they provide higher returns.
However, it also means that the investor will have to incur huge costs to set up real estate properties and customize each unit according to each tenant’s preferences. An investor interested in investing in commercial properties can choose to make investments either directly through the ownership of a real estate property or indirectly through owning shares in REITs that invest in real estate.
1. Direct investment
Direct investment requires a considerable high amount of capital to finance new construction and acquire existing commercial buildings. Commercial properties are a high-risk, high-return investment. It means that people who invest directly into such properties must possess significant knowledge about the industry and a large amount of capital.
Direct investments are suitable for high net worth individuals and institutional investors. To learn more about financing direct investment in commercial real estate, consider CFI’s Commercial Real Estate Finance Specialization program.
2. Indirect investment
Indirect investment is the most popular method of investing in real estate without spending too much capital or being directly involved with the property. Investors get to own commercial real estate by purchasing shares in a real estate investment trust that specializes in commercial properties.
REITs develop and own commercial real estate, and investors can purchase their shares in the same way they purchase stocks and bonds. It also means that investors will own properties without taking any mortgages, as is the case with direct investment.
Investors get a share of the net revenues, which are distributed to shareholders as dividends. REITs are managed by an experienced team of professionals, which saves investors the hardships involved in dealing with difficult tenants. To learn more about publicly traded securities and other capital markets concepts, consider some of CFI’s courses on these subjects.