When evaluating all your investment options, it’s important to understand the fundamental differences between investing directly in commercial real estate versus other investing opportunities including public markets, REITs, and more. Understanding these differences, as well as the relative benefits and drawbacks of each opportunity, can help you find the right investment option for you and your portfolio.
CrowdStreet believes in the power of commercial real estate. It’s why we developed the Marketplace–to give individual investors direct access to real estate deals that historically belonged to a very gated community.
These are just six reasons to invest in commercial real estate:
Attractive returns–Real estate returns can be more attractive compared to stocks, bonds, or even other commodities such as gold.
Cash flow–Real estate investments are often structured to deliver steady cash flow with distributions that are paid to investors monthly, quarterly, or annually.
Equity upside–Investors may have the opportunity to boost their overall return by cashing in on property appreciation or a capital gain on an asset once it is sold.
Depreciation–Real estate operators (sponsors) use this tax benefit tool to give investors the chance to utilize a passive “loss” from depreciating improvements to offset other passive income.
Principal paydown–Typically, a property’s revenues are used to service any outstanding debt that decreases with each month’s payment.
Tangible assets–Real estate is a hard asset; it’s a physical thing with intrinsic value, both in the building and the land.
But how does commercial real estate compare to other investment options?
Commercial Real Estate vs. Stocks
Private equity is an alternative investment class that consists of capital that is not listed on a public exchange (as opposed to stocks on the public stock markets, which are). Stocks that are listed on public exchanges are registered securities, which subjects them to a rigorous level of regulation and oversight by the Securities Exchange Commission. In contrast, private equity investments are unregistered securities and are therefore exempt from some levels of regulatory oversight and reporting requirements via Regulation D Rule 506.
Most commercial real estate investment opportunities fall into the category of private equity.
Historically, stock markets have exhibited greater volatility than commercial real estate markets. Since most investors are seeking to build a balanced, diversified portfolio and mitigate volatility, a direct commercial real estate investment offers a way to gain both the benefit of portfolio diversification, as well as escape the up-and-down of the public equity markets.
One other important difference is liquidity. A real estate investment requires tying up your capital (potentially for several years), whereas generally, investors can sell their stock positions at will. Commercial real estate investments are not, for the most part, intended to be short-term investments. This longer holding period, however, does mean that you might be able to carry your investment through an overall economic downturn and hold on until the real estate cycle is in a better place.
Commercial Real Estate vs. Publicly Traded Real Estate Investment Trust (REIT)
A publicly traded REIT is a portfolio of properties (similar to the way a mutual fund holds stocks or bonds) that can be bought or sold by investors on a public exchange, whereas an investment made on our Marketplace offers direct exposure to a specific property or a specific strategy via a sponsored fund. While REITs are advantageous in the sense that they provide some level of liquidity in an industry that is notoriously illiquid, a REIT’s performance tends to track closely with the overall performance of stocks and bonds. Despite the fact that a REIT owner gains exposure to commercial real estate, you have still not significantly improved your portfolio in terms of either diversification or market risk. Direct investment has less of a correlation with the public markets and this gives you more downside protection than just buying publicly traded REITs.
Another important difference is the fees. As with any large entity, REITs have a number of expenses to carry in terms of running the broader company. Generally speaking, those operational costs will tend to result in more conservative return expectations. On the CrowdStreet Marketplace, sponsors pay to license our technology tools, and while this cost may be passed on to investors ultimately as a means to recoup fundraising expenses (as is the norm in private equity), there are no investor fees for joining CrowdStreet or for accessing the investment opportunities.
Commercial Real Estate vs. Residential Real Estate
For many investors, investing in real estate often means buying and renting residential real estate. While this type of ownership has the potential for higher yield, it also comes with a host of potential headaches with drains on time and capital (like when a bathroom pipe needs fixing in the middle of the night), as well as increased risk to your cash flow given that occupancy is either 100% or 0%. Commercial properties, on the other hand, are leased to businesses and often have multiple tenants to help mitigate the cash flow risk. While residential leases often run 12 months, a commercial lease is usually at least three years long. Leases for five and even 10 years are not uncommon. A longer lease means a greater assurance of reliable cash flow, lower vacancy rates, and lower turnover costs.
Another important distinction between residential real estate and commercial real estate is in a property’s valuation. The market value of a residential property is determined by the average value of comparable properties in the neighborhood. Commercial real estate valuations are still impacted by comparable market values, but the potential amount of revenue is mainly generated by the property itself. A strategic improvement that increases the overall revenue generated by ta property. can have a huge impact on a commercial property’s resale value.
Until recently, most individual investors lacked the requisite tools and access to successfully buy, manage, and sell commercial real estate. Many sponsors had set investment minimums in the $250,000+ range, excluding the average investor from diversifying into direct commercial real estate. Deals on the CrowdStreet Marketplace, by contrast, typically have a minimum investment amount of $25,000 and invite all accredited investors to co-invest alongside experienced sponsors and spread their portfolio’s real estate allocation across markets, property types, and investing strategies.
Commercial Real Estate vs. Bonds and Other Fixed-Rate Vehicles
Government bonds, CDs, and annuities are often utilized by investors to preserve wealth and guard against inflation. While these options offer a lower risk of default and require very little knowledge or upkeep, they usually have limited annual returns, typically between 0.5% and 5%. Direct commercial real estate investments are often cash-flowing “pre-investment” and can offer a higher-yield alternative to fixed-rate vehicles.
It is important to remember that commercial real estate investments are illiquid and carry a far higher risk of loss of principal than a fixed-rate vehicle. You can manage this risk by spreading your investments across different geographical areas, asset classes, risk profiles, holding periods, and business models.
|Private CRE||Public Stocks||Residential Real Estate||REITs||Fixed Income|
|Ease of Diversification||Medium||High||Low||High||Medium|
CrowdStreet offers investors the opportunity to diversify their portfolios beyond stocks, bonds, and REITs. We have worked to democratize real estate investing by making it far easier for accredited investors to access, evaluate, and participate in deals. To be clear, we do not advocate making a binary decision between real estate and stocks or any other asset class. But modern portfolio theory advocates allocating 10-20% of investable capital into hard assets such as real estate and diversifying both across asset classes as well as within asset classes.
You can check out our online CRE marketplace [here] to begin reviewing our private equity CRE offerings.