Diversifying risk by investing in the lucrative but challenging real estate industry through the use of a commercial real estate fund is much like using a mutual fund for stocks and bonds. Not only do you get reduced risk, but you enjoy other benefits as well. You won’t need to manage properties daily and consider where next to put the profits and income they are producing. You’ll also open up a larger playing field, beyond the local market you have knowledge about. That and other factors provide you with protection from downturns in local markets and certain sectors that are part of the normal ebb and tide of this industry.
Hand Off Management
Managing properties yourself is very time consuming. From locating investments to keeping up with tenants and upkeep, depending on the type of property, the team you have in place and the number of investments, you could have very little time for anything else. Assuming you are creating an income flow, you also need to be involved in how to reinvest those funds to keep them working for you. All this is well and good if this is what you enjoy doing, but for many letting a commercial real estate fund take care of all that is preferable. It is advantageous at many times in your life, including when you’re young and you want to have more family time up until those retirement years when you prefer to travel and play golf.
Protection from Downturns
Being an investor in a commercial real estate fund allows for far great diversification than you could manage with individual investments. Many factors in an area can directly affect a particular sector of the commercial real estate industry. For example, consider if an unfavorable new regulation began to push small businesses into strip plazas instead of shopping malls. This would really hurt you if you owned just a mall, but if you had also invested in some plazas as well you would be in a better position. By being in a fund that has both, as well as other types of properties unaffected by the new legislation, you wouldn’t be take such a beating and could weather it until a correction righted the situation.
Larger Playing Field
In addition to safeguarding your portfolio from local downturns, by investing in a commercial real estate fund, you are further protected because of the larger playing field they conduct themselves in. You would be foolish to reach to commercial properties in an unfamiliar geographic market, but with a team of professionals managing the fund the entire country and even the world could present ideal investment opportunities. This portfolio from many geographic markets further lowers risk by having properties that are not all in one area that could all be affected by a downturn or catastrophe.
Furthermore, when you consider that a fund has the professionals to handle all types of properties, whereas you may only have expertise in one or two types, you can understand how much larger the playing field becomes.
Growth of Investment
When you are growing a real estate portfolio on your own, it can take months or years for one to create enough income to give you the capital to add another property to your portfolio. In the meantime, you have to come up with ways to have that income invested to hopefully reduce that time and not put it in jeopardy. This leaves you trying to balance return and risk. With a commercial real estate fund, there are many properties earning income making it an easy matter to continually grow the fund and thus your investment. It also keeps your growth plan on tract which could have been hampered if you had profits in hand that you’d be tempted to use for other things like a vacation or fancy red sports car.
Removal of the Emotion Factor
One of the hardest things for commercial real estate investors to conquer is basing their investment decisions on facts and figures alone. It is easy to get caught up in the beauty of a project and then ignore things that come up during due diligence that should make you walk away or renegotiate the terms. Your excitement might even mean you perform an incomplete due diligence or forget to put proper deal contingencies into the transaction. It is also a common pitfall to want to make a deal happen by any means necessary so you don’t feel like you have failed in some way by moving on. By using a commercial real estate fund, you completely eliminate this potentially disastrous outcome. The professionals in charge of acquisitions are always tasked with making sound, unemotional decisions.
Overall Superior Returns
Historically, the returns from commercial real estate funds have been superior in the long haul making them a wise investment for your portfolio. Just as real estate in general has outperformed inflation, so have these funds.
While no investment is 100% risk free, diversifying risk and enjoying the many benefits of a commercial real estate fund goes a long way to making even the most risk adverse investor comfortable. Investors with and without real estate investing experience are looking toward these funds for at least a portion of their portfolio investing. You’ll want to do a bit of homework to learn about the strategies being used with these funds. There are factors to consider when choosing a commercial real estate fund to invest with. Take the time to review their historic returns and consider the sustainability of their strategies. They are more than happy to address any of your concerns and provide you with all the information you need to make a decision. In the end, you should enjoy all the benefits of this type of diversified investment, including hands-off management, protection from down turns, a larger playing field, growth of your investment, removal of the emotion factor and overall superior long-term returns.
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