Of all the financial investing advice you get, the one most people recall is to always diversify. Just as your grandmother may have said, don’t put your eggs all into one basket. That is good advice when it comes to eggs, stock, and also investing in commercial property. Many an investor has found himself declaring bankruptcy due to making the mistake of buying the wrong property or mismanaging it to failure.
Most people are aware of the contraction in the housing industry that sent the economy into a tailspin. What most don’t realize is that this also had an effect on the commercial property industry. Many investors found their commercial properties take a big hit in terms of value. Those that depended on income producing properties experienced huge vacancies as small businesses went under. You can imagine the dire straits you’d be in if you only had one property or type of property. While even those that were more diversified had a tough time, at least they were in a position to navigate the waters a bit better.
Even though the commercial market is making a comeback, along with the intrinsically tied residential market, it is time to consider getting back into investing in commercial property. For proper diversification for safety in numbers, to avoid mismanagement concerns, enjoy liquidity and to pool resources, the best way to invest in commercial property is through a commercial real estate income fund.
What Is a Commercial Real Estate Income Fund?
The best way to understand what a real estate income fund is, is to think about what a mutual fund is in the stock market. A mutual fund is comprised of dozens, sometimes hundreds or more, of individual stocks and bonds across many different industries. It is managed by experts that keep a close watch on the markets to make adjustments when necessary. They are set up for a specific purpose, be that a focus on growth through dividends or through a rising price. You would be hard-pressed to purchase all these individual investments on your own, so it is worth the administrative costs to put experts in charge of it for you.
A real estate income fund works the same way, although they are investing in the real estate industry either directly or indirectly. They diversify through the various types of investments including raw land, shopping malls and plazas, industrial parks, office buildings, and multi-family residential buildings. They may also invest in the players, such as real estate developers and home builders. Finally, they may also invest in the supply chain for building, such as lumber companies and other building material suppliers. A few may go further and invest directly in REITs and real estate companies.
Your Time Is Valuable
Unless you want to make a full-time job out of managing your commercial real estate properties, you are going to need a good team behind you. Even then, you will probably put in considerable time making decisions and managing people. If you listened to the advice to diversify and purchased multiple types of property, you are probably stretched pretty thin. With all that comes a great deal of stress, as well as the likelihood of something important falling through the cracks. Investing in commercial real estate funds releases you to do the things you love, as they are pretty much autonomous. All you’ll need to do is look over the periodic reports and then enjoy the profits when you sell.
Only a small number of investors have the capital and/or borrowing strength to get into the major real estate investments. While you might love the profits from a multi-story office building, for example, buying one is not for the faint of heart. However, when you are part of a commercial real estate fund, those bigger fish are now within grasp. A huge pool of investors has the capital necessary and a well-managed fund has experts in leveraging to make the investment work for all of you. Since financing is still a bit tight and far from inexpensive right now, it is harder for an individual investor to get the leverage they need for the best net profit. A fund doesn’t have nearly as much of an issue.
Talking About Experts
It takes a village to raise a child, and it takes just as many experts to be successful in the commercial real estate industry. You may have a keen eye for picking properties, and perhaps killer negotiation skills, but what do you know about finding tenants or getting the best insurance policy? It is likely that you can’t wear all the hats, but a commercial real estate fund can. With key people each having their own experience they fill all the niches perfectly, with a more successful outcome that you could realize on your own. As an individual investor, you would have to hire at least a few professionals along the way, but then you have to manage them and hope you hired the right ones because one weak link can spell disaster.
When you purchase a property, you now have, for better or worse, an asset that is not liquid. Should you find yourself needing some capital, it is not an overnight transaction. You will need to find a buyer, or leverage your property through a mortgage or taking in another investor. With a commercial real estate fund, you simply sell your interest which can often happen in just a day or two.
Advantage Over REITs
A commercial real estate fund is similar to a REIT (Real Estate Investment Trust) but with a noticeable advantage – growth. When you invest in a REIT, you will receive the income and profits being produced. This results in the value of your investment remaining steady. If you would prefer your investment to grow, a commercial real estate fund is the way to go. The profits and income stay in the fund to continually grow the fund and your investment, which you will get when you sell out of the fund.
As the commercial real estate industry makes a rebound, there has never been a better time to invest in commercial real estate. However, listen to your grandmother and don’t put your investment eggs all in one basket. Diversification, going after bigger fish, reducing risk of failure, limiting your management time demands and maintaining liquidity are all possible with commercial real estate funds. Let a village raise your portfolio and you can focus on other things.
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