Are you interested in investing in commercial real estate? Now, even if you don’t have the disposable cash on hand to enter this profitable investment arena, you can get your foot in the door, thanks to crowdfunding options that level the playing field. Commercial real estate can be a terrific investment if you’re seeking a steady income, looking to diversify your investment portfolio, or want to participate in the aggressive returns available when you turn over a property. Take a look at some of the investment models and platforms available to help you move into this exciting field.
The Steady Returns of Debt Investing
Debt investing is ideal if you’re seeking safe, steady returns. Most CRE debt investments in Canada cover a six- to 18-month term and provide returns between 7 and 12%.
You can choose from two different ways to go about debt investing, with platforms available to support each method. You can invest in an existing real estate loan at a fixed rate of return, or you can invest in a platform that serves as the actual lender. NexusCrowd Inc., based in Toronto, was the first Canadian company to close an online CRE investment offering for CRE, opening up the platform method to investors. This investment model offers a fixed return and relative safety.
The Potential of High Gains of Equity Investing
Investing in CRE equity via crowdfunding is the closest thing to traditional real estate investing. Teaming up with other online investors, you put your money into large-scale commercial projects. But where you once had to come up with the full capital for such a project — or plug into a team of investors — on your own, with crowdfunding, the platform does the work for you. That means much lower minimum investment requirements and a ready-made network of investors.
Equity investing involves putting money into big-time projects in their early stages. That translates to high potential returns but also significant risk. Experienced investors who study the market diligently and have a deep understanding of risk versus reward tend to best with CRE equity investing. Platform options for commercial equity investing are numerous and include Brix, ConsiderFunding.com, and Crowdmatrix.
The Easy Barrier to Entry of eREITs
A Real Estate Investment Trust (REIT) is like a mutual fund for real estate. An eREIT simply refers to an REIT administered online or via an app. It pools money from a bunch of investors and buys into a portfolio of real estate projects. As an individual investor, you discover gains and losses that are in proportion to your share of the portfolio.
An eREIT differs from equity or debt instruments in that it doesn’t involve investing in a single project or property. It’s more like betting on the CRE market as a whole. In other words, when the broader market is expanding, eREITs almost always do well, even if individual properties go under from time to time. This is in contrast to debt or equity investments, where an investor can lose their shirt on an individual property, even during a strong bull market.
A typical eREIT has very low minimums, making it ideal if you don’t have a wallet full of start-up money to invest. They are also diverse by their nature. This combination of traits makes eREITs ideal for those just getting their feet wet with CRE investing.
If you’re seeking an eREIT platform, check out Fundrise and RealtyMogul. Both platforms helped pioneer the CRE crowdfunding space in Canada and have now pivoted to administering eREITs.
What to Look for in a Commercial Real Estate Crowdfunding Platform
Your choice of platforms is huge and growing every day. Which commercial real estate platform is ideal depends on a few factors. If you’re a rookie investor, for instance, you might prefer a platform that does most of the research for you. If your chief concern is cash flow, you could go with a platform that pays back both interest and principal throughout the term.
Payout structure refers to when you get paid as an individual investor. With debt investments and eREITs, payout structure doesn’t vary much. You get your stated rate of return on a debt investment at known intervals. With eREITs, you can add or withdraw money at any time, similar to investing in a mutual fund. If you’re investing in CRE equity, make sure you find out where you are in the capital stack and in what order you can expect to be paid back your principal and any profits from the deal.
Consider liquidity as well before you invest. Even if a platform offers large returns, it doesn’t help if you’re looking for immediate cash flow. Pay attention to how often an investment pays out. Is it monthly, quarterly, or annually, or do you receive a lump sum at the end of the term? Make sure a platform’s liquidity lines up with your goals.
Risk factors are another consideration. With every investment comes risk. Even a short-term debt instrument can implode if a borrower defaults. Reputable platforms are highly transparent about risk. They can let you know past default rates and unique factors that might make an investment more hazardous. If you can’t find this information, you should be wary of the platform.
In a booming economy, commercial real estate can provide strong returns with reasonable risk. With so many crowdfunding platforms to get you started, you don’t have to be rich or experienced to get in on the action.