These days, having one income source often just doesn't seem to cut it. In fact, according to CNN, more than 44 million Americans have a "side hustle," or a secondary source of income to supplement the money made from their primary job. One common side hustle is real estate; you've undoubtedly seen, heard, and read plenty about people who buy houses and flip them to make a significant return on their investment.
If you make the right moves, flipping single family homes is a good way to make a side income, but the potential for even bigger money lies in commercial property. Savvy investors are gravitating toward commercial real estate investments in order to take their income streams to the next level. If you're considering investing in commercial real estate, it's important to research your options so you know what you're getting into. There are two primary types of investment opportunities in commercial real estate: direct investments and indirect investments.
Direct Investments (DI)
A direct real estate investment entails purchasing a stake in a property. In other words, you would have an ownership interest in the property, be it an apartment complex, office building, or a retail center. With a direct investment, you can tackle the investment on your own or with a small group of partners and be the head honcho, or you can participate in a crowdfunding investment, in which you own less of the property and have less decision-making power, but still own a piece of a potentially successful venture.
With a direct investment, you get to call the shots. Direct investors reap the benefits of a steady stream of rental income while also enjoying a more diversified portfolio. Typically, a direct investment will entail a 20–30 percent equity investment in the purchase price of a property. There is a lot of work and risk involved with a direct investment like this—you need to be a good financial planner and be knowledgeable of the tax consequences of the investment—but that high risk can potentially yield an even higher reward.
As a direct investor, you have more control over decision making than you do through other investment options. From the investment strategy to the property location to the structure of the deal to the property manager who will be in charge of the property, you are in the driver's seat. This means you have the opportunity to invest in only the deals you're interested in and passionate about.
How Do You Make Money?
With a direct real estate investment, you have invested your own money into the deal, so the returns come directly to you. Of course, if you have a few partners or co-investors, you must split the returns accordingly.
Real Estate Crowdfunding
If you don't quite have the capital to take on an investment yourself or with a small group of partners, you can join a larger group of other investors in backing a commercial or residential rental property. The benefit of this is a lower minimum buy-in. Some commercial crowdfunded real estate requires a minimum investment of as little as $1,000 for a small ownership stake in the property. In addition, you do not need to be an accredited investor.
Real estate crowdfunding is a great way to diversify your investments without spending too much on each individual investment.
How Do You Make Money?
With crowdfunded real estate investments, you make money based on the appreciation of the property (for example, the value of the land or building increases over time) as well as from the monthly income the tenant pays—a business renting an office space will pay a monthly lease, or an individual renting an apartment will pay rent each month.
Where to Start?
There are a number of proven and reliable websites to check out if you're interested in getting involved with real estate crowdfunding:
PeerStreet. If you want to dip your toes into real estate investments without laying out too much cash, PeerStreet is the site for you. PeerStreet has become popular due to the low buy-in as well as the endorsements it has received from a number of well-respected figures in the finance and real estate industries. All it takes to get started on PeerStreet is $1,000.
Fundrise. The minimum investment through Fundrise is a meager $1,000, and the fees are low as well; they typically only charge between 0–3 percent in fees. In addition, Fundrise has stringent requirements about what investment opportunities it will accept. Only the top 5 percent or so of properties end up being chosen. In addition, you do not have to be an accredited investor to participate.
Realty Mogul. One of the benefits of Realty Mogul is the large scale of the projects they offer an opportunity to get involved with, like the Hard Rock Hotel in Palm Springs, Florida. The minimum investment is $5,000, and you can invest either through the funding or real estate loans or an equity share in a property.
Realtyshares. This popular real estate investing site offers a wide variety of options to choose from, ranging from residential properties to mixed-use, commercial, and retail spaces. There are no fees for investors who use Realtyshares, and the minimum investment is $5,000.
Prodigy Network. Prodigy Network is making waves as the real estate crowdfunding network for high rollers. The initial investment required is $10,000, so this isn't exactly the site for beginners. Of course, with that substantial of an investment, investors get highly personalized service. Keep this site in mind if you find success in your early investments and want to take a bigger bite in the future.
iFunding. With a $5,000 initial investment, iFunding allows investors to invest in properties like offices, apartments, and retail developments. The site has received attention from a wide variety of mainstream media for its investor-friendly opportunities.
Patch of Land. Patch of Land is a bit different from other real estate crowdfunding sites. They tend to focus on rehabilitation projects and flip deals. The minimum investment is $5,000, and there is a wide variety of investment opportunities to browse and select from.
Indirect Commercial Real Estate
Unlike direct real estate investments, where you're at the helm of the deal, an indirect commercial real estate investment involves buying shares, much like the stock market. These shares are called real estate investment trust (REIT) stocks. In this case, you're basically investing in the landlord or operating company of the property, rather than investing in the property itself. Investments in REIT stocks are fee-based, so even if your property isn't performing well, you'll have to pay the agreed-upon fees associated with the investment.
Commercial Real Estate Investment Trusts (REITs)
An REIT is an opportunity for an individual to be a part of a large-scale real estate project. The REIT is a trust that owns and operates the real estate asset (usually a very large project with lots of potential to generate income, like a shopping mall, hotel, or apartment complex). REITs are a great way for investors to make money on a real estate deal without actually having to buy the real estate themselves. Some REIT trusts are registered with the U.S. Securities and Exchange Commission, allowing them to be publicly traded on the stock exchange. Other REITs are registered, but not traded like stocks. These are called non-exchanged REITs.
How Do You Make Money?
You earn money from an REIT just like you would earn money from stocks. The investors get dividends from the profits of the company (the trust), and investors can sell their shares in the marketplace if the REIT is a traded trust.
Where Do You Invest in REITs?
Much like you can buy and sell stocks online, you can invest in an REIT online through broker websites. One popular site for investing and trading REITs is www.reit.com. Keep in mind that you don't have a lot of knowledge or control over the assets that the REIT may be buying and selling. Some of these properties include international investments, which can increase your risk as an investor due to the potential shifting of foreign markets.
Real Estate Limited Partnership (RELP)
A real estate limited partnership (RELP) is much like an REIT, except privately held. The partnership is lead by an experienced property manager or real estate firm. This head of the group is known as the general partner. The general partner has unlimited liability and is usually the most active in the operations of the partnership.
The general partner brings in outside investors to help provide financing. These investors are known as limited partners, and they receive a small stake of ownership in the partnership in exchange for their investment. Investing in an RELP is like investing in the stock market, except, as the name suggests, limited partners only face limited liability. If the RELP loses money, limited partners are only liable for the amount of capital that they contributed.
Limited partners are much like stockholders in a public company in that they have only limited influence in the business operations of the limited partnership. However, limited partners also have limited liability. If the RELP faces losses, limited partners are only liable for the amount of their capital contributions.
How Do They Make Money?
The investors in the RELP receive a quarterly payout. This cash distribution is taxed more favorably than earnings from the stock market, which is one reason why an RELP is an attractive investment option.
Where to Start?
One of the first things you should do is consult with an accountant and a lawyer. No matter how well prepared you feel you are, you're putting your time and money on the line, so it's a good idea to work with experts and professionals who can ensure you're making prudent choices. They can provide invaluable advice as you begin your investment journey. The process of registering your limited partnership will vary based on your state, but it's typically comprised of the following four steps:
1. Decide where to register your limited partnership. The requirements vary by state, and registering in some areas of the country are more advantageous than others. You can find some information on the Register With State Agencies page of the U.S. Small Business Administration website. Your attorney can also help you better understand each state's business laws and tax codes.
2. Once you have chosen a state, register your limited partnership there. This must be done through the secretary of the state's office, and there is typically a filing fee to register. The fee isn't cost-prohibitive, though. In Delaware, for example—a state where many businesses are incorporated and registered due to their favorable tax laws—it only costs $200 to register a limited partnership. The name of your partnership will usually have to include an "LP" to indicate that it's a limited partnership.
3. Draft a limited partnership agreement. This is another step where your attorney will come in handy. This legal document clarifies the roles of the individuals in the limited partnership as well as sets guidelines for how profits and losses will be divided among the members of the business.
4. Research, file for, and obtain the proper permits and licenses that your limited partnership requires. The U.S. Small Business Administration offers a helpful tool to figure out what type of paperwork your business will need.
Invest Wisely
Investing in real estate, especially commercial real estate, isn't as easy as they make it seem on TV. However, getting involved in this industry is a great way to bolster your investment portfolio. Just make sure you do the research required to be well educated, and take the time to formulate a plan and target only the investment types and opportunities you feel comfortable with.