Investing In Commercial Real Estate: Smarter Strategy Than Single-Family Rentals

Single-family rentals have long been the standard for individuals wanting to invest in real estate. One of the reasons this method is common is because it is familiar. In a good market, the homeowner has seen the equity in their own home rise over time, showing them the potential of this type of investment. This potential entices them to invest, sometimes without knowing what they’re getting into. 

Owning single-family rentals can be more challenging and require much more property management than most people expect. First, there are very few who can afford to purchase an additional single-family property outright, leading them to take on some kind of debt to finance their investment. Although they aren’t likely to pay utility costs or landscaping, as this is often the responsibility of the renter, they will have a mortgage payment every month. This may not be a problem when the housing market is good, but if there is a downturn in the market and the rental value decreases, it leaves the investor in a difficult position because their mortgage payment may end up being more than the market value of the rental.

Additionally, as most homeowners can attest, there are many unforeseen capital costs that can arise when owning a home. If the home unexpectedly needs a new heating system or a new roof, the investor is responsible for that. If this isn’t taken into account ahead of time, the investment can quickly become a drain.

Because of these challenges, among others, smart investors have moved over to passive commercial real estate investments. In the past, many of these investors were unable to invest in commercial real estate due to the significant upfront cost of buying commercial property. However, new investment structures have opened up possibilities that were previously unavailable. 

One of these investment structures is real estate investment trusts (REITs). With REITs, the investor invests in publicly traded shares of a company with a substantial commercial real estate portfolio, which makes them much easier to buy and sell and makes them much more liquid than owning a physical property.

One of the benefits of REITs is that they are diversified. Since they often hold properties in a variety of locations, REITs are much more insulated from downturns in specific areas of the market.

Another benefit of REITs is that the individual investor doesn’t need to be an expert in commercial real estate to benefit from investing.  It allows individuals to collect quarterly dividends based on value appreciation and income from a commercial real estate portfolio, without the headache of being a landlord.