5+ Best Ways to Get Started with CRE Investments in 2021

2021 has been a wild ride for the commercial real estate (CRE) market. With lockdowns in place and other social distancing measures imposed on non-essential businesses, many companies were forced to close their doors forever. As more hotels, bars, restaurants, and other businesses terminated their leases, the value of commercial real estate (CRE) plunged to its lowest mark in 10 years.

As challenging as the past year has been for CRE owners and established investors, there couldn’t be a better time to start your own real estate investment portfolio. What’s the main reason?

CRE is dirty cheap at the moment and is bound to get more expensive in the future. And there are plenty of different commercial real estate firms that can help you get started.

As Warren Buffet put it, “Our favorite holding period is forever.” In the long term, real estate prices are going to appreciate, as they always do. This presents a lucrative opportunity for beginner investors to kickstart their portfolios.

It might seem like getting started with CRE investments is a huge challenge:

• The minimum investment is high;
• There is virtually no liquidity in the CRE space;
• Finding the right property is tough;
• Investing takes a lot of legal work and processing time;
• An unprecedented event like COVID-19 can cause the markets to collapse;
• The fees of commercial real estate intermediaries are high.

With that being said, the leading players in the industry realized the limitations to the traditional buy-and-hold CRE investment model and came up with alternative solutions to tackle this problem.

We have a team of experienced real estate professionals who are happy to share their expertise and suggest the best commercial real estate investment options based on the following criteria:

• Minimum investment amount;
• Convenience;
• Ease of getting started;
• Investment security and management model;
• Other things to keep in mind.

We hope that this article will help you pick your next unicorn CRE investment option.

Getting Started in CRE investing

A lot of beginner investors have a misconception that the CRE market has insanely high entry barriers and lacks the liquidity that other asset classes can provide. While this assumption holds true for the majority of traditional real estate ownership models, there are a few ways to get started BIG with little capital. Let’s look at each one of them one by one.

Investing in REITs.

Definition: In a Real Estate Investment Trust, the company that represents the REIT chooses and manages all properties by itself. The ownership of the building is tied to the REIT where investors represent a body of co-owners.

Minimum Investment Amount: $1,000 to $25,000.

Convenience/Ease of Getting Started: The process is very similar to how you trade stocks, mutual funds, ETFs, index funds, or other securities — by going to the market (online or in-person) and placing an order. This is usually done through a third-party broker. One of the main benefits of a REIT is its ability to avoid double-taxation. For instance, whenever you purchase stocks of a company, the company gets taxed on its operation, and then you get taxed on your dividends. However, REITs avoid this double taxation, and taxes are only paid on your dividends.

Investment Security and Management Model: A REIT selects, purchases, sells, owns, and manages the properties using investors’ funds to finance its operations. In return, investors receive dividends on their share of ownership. This means that your investment is managed by real estate professionals but even they can make costly mistakes.

Underwater Stones: Up-front fees can be high, significantly decreasing the value of your investment. You cannot directly influence the acquisition and management decisions in a REIT. You have little to no control over your investment.

Levels of Risk: Low/Medium — if you invest in a publicly-traded REIT, you should be able to sell your REITs shares easily on a major stock exchange but that does not protect your funds from possible poor acquisition and management decisions.

To put it simply, if you want to have a hassle-free solution where you put up your money for investment and have an experienced property management company take care of the acquisition and management of your assets, then REITs are a good choice for you. The downturn is that you give up control over your investment and cannot select the properties that you like.

Direct Ownership of Triple-Net Properties.

Definition: Buying a property and leasing it out to triple net (NNN) tenants is one of the most popular ways to invest in real estate.

Triple net tenants are the kind of tenants that pay ALL the fees for building maintenance, taxation, insurance, and everything else related to the actual operations. Once you find a triple net tenant, all you have to do is collect the money from the renters, and you can kick-back with a couple of margaritas by the pool…Well, at least for as long as that lease lasts.

Triple net tenants have established operational workflows, years of experience in franchising, property management, and efficient operations. They are the gurus in their respective industries and know how to set things up properly. This expertise and access to capital enable them to run their companies more efficiently than you ever would.

So, what’s the catch?

First of all, when you buy a property, you need to have a substantial amount of money to afford the entire building.

Second of all, finding a NNN tenant (like McDonald’s, Starbucks, or Evergreens, for instance) could be extremely challenging. You have to be in the right location, with the right type of properties and have the connections needed to find such companies.

Last but not least, once their lease is up, there is no guarantee that you are easily going to find another super-star tenant.

Minimum investment amount: $100,000 to $100M+..

Convenience/Ease of Getting Started: It is hard. Buying a building, finding a tenant, and setting things up could be a huge hustle. On the bright side, if you do manage to bring in a triple-net top dog, you will have a stable source of passive income for years. Moreover, NNN-tenants have a tendency to drive the value of real estate in your area up.

This solution is not beginner-friendly. If you have a substantial amount of capital, years of experience in real estate, and you are not risk-sensitive, then this might be a good pick. Proceed with caution — find the right advisors, do your research on the area, estimate the possible traffic and run several scenario analyses before getting started.

Investment Security and Management Model: You, as a property owner, will purchase and own the building, but the tenant will be responsible for the management, repairs, and headaches associated with it. In return, you will get a stable source of income for the duration of the lease.

Underwater Stones: Setting things up is very challenging. Also, as a property buyer, you need to make sure that you get things right from the beginning. If this does not happen — you might end up with a property that nobody wants to rent.

Levels of Risk: Medium/Low — Once you get started and if you manage to find the right tenant — things are pretty much risk-proof for the duration of the lease. However, this is a very big if. Finding the right tenant can be very challenging and few NNN-tenants might be looking for a building in your area. Thorough research and stellar connections are required to make things work, which can be risky and costly.

Investing in DST (Delaware Statutory Trust)

Definition: Think of a DST as a partnership between different investors in a fund. This partnership is formed with one idea in mind — to invest in real estate projects along with other investors, significantly reducing the minimum investment amount. DSTs usually invest in institutional-grade assets — the least risky type of assets with a lower return rate.

There are 3 main reasons to invest in a DST:

1. It is a simple and completely passive source of income.
2. It is safer than most other options on this list.
3. It has low entry requirements.

So, what are some other benefits connected to DSTs?

1. Shared expertise — Having the expertise of several real estate professionals can make decisions more well-rounded and reduce the chance of a poor investment.
2. A passive and secure source of income — this means that while they are not likely to bring abnormal returns to investors, the money will be invested in safer assets.
3. Reduced entry barriers — you can start as low as $10K. This means that investors get access to safer, institutional-grade assets that they could previously never part-take in.
4. 1031 exchange-eligible — 1031 exchange enables investors to defer capital gain taxes (which can reach up to 40% if your property appreciates fast).
5. Diversification — with small entry requirements a DST allows investors to get a share in many properties, thereby diversifying their risks.
6. No landlord responsibilities — experienced professionals take care of it.

On the downside,

1. You lose control over the purchasing decisions — While allowing experienced fund managers to make purchasing decisions might be a good thing for beginners, it can cause a lot of discomfort for more experienced investors, and it does not save you from losing your capital if a poor decision is made.
2. No liquidity — DSTs are only a good fit for buy-and-hold passive investors. This is because you cannot sell your ownership in a DST easily — you have to wait until the capital is raised in the pool and the DST is sold (which can take 5–10 years).
3. You can only invest once — According to the IRS ruling of 2004–86, once the initial funding amount is raised, no other investors could be invited and existing investors cannot pour more capital into a DST. This means that you won’t be able to adjust your investment according to the performance of DST.
4. Defaults — In cases the building is purchased on a loan, your funds won’t be protected in case of a default.

Minimum investment amount: $25,000+

Convenience/Ease of Getting Started: Very simple. You just have to find the right fund, talk to the representative, agree to the investment turns, and provide liquidity for the next round of fundraising. This is a great solution for experienced investors who are looking for a passive source of income and reduced stress. This solution is also one of the most beginner-friendly ones, considering lower barriers to entry and the passive nature of being a DST investor. However, if foregoing the possibility of high returns does not sound attractive, choose another option.

Investment Security and Management Model: All the purchasing decisions in a fund are executed by the management body and property advisors (usually very experienced people). Obviously, you should make thorough company research because a successful DST can only be maintained by an honest property management body with a proven track record

Underwater Stones: While you won’t earn as much as you could with slightly riskier alternatives, poor decisions by the management body can still be very costly for everyone involved.

Levels of Risk: Low — usually the management body picks higher-grade properties with lower return rates that can almost guarantee success. However, bad things can happen even to the best properties, and the best commercial real estate owners can make a mistake as well.

REINNO Platform — One-Stop-Shop for Commercial Real Estate Lending and Investment

Definition: REINNO is the perfect commercial real estate platform if you have always wanted to invest in commercial real estate in the USA but never had the funds or patience to do it yourself. REINNO offers a commercial real estate investment platform with low entry barriers and no processing fees. Here’s how the solution works:

1. REINNO creates digital shares of commercial real estate properties, through the process known as tokenization.
2. The property owners sell these shares through the tokenized real estate marketplace to prospective investors like you.
3. Investors earn regular dividends.
4. If investors need liquidity, they can take instant fractional loans using a part of their equity in the property as collateral (loan rates are similar to what banks offer).

REINNO hand-picks properties located across the United States, focusing on recession-proof options, like recovery centers and industrial buildings.

REINNO has a dedicated team of lawyers and real estate professionals who take care of selecting the best-performing properties in different locations. You can certainly find a property best suited for your own liking one the REINNO marketplace.

Pro tip: If you want to diversify risks, you can invest in property portfolios, but if you prefer to get started small — you can invest in individual buildings.

Minimum Investment Amount: $5000. The smaller the property/portfolio — the lower is the minimum investment amount. There are no investment or processing fees, and investors can pay with USD or major cryptocurrencies.

Convenience/Ease of Getting Started: The platform is an automated online system that allows you to purchase fractional ownership in real estate from the comfort of your own home. There are no intermediaries or loads of paperwork, which results in faster processing time. All properties are managed by real estate professionals, allowing you to lay back and enjoy your passive investment.

Investment Security and Management Model: Whenever REINNO creates digital shares of properties through the process known as tokenization, it creates a new SPV for each property/offering. This means that if REINNO stops operating, it will not affect property ownership. Investors will still have equity in the property they invested in.

Underwater Stones: You only obtain property tokens if the minimum fundraising amount is reached during the fundraising period. Until that happens, investors’ money is safe in an escrow account. If the fundraising goal is not reached — the money you have invested will be transferred back from the escrow to your bank account. If the fundraising is completed successfully, tokens cannot be sold on a secondary market for one year (the lockup period). Moreover, you need to be an accredited investor and pass the KYC/AML procedures when registering on the platform.

Levels of Risk: Low. The main risk is the devaluation of property — if the value of the property drops over time. In this case, the value of the property tokens in your portfolio will also drop. Unlike REITs, REINNO does not directly manage/purchase the property, which means that if REINNO bankrupts, you will still be safe with your investment.

Fix & Flip

Definition: Do you have a lot of free time on your hands? Do you like the challenge of managing your own projects, and being your own boss? Then the good old Fix & Flip model might be the right choice for you.

Here’s how Fix & Flip works:

1. You buy a lower-grade property at a fraction of the market price.
2. You invest countless hours and thousands of dollars into the renovation and maintenance of the property.
3. When the property conditions improve, its value skyrockets.
4. You sell the property at a much higher price and factor in a substantial commission.

Even though Fix & Flip might sound like one of the easiest options on paper, it is actually one of the least recommended solutions for beginners.

Managing & reconstructing a property requires a lot of experience. You have to pick the right location and construct the property in a way that will attract new buyers. This requires tons of expertise and a professional hunch that entry-level commercial real estate investors still have to gain.

Pro tip: If you found a great investment property, but do not have the right set of skills to execute the project, you might consider getting an experienced property manager on board — his decisions and expertise are likely to bring you higher returns.

Minimum Investment Amount: $20k-$500k+ depending on the type/condition of the property.

Convenience/Ease of Getting Started: Complicated. It requires a lot of hands-on experience and/or support from various third-party service providers, such as property management firms, appraisers, lawyers, brokers, certification agencies, architects, interior designers, plumbers, carpenters, and more.

Investment Security and Management Model: You buy a low-performing asset at a lower than market price and redevelop it to suit the needs of prospective tenants in the area, driving the price of an asset to go up and reselling it.

Underwater Stones: It’s a very risky investment — a wrong purchasing or development decision might bring a substantial decrease in the price levels of your property or discourage buyers. Tied with the reconstruction, management, legal, and operational fees, this solution might end up bringing you negative cash flows.

Levels of Risk: Very High. Consider it only if you can partner with an experienced real estate industry partner and buying a particular property makes a lot of sense. Moreover, make sure you have plenty of budget reserved for fixing and flipping before proceeding with a purchase to make sure your project does not get frozen.

So, which CRE Investment Method is Your Cup of Tea?

Aaaand, that’s a wrap! Historically, commercial real estate has only been available to the highest echelon of investors. However, with the introduction of crowdfunding-based solutions and innovative technologies for real estate investment, such as blockchain, these barriers are being removed, and more players than ever have a chance to enter the industry.

So, to sum it up, here’s the list of top CRE investment vehicles that can help you get started with commercial real estate investment in 2021:

1. Invest in REITs if you are looking for low entry barriers, and want real estate professionals to handle your purchasing decisions when it comes to CRE assets.
2. Use REINNO Platform if you are looking for enhanced liquidity, the ability to manage your own portfolio, and unmatched speed of commercial real estate investment transactions.
3. Fix & Flip if you have a substantial amount of capital and a considerable amount of knowledge (or good partners) in the CRE industry, plus you would like to take the full ownership of your project.
4. Buy and lease to NNN-tenants if you have a substantial amount of capital and a considerable amount of knowledge (or good partners) in the CRE industry, but you do not want to deal with the day-to-day management of the property, maintenance, and general setup.
5. Invest in DSTs if you are looking for a safe, long-term passive investment and want things done on autopilot.

We hope that this list helps you make the most of your investment.

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