The recent problems on Wall Street indelibly underscores the benefits of investing in commercial real estate. High-quality investment real estate allows you to diversify your portfolio and insulate yourself from stock market fluctuations. You may be surprised to learn that owning commercial real estate is within the reach of many investors, not just the super rich. In this article I will address three ways to invest in commercial real estate with as little as $200,000.
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Purchase a Net-Leased Building with a Credit Tenant. “Credit Tenant’ refers to a well-capitalized company with strong resources to back-up its lease obligations. Many of the world’s best managed and best capitalized companies choose to lease, as opposed own their real estate. Such companies include Walgreen’s, CVS Pharmacy, Enterprise Rent-a-Car, AutoZone, DollarGeneral and many more. Corporations’ preference for preserving their capital to expand their core business as opposed to investing in brick and mortar, creates an opportunity for the real estate investor. These companies sign long-term (15 to 25 years) leases with rent escalations over time. They are Net-Leases, meaning the corporate tenant, not you, the landlord, are responsible for upkeep of the property and paying the real estate taxes and casualty insurance. Because of the credit strength of the tenant, mortgage financing is easier to obtain.
2. Invest in Commercial Real Estate through a Your IRA. An IRA which enables you to directly purchase of real estate into your retirement account, is called Self-Directed IRA. To set one up, you will an independent IRA administrator allowing real estate investments, such as Entrust New Direction IRA located here in Boulder. Because the IRA holder is not allowed to guaranty debt on the property, a debt-free property works particularly well. One property option we recommend for a IRA’s is a debt-free tenant-in-common (TIC) interest. A TIC property is a deeded, fractional interest in a larger commercial property. While the total property may be valued in the millions, the fractional interest can be purchased for as little as $50,000.
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Exchange from Residential to Commercial Property. In a university town like Boulder, many investors in student rental properties have accrued substantial amounts of equity and contingent tax-liabilities. Furthermore, they are tired of the hassles associated with managing student rentals. The 1031 Exchange allows you to exchange the equity in your residential rental into a shopping center, medical facility or office building. Once again, we like TIC’s because they are within reach of small to mid-sized investors. Since high-quality TIC’s are professionally managed, you can also say good-bye to hands-on property management, while retaining a say in major decisions regarding the property.
Regardless of the investment vehicle you choose, it is important to be very clear about your goals. Investors generally choose real estate because of its attributes of enduring value, tax-deferability, inflation hedge and portfolio diversification. Be prudent in your use of debt. Financial leverage is a two-edged sword. Lastly, use the expertise that is available to you through skilled professionals. A real estate investment advisor, a property attorney, a tax accountant and a financial planner should be included in your team.
Article by: Mark Casey
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