What are Commercial Real Estate Investment Funds?
July 29, 2022
There are two main types of real estate properties you can invest in- residential real estate and commercial real estate. While residential properties include structures that are suitable for human habitation, commercial properties are used to generate income while many also serve as residences for tenants. If you are keen on generating passive income while investing in a property, consider commercial real estate investment funds.
A commercial real estate investment fund is an investment product that pools investor capital and deploys it towards commercial properties. The specifics and structure of the fund will vary but they have a few things in common, such as liquidity, management, diversification, income, minimum investments and access. CRE Funds can provide rent income as well as capital appreciation in the long term.
Three Types of Commercial Real Estate Investment Funds
There is more to commercial real estate funds than most believe. It offers a wide choice and has different funds based on the investor’s preferences, risk appetite and liquidity. Commercial real estate funds can be divided into three types:
Real Estate Investment Trusts (REITs)
A real estate investment trust is a fund known for high dividend yield and tax benefits. The major benefit of investing in an REIT is that they are not taxed at the corporate level and the taxes are paid directly by the individual unit holders. REITs are privately held as well as publicly traded and they specialize in a specific property type like office buildings, shopping centers, healthcare, apartment buildings and data centers. You can find three different types of commercial real estate REITs:
- Equity REITs- This REIT invests in real estate and generates income from the dividend, rent and capital gain on sales.
- Mortgage REITs- A mortgage REIT will invest in mortgages and mortgage backed securities that remain secured through commercial real estate assets and generate income from interest.
- Hybrid REITs- As the name suggests, hybrid REITs are a combination of property and mortgage investments.
A mutual fund is similar to a REIT. It invests in the equity of companies that invest into properties. Through mutual funds, you can enjoy moderate risk, consistent income and diversification of your portfolio.
Private Equity Funds
A private equity fund is privately held, has a longer time horizon and offers less liquidity. They are ideal for investors who have a time horizon of 5-10 years and can take moderate risk. There are different types of private equity funds to choose from.
Top 3 Benefits of Commercial Real Estate Funds
There are several benefits of investing in commercial real estate which is why it suits all types of investors. Let’s take a look at a few benefits in detail.
- Flexibility – Real estate investment does not mean you have to sacrifice on flexibility. When you invest in a single property, you might have to hold it for long and wait for it to appreciate but investing in a CRE fund will give you more flexibility and control. You can put your money into different funds and choose the properties you want to own.
- Steady income – CRE Funds are structured to generate passive income. Since tenants pay monthly rent to the property owner, you can have a steady flow of income. The sponsor ensures that the deal achieves the intended profit threshold and it is structured in such a way that the interests are aligned between the sponsors and investors.
- Diversification- With CRE Funds, you can enjoy diversification in your portfolio. Since the fund invests across multiple properties across different geographies, you enjoy high diversification and have low risk of losing money in case of an economic downturn.
Commercial real estate funds are a great choice for investors to dive into real estate investment. You can start small and choose from a wide range of funds while enjoying high liquidity and diversification.