Investing in commercial real estate is lucrative and rewarding. Between REITs and fractional ownership, which should you choose and why?
When speaking of Commercial Real Estate as an investment option, the more commonly heard term might be REIT, for those who do not want to buy a property outright and become the landlord. The lesser-known, but fast-evolving fractional ownership might sound alien, but it comes with its own batch of advantages. To begin with, let us first try to understand why real estate should be looked at as a viable investment option and why commercial real estate is the better sibling you should pick.
Real Estate Investment – Commercial vs Residential
Real estate is much more than your house and your office. Commercial and residential estates are different on a lot more aspects than your 8-hour shift. Residential real estate can include houses, flats, villas, condos, cottages, and the like. Such places come normally with an annual rental contract if you do not own them. These are places people live in. Commercial real estate involves places of work, shopping, entertainment, leisure, et al. Offices, warehouses, parking lots, malls, industrial floors, SEZs belong to this category. Very few commercial properties will be owned by an individual. They are mostly offered out on lease periods that can be 5-15 years long.
Compared to residential real estate, commercial real estate has stricter terms of lease and tenant agreement. Details of maintenance, upkeep, power consumption, and many other factors form the crux of the agreement. Considering all this, investment in commercial real estate is handled by companies, rather than individuals. One can invest in CRE via REITs or fractional ownership since a single CRE asset might be unaffordable for the general investor. Now let us look at what these options are, and which one is a better choice for you.
REIT – Real Estate Investment Trust
If you understand mutual funds, REIT will be a piece of cake for you. It is a real estate company that operates on principles like a mutual fund. Mutual funds pool money from many investors to purchase financial securities like government bonds, direct equity, stocks, et al. REITs pool money from many investors to invest in income-generating real estate properties. These properties are mainly occupied by businesses and companies through lease agreements. The investment returns paid to the investor come from the monthly rents and the interest on the security deposit paid by the tenant. However, the investor cannot control where his money is being used, just like in a mutual fund. You can choose the basket of goodies, but not pick the only candy you want to eat.
Fractional Ownership
The way the fractional ownership model works is a bit different. An asset or a CRE property is listed or advertised to be open for investment. Based on the total investment required, a minimum ticket size is allocated as a portion of the property. Your investment can be in multiples of the same ticket size. Based on your investment amount, you legally own a percentage of the property. Based on the percentage of ownership, your returns are a mix of monthly rentals and interest on the security deposit paid by the tenants.
Investment in anything carries risk. However, CRE is much more insulated from market fluctuations and volatility. This makes CRE investment a wise choice to make if you are interested in a stable source of returns. Fractional ownership gives you all the benefits of REITs and more. If you wish to know more about fractional ownership and how it can benefit your investment portfolio, please contact ASWIN BUSINESS CORPORATION
