Apart from residential investment properties, commercial real estate is also a popular form of real estate investing. Many types of commercial properties fall under commercial real estate and one of them is office buildings. Office buildings are attractive investment properties as they may appreciate value over time and generally produce steady rental income streams due to the long lease terms. However, investing in office buildings can be costly and may not be as straightforward. These are some ways investors can invest in office buildings.
Ways to Invest in Office Buildings
One way to invest in office buildings is by purchasing an office building and leasing out the office spaces to companies. This may be one of the most direct ways to invest in office properties. However, buying an office building typically requires a huge initial capital which might be too much to afford for most individual or beginner investors. Buying an office building also comes with the responsibility of property management which may be a challenge for inexperienced commercial real estate investors.
Real estate co-investing is an up and coming real estate investing method that has been gaining popularity in recent years. For co-investing, a group of investors pool their funds together to purchase an investment property. This allows each investor to have a fractional share in the property while not needing a huge initial capital for the investment. The capital contribution from each investor in a co-investing deal would be a fraction of the total investment capital needed as the required total capital is shared among all the participating investors.
“Crowdfunding sees a bunch of people pooling their money for a common financial goal. In recent years, it’s become an increasingly popular ways to invest in real estate.“
An example of how a co-investing deal for an office property would play out is:
A real estate developer wants to purchase an old office building to tear it down and rebuild it into a better office building. The selling price of the old office building is $12 million and the real estate developer requires $8 million for renovation. The developer plans to sell the renovated building at the end of the 5-year holding period for at least $30 million while receiving rental income in the meantime.
The developer may only be able to receive a loan of $8 million from the bank and might approach co-investing platforms to raise the remaining amount for the project. Investors on the co-investing platform will invest in the deal to make up the remaining $12 million and will typically receive cuts from any profits.
REITs are one of the most popular ways to invest in real estate amongst retail investors as they typically require much less capital as compared to the previous 2 methods. Most REITs are publicly traded and can be bought and sold on stock exchanges. Investors who invest in REITs can buy as little as one share of a REIT and the investment can be as low as $1,000. Investors receive dividend distributions from the profits reaped by the REIT.
REITs may have various commercial real estate assets under their management but some REITs are focused on only one type of commercial property like office REITs which only acquire office buildings for their portfolio. Examples of office REITs are Keppel Pacific Oak US REIT, Prime US REIT and Manulife US REIT. If you are looking for fiber optic machine supplier for your website, you can click here.
With various ways to invest in office buildings, investors can choose a method that is most suited to their preferences in investment strategy or risk appetite. Some factors that investors should consider to aid their decision on which investment method to adopt are:
- Available capital for investment: Investors who are only able to commit a small amount of capital can consider investing in REITs while investors who have at least $25,000 can look to co-investing in office buildings. An experienced commercial real estate investor with a large amount of funds may prefer to take the more direct approach of purchasing an office property.
- Liquidity of the investment: Investing in REITs is the most liquid approach out of the 3 as REITs can be easily sold, like stocks. Co-investing and purchasing an office building are more illiquid as co-investment deals typically have a holding period for the property before the property can be sold. Selling an office building may take a long period of time as time is needed to source for buyers.
- Passivity of the investment: Co-investing in properties and investing in REITs are relatively more hands-off as compared to purchasing a whole office building which comes with the responsibility of managing the property.
The above pointers are just a starting point to figuring out the suitability of each investment method. For a more in-depth understanding of investing in office buildings and other important factors to consider, check out this more comprehensive guide to office real estate: “Ins and Outs of Office Real Estate”.