By Joanne Cleaver, Paul Curcio, and David Tony, CNN Underscored Money, featuring Brian Spinelli, CFP®, AIF®, Co-Chief Investment Officer
All the returns, none of the hassle: Commercial real estate investing seems like the sweet spot for individual investors. You are investing in actual buildings, so there’s the comfort of the tangible, and commercial tenants appear to represent steady income flow with, hopefully, less drama than small residential properties.
Commercial real estate also offers a wider scope of options than investing in single-family houses and small rentals. Best of all, you can tiptoe in with a relatively small initial investment, learn how this huge sector works and determine if it will help you achieve your financial goals.
Commercial real estate investing 101
Commercial real estate spans multifamily housing — big apartment buildings — to buildings that are occupied by things, not people, such as warehouses. In between are retail, office, medical and other special-use buildings.
A commercial real estate holding consists of both the land and the building. Those are two points of value that anchor the investment.
Even if one sector falls out of favor — as office buildings are now in the post-pandemic, remote-first world of work — buildings and land are still worth something.
That inherent value explains why commercial real estate accounts for about 15% of institutional portfolios, said Sam Adams, CEO and co-founder of Vert Asset Management, which creates and manages real estate investment portfolios.
For individual investors, the recommended allotment usually ranges between 5% and 15%.
Typically, you can count on average annual returns from a real estate investment trust (REIT) of about 11% and, from private REITs, about 8% annually. A commercial real estate investment structured through a private partnership, or even that you own directly, is probably going to yield closer to 6% due to expenses, he added, though tax considerations might offset some of those expenses.
Real estate is “staid,” said Brian M.
Spinelli, co-chief investment officer with financial advisory firm Halbert Hargrove. And many investors want staid because it balances out more volatile holdings, such as growth stocks.
In a way, said Spinelli, commercial real estate is “an alternative to fixed income,” because the steady stream of rental income is similar to the debt payments that flow to bondholders.
