Real estate is considered a critical driver of economic growth and often seen as an important asset class in a diversified financial portfolio.
Commercial real estate is a $1.1 trillion market by revenue and growing. It is an alternative asset (relative to stocks and bonds) that can be a valuable piece of any investor’s portfolio. Potential benefits of investing in well-chosen commercial real estate include income generation, low correlation to other asset classes (i.e. diversification), protection against inflation, capital appreciation, and tax benefits. Drawbacks include high transaction costs, relatively long hold times, and lack of liquidity. While leverage is often used to increase returns on equity and considered a benefit, it comes with the drawback of additional risk.
Individuals can invest in real estate in a number of ways, both public and private. In general, public real estate investments can offer higher liquidity and transparency while private real estate investments provide more flexibility, lower volatility and more diversification. The lower liquidity of private real estate investments also usually is rewarded with higher potential returns.
Some of the main commercial real estate property types are multi-family, retail, office, hotels, and industrial. Most are managed by professionals well-versed in the acquisition, development, and management of their property type. Each has its own pros and cons when it comes to risk, return, and effort. Generally, of course, as risk and effort increase so should potential return.
Real estate crowdfunding eliminates some of the barriers that previously made real estate investing out of reach for the typical investor. With real estate crowdfunding, investors can participate in deals that were previously out of reach financially and reserved for those that had personal relationships with the project sponsor. Now, well-managed crowdfunding platforms help to manage the relationship between investor and sponsor while keeping investment minimums relatively low.