Many people I speak with have an inherent fear of commercial real estate.? Most people think it costs an enormous amount of money to get returns from this market so they don?t bother doing any research to find out more.? So, I am here to clarify some of those thoughts and to help you get some ideas of how to invest in commercial properties without investing a huge sum of money.
3 Approaches
There are a number of approaches but the 3 approaches I will discuss today are:
- Investing in a REIT
- Pooled money or tenant-in-common
- Direct purchase of a property
I will go into the basics in this post but will be discussing each of these in greater detail in later posts.
Today?s topic is Investing with pooled money or Tenant-In-Common
Pooled money or a TIC or Tenant-In-Common approach to investing in commercial properties can be confusing since many people I speak with believe this to be very different than what it is.? So, I am going to discuss both versions in this post.
The most common belief of this investment is that a bunch of family members, friends, acquaintances pool their money and buy a property.? This is actually a common approach to real estate investing.? Many of my clients got started in commercial real estate by getting a number of family members or friends together and having each of them invest money until they had enough to purchase the property.? Depending on the property and the number of investors, you might be able to invest for as little as a couple of thousand dollars.? The drawback of this type of investment is you are doing business with family and friends and emotions can run high.? This can be a very rocky road if the investment doesn?t perform as expected or if someone runs into hard times and needs their money back.? If you don?t create the proper entity to hold the property and manage the investments, then you could run risk of making everyone?s money at risk for the actions of one of the investors.? On the other hand, it is popular and several of my clients have used this to get started.
The more formal type of Tenant-In-Common (TIC) is where an asset management company solicits investors to put in a defined amount of money ? say $50,000.? The asset management company then creates a formal entity that buys properties then returns a specific rate to the investors for their investment.? For example, say you invest $50,000 in a TIC that invests in strong office buildings in secondary markets outside of major commercial zones.? The TIC may then give you a guaranteed return of 8% on your money for a period of time, then return your money to you at the end of the investment period.? This type of TIC also requires you to invest for a specific period of time.? You cannot get your money back before that time since your money was directly used to purchase the property.? The amount required to invest is higher in this approach.? In most cases, the TIC company would like to see $50,000 or more as an investment.? This type of investment also is handled through a professional asset management company who specifically handles this kind of investment.? The benefits of this approach are the guaranteed return on your money and the fact that you aren?t actively involved in the management of the property.? The asset management company employs professionals who identify target properties that meet their performance criteria for investment so you don?t have to handle that aspect of it.? You also aren?t pooling your money with your family members or friends so emotions run lower in this type of investment.? The people I know who invest in this type of structure love it and usually reinvest their funds with the company after the investment period has ended.
Whichever approach you are considering, the tenant-in-common or pooled money approach can be helpful for a number of people to invest in commercial properties without owning the properties outright and having to manage them.
Please post a comment below to let me know your thoughts on Tenant-In-Common.
Tomorrow?s post is going to cover the most common approach which is direct ownership of commercial property.
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