Why not simply invest in a REIT instead of going through the pains of ownership?
Why not just leave it to the pros?
As many of you know we work with funds, individual investors, and end users of commercial spaces. So while I can kind of see why an end user would want to own their own commercial space, there are a whole lot of reasons why an individual real estate investor may be better served by investing in a REIT or real estate fund.
Pros of Direct Investing:
Leverage. While you can really lever up on commercial as well as residential investments to juice your returns, its hard to do with Reits. While may be able to lever a REIT on margin or even with options, it is much more straight forward with a direct investment. I'll put this on as a pro, but as you know, 'gearing works both ways!'
Tax benefits: Direct Management does take some real expenses, which may include lobster dinners with your accountant, an annual meeting in Las Vegas to discuss strategy, 'look at properties' etc. This along with items like depreciation can really help ease your year to year tax burden.
Appreciation: While commercial real estate is much more open to dramatic swings than residential, the right property in the right place can be a boon to the individual investor when they sell.
Pros of REIT investing
Liquidity: For anyone who has tried to sell a commercial property in a declining market, this has special meaning. When you can click a button to sell in a liquid market at anytime, that definitely has value.
Direct Exposure: With the 225 REITS on major stock exchanges, you can invest in practically any niche that you would like exposure to. Run by pros, you can transparently see the track record, investing philosophy, and open books as required by the SEC.
Smaller Investment: You could in theory buy 1 share of a REIT, nibbling off as much as you like incrementally. As you trust management more you can increase or decrease your holding as you see fit.
So ultimately as a pure investor, if you have specific knowledge or expertise in an area, like development, or connections with a local governing body that can help you rezone, then go for it. But for many passive investors, a REIT is a great way to gain the exposure to a sector that you are looking for without the liquidity issues of regular real estate.
For all of you office landlords out there, it is sometimes worth it to stick to your guns on rent and terms. Now may not be one of those times.
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