Top 5 CRE Investment Concerns - Answered
Real estate investments are often overlooked by retail investors when preparing a sustainable investment portfolio. Part of the reason for that lies in the fact that this channel of investment is not understood well or explained sufficiently. The other half of the reason lies in the uncertainty that comes with looking for stable assets to invest in. As with every other form of investment, care and planning should go into making your real estate investment portfolio. As a part of our knowledge series, this article will help you know the top 5 CRE investment concerns and how to mitigate them.
The lack of clear information about the risks involved in this kind of investment option is one of the major reasons why retail investors tend to stay away from such a stable mode of investing. Let us take a detailed look at what those particular concerns may be.
Commercial Real Estate (CRE) being one of the most stable investment options, is surrounded by a lot of murky waters. The top 5 concerns that investors feel are -
- Bigger Initial Investment
- Time Commitment
- Professional Help Requirement
- Asset Level Risk
- Liquidity Risk
Concern - Generally speaking, when opting for investing in CRE, the initial investment can go to the tune of multiple crores. That is not a standard sum of investment that an average retail investor would be comfortable with. Compared to a residential real estate asset, that is a much larger overhead to take care of. Traditional investment in any CRE asset can also involve further larger capital expenditures to follow. With more numbers of tenants, the maintenance and repairs of a CRE can rake up quite the bill. The only hope you can have is the rental returns to outweigh the costs involved.
Answer - When investing via fractional ownership, the initial investment is split into bite-sized pieces that amount to a few lakhs. That is quite lucrative. Additionally, since the asset is managed by an SPV (Special Purpose Vehicle), the maintenance and upkeep costs are managed quite economically. The returns stay the same and are divided among the investors as per the share of their investment in the asset.
Concern - Rarely you can come across a commercial asset that is rented only by a single tenant. Any sizeable asset that is capable of giving more returns than the maintenance involved will naturally be occupied by 2 or more tenants. This brings in multiple leases that can start at multiple times. The time involved in taking care of all that does not make for an attractive investment model.
Answer - Since an SPV manages all the legalities and formalities, the only concern you are left with is to invest or not. Irrespective of when a tenant leaves or comes on board, your returns continue unabated, and this makes for a great passive investment.
Concern - If you are going to handle all the maintenance and upkeep issues at a CRE asset, you need to be licensed to do so. Not everyone is knowledgeable on all aspects considering this, so you will need to hire someone to take care of this on your behalf. That counts as an additional cost. Factoring in all management issues, you might need to hire a property management company to cover it all. They charge between 5-10% of rent revenues for their services. Outsourced professional help or your own expertise? Which one would you choose?
Answer - For every asset that you invest in via fractional ownership, you get an SPV that comes with its own experts on financial modeling, property valuation, and management. All the charges for that are factored in beforehand and are shared across all investors, making the overhead almost negligible on the individual investor level.
Concern - Risks are involved in any kind of investment. The major concern in a CRE investment is the asset-level risk. Single occupancy assets come with a higher level of risk than multi-occupancy ones. The risk primarily is of the tenant vacating the asset and not finding another tenant before the rental returns start getting affected.
Answer - Through fractional ownership, the key factor remains diversification. Grade A assets are handpicked so that asset-level risk is kept low. This is done through due diligence and concrete lease terms. Additionally, the SPV in charge of the asset management always keeps a sharp eye on the market and tenant requirements, so that rental returns are not affected by any sudden exit.
Concern - Liquidity is the sweet spot for every investment. As a sole investor in a traditional CRE investment, it will be hard to get buyers or investors for an asset that is in a market that’s facing any ebbs in capital appreciation. Exiting from the investment becomes harder.
Answer - In fractional ownership, since the asset is divided into portions, exits are easier. Because getting investors for smaller initial investments is much more pragmatic. To add to that, internal auctions can be held periodically to help investors assess their portfolios and put up their ownership portions for sale if needed.
We hope this comprehensive article has helped address some of the major concerns that investors have when thinking about investing in CRE assets. If you would like to know more about how Strata helps retail investors navigate the CRE investing waters via fractional ownership, please visit us at www.strataprop.com.