There are no limitations on the different ways in which one can invest in the commercial real estate.
With the advent of new technology, there are numerous ways of investing in commercial real estate and it has opened up the possibilities of investing for different classes of people including the lower class and middle-class people.
It is no longer believed that only affluent people can play in the world of real estate. The crowd funding and other forms of investing in real estate have changed the game and made it much simpler for other people to enter the commercial real estate market too.
However, the real challenge lies in choosing the most appropriate type of fundraising to buy your commercial real estate.
Any real estate expert would tell you the different ways through which one can invest in the commercial real estate, but the real challenge is in analyzing which way of fund-raising should you choose to buy your commercial real estate property that will give you best returns in the long run.
Which is the best way of purchasing commercial real estate property with respect to your interests and the scope of your property?
In this, we will discuss one of the oldest types of fundraising to buy a commercial real estate property – Direct ownership, as opposed to one of the newest ways of investing in real estate – Crowd-funding.
They are both one of the most widely used methods of investing in commercial real estate property and here’s all you need to know about them. So, Hang in tight!
Before understanding the pros and cons of direct ownership and crowd funding which can be used to analyze which is a better option to buy your commercial real estate property, let us first understand what exactly is direct ownership and crowd funding.
What is direct ownership?
Direct ownership is one of the oldest ways of investing in commercial real estate and it is one of the easiest to understand.
Direct ownership is when a piece of land is wholly owned by an individual owner or a partnership company, or LLP or a private limited company.
This method of investing in the commercial real estate was very popular a few decades ago when there were no other means of investing – one should either have the potential of buying a property by using personal money or have the eligibility to qualify for a loan for the purchase of commercial property.
This is the reason why only those people who had a huge amount of money were able to invest in real estate market.
What is Crowd-funding?
Crowd funding is one of the newest ways in which one can invest in commercial real estate property.
Crowd funding basically involves raising funds from online investors in order to buy a particular commercial real estate property or a Portfolio of such Investments.
This new way of investing in the commercial real estate was started in the year 2012 and a lot of people who belong to the upper middle class and other classes of society had finally found their way of getting into real estate markets.
This crowd funding is regarded as a boon to the non-High Net-worth Individuals.
Let us now understand the pros and cons of direct ownership and crowd funding in order to analyze which one is the best way to invest in the commercial real estate. Here we go!
Pros and cons of investing through direct ownership
- A better judgment of how the property is doing – Having the Direct access to all the documents of the properties and being able to look at the property physically, direct ownership allows in making better judgments on how the property is performing. This will also help in making better judgments about the additions that are required to be made to the property to increase the revenue generation.
- Ease in decision making – Since there is a very limited number of owners or only one, in case of an individual owner direct ownership, it becomes very easy for making decisions. This is one of the biggest advantages as it helps in making timely decisions of Reselling the property, finding new tenants or having additions or extensions to the building. Best use of the timely information can be made and decisions can be taken very easily thus providing a competitive advantage over other types of fund-raising where a lot of time is required to make a final decision owing to the involvement of many different parties.
- Requires less time to arrive at a final decision – Since there are no multiple owners here, it requires very less time for arriving at a final decision and this is a very big advantage as time is of the greatest essence when it comes to real estate industry. Because in real estate a right decision is not the only one that counts but a right decision at the right time is most important.
- Requires huge amount of initial investment – Direct ownership usually does not involve any commercial real estate loans and hence the whole burden of the large investment has to be borne by an individual or the limited number of owners. This also blocks a large amount of money in just one particular sector which can otherwise be used in other forms of investment.
- High risks to be borne by Limited number of owners – No real estate property come with an assured percentage of returns. High risks may sometimes lead to high rewards but at the same time, it may also lead to huge losses. These huge losses in case of direct ownership have to be borne by limited number of owners or one single company or an entity. So, in case of direct ownership, most of the investors are not willing to invest in high risk properties.
- Give a hard time in handling portfolio Investments – When there is a Portfolio of investments, it becomes really hard for a single entity or an individual to look after all the properties.
Pros and cons of investing through crowd funding
- Crowd funding does not require huge amount of capital outlay by single person or entity – The entire purpose behind starting crowd-funding in the year 2012 was to make it easy for the people with modest incomes to enter into the real estate market as it does not require huge amount of money to be invested by any individual.
- It has low or medium barriers to entry – Since both the risks and the rewards are shared by different persons or entities, crowd funding has low or medium barriers for entry. The online portals have made it all the more easy for these investors to access crowd-funding websites and choose where they wish to invest.
- The online investors who invest in crowd funding have great amount of flexibility – instead of focusing any particular type of property, crowd funding allows the investors to invest in large portfolio and different type of real estate properties. As compared to the direct ownership, crowd funding has more flexibility for investing in portfolio of investments like multifamily or industrial assets.
- Less liquidity – One of the major drawbacks of choosing crowd funding to invest in real estate is that the funds are not easily liquid-able. In other words, investors who invest through crowd funding has to lock their money for minimum 18 months and maximum up to 5 to 6 years. Thus, in cases of emergency, one cannot rely on the real estate property Investments for meeting immediate financial needs.
- Technology oriented approach over Practical Real Estate experience – numerous websites which are coming up with crowd funding options are more Technology oriented rather than focusing on the practical aspects of real estate industry.
This can be a major drawback because it requires experience and expertise in order to arrive at right decisions to invest in a real estate or a portfolio of commercial real estate properties rather than having a strong website.
Being technologically advanced is in no way going to help the team of online investors who have invested in crowd funding in making higher profits because real estate is more about making the right decisions at the right time rather than ease of operation and accessibility!
These are some of the major pros and cons of direct ownership and crowd funding methods of investing in real estate.
The answer to, “Which is a better form of investing?” is very subjective and it depends on a lot of factors.
One needs to consider the pros and cons of both ways of investing in light of one’s own interest and capabilities to take risks before arriving at the final decision.
If you have large amount of funds or can easily qualify for a loan for purchase of commercial property, then direct ownership maybe the right option for you.
On the other hand, if you do not wish to block huge amount of money and wants to take shared risks and rewards, crowd-funding is a better way of investing for you!
This was just an example based on the factor of ability to lock or invest huge funds. Conducting similar analysis on different factors will give you an answer on which one of the two is a better way of investing in your commercial real estate property!