Here's how a crowdfunded real estate deal might work: An experienced real estate developer notices that an older office building is only 50% occupied. The developer plans to buy the building for $10 million, spend $4 million renovating it, and lease the vacant space over the next few years. At the end of a five-year holding period, the developer is confident that the fully leased building will sell for at least $20 million. Meanwhile, the building will generate a nice income stream.
The problem is that a bank is only willing to loan $8 million and the developer only has $2 million to contribute. The developer might list the opportunity on a crowdfunding platform to raise the other $4 million from investors like you and me. Investors help fund the project and get a cut of any profits.
One key point is that crowdfunding isn't a low-risk way to invest in real estate. Most crowdfunding deals include a value-adding project such as a renovation or a beneficial refinancing. They're also contingent on the successful sale of a property. That means there's a great deal of execution risk. However, the reward potential is high, and early results have been quite promising.
Investing in office buildings through the stock market
The easiest and least capital-intensive way to invest in office buildings is through the stock market. Several reputable real estate investment trusts (REITs) specialize in office properties. These companies are like mutual funds: They pool millions or billions of dollars from investors to buy a portfolio of properties.
Many (but not all) REITs are publicly traded, meaning they can be bought and sold on major stock exchanges through your broker. This means you can put your money to work in office buildings by buying as little as one share of an office REIT.
In addition to other requirements, REITs must pay out at least 90% of their taxable income to shareholders. Because of this, REITs generally pay above-average dividend yields and can make great income investments -- especially in retirement accounts like IRAs.
There are several office REITs you might consider. I own shares of Empire State Realty Trust (NYSE: ESRT), just to name one example. This REIT owns the iconic Empire State Building as well as a portfolio of other office properties mainly in New York City.
Boston Properties (NYSE: BXP) is another example. It's a massive REIT and one of the largest owners of Class A office properties in the United States. The company holds properties in major markets such as Boston, Los Angeles, and San Francisco. Alexandria Real Estate Equities (NYSE: ARE) is another interesting choice: It's an office REIT that leases space to life science and technology companies.
Which is the best choice for you?
When it comes to investing in office real estate, there's no one-size-fits-all strategy.
For a deep-pocketed, experienced real estate investor, buying an office building could certainly be the way to go. An investor with high risk tolerance, a lot of money to invest, and no desire to operate an office property might like a crowdfunded real estate deal. And for an investor with little capital or lower risk tolerance, an office REIT could be the winner.
With that in mind, here are a few things that can help you decide:
- Capital needed to invest: These options have very different minimum capital requirements. You aren't likely to buy even a small office building with less than a six-figure sum to invest. Most crowdfunded real estate deals want at least $25,000 per investor. But you can invest in a REIT even if you only have a few hundred dollars to commit.
- Liquidity requirements: How easily do you want to be able to cash out of your investment? You can technically sell an office building whenever you want, although it can take months or even years. Crowdfunded opportunities are even less liquid, with your money typically tied up for several years and no way to cash out early. On the other end of the spectrum, you can sell a publicly traded REIT at any time you want with the click of a mouse.
- Time commitment: Crowdfunded real estate investments and REITs are passive investments. You put your money in and you have no further obligations. On the other hand, owning an office building -- even with a property manager in place -- can be like a second job.
- Risk tolerance: There's a wide spectrum of risk within each of the three categories. But, generally speaking, office REITs are the least risky, followed by owning an office building. Crowdfunding is the riskiest way to invest in office buildings. But these deals also come with the highest potential reward.
- Income requirements: If you rely on your investments for income, be sure the path you choose meets your needs. This is especially important with crowdfunding -- while many deals target a certain level of income for investors, it's not a guarantee, nor does the cash flow always start right away.
The bottom line is that there's no perfect office building investment for everyone. But there could be an ideal way for you to invest in this potentially lucrative type of property.