Everyone has their own version of the American dream, from owning a successful business to building a future for their family or achieving an early retirement with a beautiful home on the beach. However, this dream takes money, and making money requires a combination of hard work, dedication and calculated risk. Unfortunately, many Americans believe that risk is a reward of the wealthy and, when it comes to money and savings, stick with what they know — whether that’s a high-yield savings account, a 401(k) or dipping a toe into the stock market. When it comes to alternative investments, while Americans want in, many simply don’t believe they’re qualified or have a hard time knowing where to start.
This way of thinking is quickly becoming a thing of the past. A new wave of technology-powered startups — which I’m proud to have my company included in — is making various alternative investment options accessible to everyday investors looking to put their money to work. Commercial real estate is one asset class in particular that is experiencing a rapid transformation. Once reserved for high-net-worth individuals or institutional investors, it can now be positioned as an attainable alternative investment option. Many of us are working to make investing more accessible and debunking the common misconceptions associated with CRE investing.
After more than 20 years of experience in the real estate investment industry, I believe that now more than ever we have the tools to make commercial real estate an impactful and accessible investment option for a large pool of individual investors. In order to tap into these opportunities, one should have a firm grasp on the space, and that includes an understanding of not only how and why to invest, but how to approach the industry in its current state.
Changing The Game
Commercial real estate investing has demonstrated real growth over the last several years and is delivering strong returns, creating a pathway for new, disruptive technology. Just like Uber, Venmo and Airbnb revolutionized traditional business models, startups in the commercial real estate investing space like ours are creating opportunity by removing the barriers to entry in the process. From crowdfunding platforms that bring new developers to the table to artificial intelligence and predictive analytics technology improving the process for vetting deals, startups in the space are challenging Americans to redefine their savings strategies.
While this new use of technology will help guide novice investors to more successful outcomes when they are ready to take the plunge into the market, convincing them that CRE can work for them requires education and dispelling some myths that are holding them back.
Overcoming Commons Misconceptions
I often hear these three old-school misconceptions about how CRE investing works:
1. It’s too expensive.
The fact is, you don’t have to be a professional investor or wealthy entrepreneur to invest in today’s CRE market. CRE startups and real estate investment management companies (REIMCOs) have created opportunities for the roughly 10 million accredited investors in the U.S., often requiring a minimal initial investment to get started, while the professionals manage the entire process from vetting assets to the day-to-day management of the investment.
2. It’s too risky.
All investments involve a degree of risk, and CRE is no different. But it’s worth noting that even the more conservative 401(k) portfolios faltered during the market downturn of 2008. Meanwhile, the average 20-year return in U.S. CRE outperforms the S&P 500 Index at approximately 9.5%. In fact, when stocks floundered during the economic downturns of 1980-1982 and 2001-2003, real estate returns remained positive due to steady rental payment income, according to CoStar.
3. There’s no short-term return or liquidity.
While many consider CRE to be more of a long-term investment, tying up their funds for 10-plus years, several CRE investment funds also offer short-term returns. Since 1980, CRE has offered average returns of 7.2% while the average annual dividend payment from stocks comes in at just 2.6%, according to CoStar. CRE holds this advantage over traditional stocks largely because of potential rent payments, as these transactions serve as a potential source of income for investors throughout the entirety of the investment life cycle — from the moment an asset is acquired through to exit. As a result, investors are in a position to potentially collect returns, ensuring that they remain liquid.
Most Americans still have a traditional approach and limited view of planning for their financial future, with minimal insight or control into where and how their money is invested. Thanks to new technologies it is now possible to capitalize on opportunities outside of traditional mutual funds, stocks and bonds. Exploring income-producing alternative assets like commercial real estate not only provides added safety through diversification, but also offers investors the chance to put their money to work in new ways.