You invest in commercial real estate in one of five ways: listed real estate investment trust (REIT) shares, a non-traded REIT, an online offering, a private syndication or fund, or a building you buy yourself. The routes differ in who may buy, what you pay up front and how you get your money out.
A REIT is a company that owns and usually operates income-producing real estate. You buy a listed REIT through a broker, as you would any share, and a non-traded REIT through a broker that takes part in its offering (Investor.gov, REITs). A syndication pools several investors' money to buy one property, run by a sponsor.
| Route | Who may buy | How you get your money out |
|---|---|---|
| Listed REIT or REIT fund | Anyone with a brokerage account | Sell the shares on a stock exchange |
| Non-traded REIT | Investors the offering accepts | Limited redemptions, or a sale or listing of the REIT |
| Online offering | Anyone, within the limits below | Usually when the sponsor sells the property |
| Private syndication or fund | Mainly accredited investors | When the sponsor sells or refinances |
| A building you own | Anyone who can finance it | Sell or refinance the building |
Buying a commercial building is the hands-on route, and the commercial mortgage calculator shows the payment on the loan it needs.
Answer four questions before you choose a route:
- How long can the money stay invested? Money you may need within a few years belongs where you can sell any trading day.
- Are you an accredited investor? The answer decides which private offerings you can join.
- How much work do you want? Owning a building means finding a lender and a manager, and giving it your time. Every other route hands the work to someone else.
- Who is selling it? The SEC lets you check a REIT's registration on its EDGAR system, and the AMF keeps a register of who may sell investments in Quebec.
For a first investment, a listed REIT or a REIT fund is the simplest route. Its price is public every trading day and you can sell in a single order. Its price also moves with the stock market, so it can fall when buildings hold their value.
A business owner has a second starting point: the building the business uses. A small flex building, with offices in front and warehouse space behind, can let the owner use part and rent out the rest.
Commercial real estate suits money you can leave invested for years and could lose in part. Quebec's securities regulator, the AMF, asks two questions before you invest in exempt securities (AMF, investor questions): "Do you have the financial means to take risks?" and "Can you afford to be patient?" A "no" to either points to a listed REIT, or to waiting.
Yes: anyone can buy listed REIT shares, and a non-accredited investor can put a capped amount into crowdfunding and Regulation A offerings each year. Private placements sold under Regulation D are narrower.
An accredited investor passes an income test or a wealth test, and the investing hub lists the US and Canadian thresholds. A sponsor that advertises under Rule 506(c) can do so where all purchasers are accredited investors. Rule 506(b) prohibits advertising and limits sales to no more than 35 non-accredited investors in any 90-day period (SEC, exempt offerings).
Under Regulation Crowdfunding, a non-accredited investor whose annual income or net worth is below $124,000 may invest the greater of $2,500 or 5% of the larger of the two. That limit covers all crowdfunding offerings over 12 months. When both reach $124,000, the limit rises to 10% of the larger figure, and the yearly total never exceeds $124,000 (SEC, Regulation Crowdfunding guidance).
A Regulation A Tier 2 offering sets its own cap. A non-accredited investor can buy up to 10% of the greater of annual income or net worth in a Tier 2 offering, unless the securities list on an exchange (SEC, Regulation A guidance).
Source: Sphera Credit calculation from the SEC's guidance for issuers on Regulation Crowdfunding and Regulation A, for an investor whose net worth equals annual income.
In Alberta, New Brunswick, Nova Scotia, Ontario, Quebec and Saskatchewan, the closest equivalent is the offering memorandum exemption. A company sells securities with an offering memorandum under Canadian securities law instead of a prospectus, and an individual's purchases over the preceding 12 months are capped (OSC, offering memorandum limits):
| Investor | Limit over 12 months |
|---|---|
| Not an eligible investor | $10,000 |
| Eligible investor | $30,000 |
| Eligible investor advised by a portfolio manager, investment dealer or exempt market dealer | $100,000 |
An eligible investor meets one of several tests. They include net assets above $400,000, alone or with a spouse, net income before taxes above $75,000 in each of the two most recent years, or income above $125,000, alone or with a spouse (AMF, eligible investors).
A listed REIT gives you a share of commercial rents for the price of a share plus a brokerage fee, while a non-traded REIT's sales commissions and upfront fees usually total about 9% to 10% of your investment. These costs lower the value of the investment by a significant amount, before any rent arrives (Investor.gov, REIT fees).
Take $25,000 put into each kind of REIT:
| Listed REIT | Non-traded REIT | |
|---|---|---|
| Amount you pay | $25,000 | $25,000 |
| Upfront fees | A brokerage fee | $2,250 to $2,500 |
| Left to invest | About $25,000 | $22,500 to $22,750 |
| Value per share you can see | Every trading day | None until 18 months after the offering closes |
A non-traded REIT typically gives no estimate of its value per share until 18 months after its offering closes, which may be years after you invested (Investor.gov, REIT risks).
A listed REIT sells on a stock exchange on any trading day. Non-traded REITs "generally cannot be sold readily on the open market" (Investor.gov, REIT liquidity), so money you may need soon belongs elsewhere.
In the United States, REIT dividends are generally taxed as ordinary income, and they miss the lower rates that apply to other corporate dividends (Investor.gov, REIT taxes). Canadian investors should ask a tax professional how a REIT's distributions are taxed in their account.
Three beliefs cost new investors money: that an SBA loan finances a rental building, that a crowdfunding share sells like a stock, and that a high non-traded REIT payout is all profit.
The SBA lists "speculation or investment in rental real estate" among the uses a 504 loan cannot fund (Small Business Administration).
Securities bought in a crowdfunding offering "generally cannot be resold for a period of one year". The exceptions are a transfer to the issuer, to an accredited investor, to a family member or in a registered offering (SEC, crowdfunding resales). After the year, a buyer may still be hard to find. The AMF warns that with exempt securities "you may never be able to sell them" (AMF, exempt securities risks).
A non-traded REIT's payout can include your own money. Non-traded REITs "frequently pay distributions in excess of their funds from operations", using offering proceeds and borrowings. The SEC adds that this practice "reduces the value of the shares" and the cash left to buy property (Investor.gov, REIT payouts).