If you are new to real estate investing, there are a few things you need to know to get your bearings. In this short video, Investor Relations Manager Scott Reasoner answers six of the most common questions we get from investors. Watch now to learn:
- What exactly is commercial real estate (CRE);
- The industry terms you need to know to get started;
- How investors make money with their CRE investments’
- What is an accredited investor;
- The different risk profiles; and
- What sponsors do.
If you have specific questions about the CrowdStreet platform, be sure to check out our Help Center.
Hi, my name is Scott Riesner. I'm an investor relations manager here at CrowdStreet.
CrowdStreet is an online marketplace that gives individual investors direct access to institutional quality, commercial real estate investment opportunities across the United States. You can use our platform to review compare and personally choose deals that meet your investment criteria.
We know that informed investors are empowered investors. So today I'm gonna answer six of the most common questions that we hear from our first time investors.
Question number one. What exactly is commercial real estate?
So before we get started, let's start by clarifying what the difference is between residential and commercial real estate, residential real estate consists of single family homes and multifamily homes with up to four units, commercial real estate or CRE
includes office buildings, medical centers, multifamily buildings with five or more units, hotels, retail stores, warehouses, and more. Most often commercial real estate is intended to generate income.
Next. It's really important to understand key industry terms. So here are a few that you'll need to know - the internal rate of return. Also known as IRR, is the rate at which each invested dollar is projected to grow. Over the investment period. If you're reviewing a deal and you see a projected 15% IRR that doesn't mean that you'll earn 15 percent return each year. But if you take into account the timing of the cash distributions coming back to you throughout the whole period and how much cash is returned to you when the property sells down the road, that might average out to about 15% per year. It's good to keep in mind that about
80% of that cash flow is distributed upon disposition of the asset. And depending on timing can impact IRR equity.
Multiple is defined as the total cash distributions received from an investment divided by the total cash invested. Essentially, it's how much money you could make on your initial investment. An equity multiple less than one X means that you're getting back less cash than you initially invested. An equity multiple greater than one X means you're getting back more cash than you invested. For instance, an equity multiple of 2.5 X means that for every $1 invested, you could ultimately earn back $2.50.
Cash yield often referred to as the cash on cash return is a rather simple investment. You just divide the annual cash flow by the initial cash invested. For example, if you invested $100,000 cash into the purchase of an apartment building and the annual cash flow you receive is 10,000, then your cash on cash return is 10%.
The whole period is simply the time between when the initial investment is made and when the property is sold, most sponsors target a whole period between three and five years, but some
investments do target whole periods as long as 10 years.
Question number three, how do investors make money with commercial real estate?
So most commercial real estate deals target hold periods between three and 10 years and are considered illiquid investments. So unlike stocks, you can't withdraw your capital until the property exits, meaning they either refinance or sell, however, commercial real estate can generate both short term cash flow and long term returns for investors. This means there's really two ways to get paid during that multiyear hold period.
First distributions, some properties generate monthly or quarterly distributions also known as cash flow through rent payments or other income. The second way to get paid is exits for many investors. The big payday is when the investment is fully realized. Opportunistic deals like ground up developments will likely not generate much if any cash flow if the property doesn't have renters, but investors may receive a large payout when the property eventually exits.
Question four, what is an accredited investor? And why does it matter?
Put simply you are an accredited investor if you've made more than $200,000 for the past two years or together with the spouse, more than $300,000 for the past two years and you reasonably expect the same amount of income for this year or you have a net worth over $1 million either alone or together with your spouse, excluding the value of your primary residence.
However, the SEC which sets the financial criteria for being an accredited investor has recently updated its definition to include individuals that hold certain professional licenses, such as a series 65 or a series seven. Essentially broadening the scope of what it means to be an accredited investor. You can find out more about these changes at our website at crowdstreet.com.
These thresholds are intended to protect those who may not possess enough capital investing
experience and or knowledge and keep them from taking on undue risk in private securities which are actually less heavily regulated than public equities on the stock market.
There are four common commercial real estate investment risk profiles, core, core plus, value add, and opportunistic. Core deals are often considered the least risky commercial real estate investment typically fully leased with high quality tenants. These properties need few repairs or improvements and are often in major metros. They may generate lower returns overall but are much more likely to have monthly or quarterly cash flow.
Core plus investments are high quality properties that are mostly occupied but have set aside some of the monthly income for future maintenance and upgrades. Meaning there's less stable cash flow for investors when compared to core properties. Value add investments are projects that aim to significantly increase cash flow in the value of the property over time by making dramatic improvements to the property.
Opportunistic deals are usually the riskiest investments. The sponsor may be executing a complicated business plan like rehabilitating or developing a property and investors are counting on many things going right. But the higher risk can mean a higher reward when the property sells.
Finally, what's the sponsor and what do they do?
So in commercial real estate, the sponsor is an individual or a company in charge of finding, acquiring and managing the real estate partnership on behalf of investors.
The sponsor is usually expected to invest anywhere between five and 20% of the total equity required for the investment to show that they have some skin in the game and that's it. So I hope you were able to answer some of your questions if you'd like to learn more, you can always feel free to visit our website at www.crowdstreet.com/resources where you'll find more videos, more articles and other helpful resources to help you understand commercial real estate better. And of course, you can always reach out to us at IR@crowdstreet.com.
CrowdStreet is an online marketplace that gives individual investors direct access to institutional quality, commercial real estate investment opportunities across the United States. You can use our platform to review compare and personally choose deals that meet your investment criteria.
We know that informed investors are empowered investors. So today I'm gonna answer six of the most common questions that we hear from our first time investors.
Question number one. What exactly is commercial real estate?
So before we get started, let's start by clarifying what the difference is between residential and commercial real estate, residential real estate consists of single family homes and multifamily homes with up to four units, commercial real estate or CRE
includes office buildings, medical centers, multifamily buildings with five or more units, hotels, retail stores, warehouses, and more. Most often commercial real estate is intended to generate income.
Next. It's really important to understand key industry terms. So here are a few that you'll need to know - the internal rate of return. Also known as IRR, is the rate at which each invested dollar is projected to grow. Over the investment period. If you're reviewing a deal and you see a projected 15% IRR that doesn't mean that you'll earn 15 percent return each year. But if you take into account the timing of the cash distributions coming back to you throughout the whole period and how much cash is returned to you when the property sells down the road, that might average out to about 15% per year. It's good to keep in mind that about
80% of that cash flow is distributed upon disposition of the asset. And depending on timing can impact IRR equity.
Multiple is defined as the total cash distributions received from an investment divided by the total cash invested. Essentially, it's how much money you could make on your initial investment. An equity multiple less than one X means that you're getting back less cash than you initially invested. An equity multiple greater than one X means you're getting back more cash than you invested. For instance, an equity multiple of 2.5 X means that for every $1 invested, you could ultimately earn back $2.50.
Cash yield often referred to as the cash on cash return is a rather simple investment. You just divide the annual cash flow by the initial cash invested. For example, if you invested $100,000 cash into the purchase of an apartment building and the annual cash flow you receive is 10,000, then your cash on cash return is 10%.
The whole period is simply the time between when the initial investment is made and when the property is sold, most sponsors target a whole period between three and five years, but some
investments do target whole periods as long as 10 years.
Question number three, how do investors make money with commercial real estate?
So most commercial real estate deals target hold periods between three and 10 years and are considered illiquid investments. So unlike stocks, you can't withdraw your capital until the property exits, meaning they either refinance or sell, however, commercial real estate can generate both short term cash flow and long term returns for investors. This means there's really two ways to get paid during that multiyear hold period.
First distributions, some properties generate monthly or quarterly distributions also known as cash flow through rent payments or other income. The second way to get paid is exits for many investors. The big payday is when the investment is fully realized. Opportunistic deals like ground up developments will likely not generate much if any cash flow if the property doesn't have renters, but investors may receive a large payout when the property eventually exits.
Question four, what is an accredited investor? And why does it matter?
Put simply you are an accredited investor if you've made more than $200,000 for the past two years or together with the spouse, more than $300,000 for the past two years and you reasonably expect the same amount of income for this year or you have a net worth over $1 million either alone or together with your spouse, excluding the value of your primary residence.
However, the SEC which sets the financial criteria for being an accredited investor has recently updated its definition to include individuals that hold certain professional licenses, such as a series 65 or a series seven. Essentially broadening the scope of what it means to be an accredited investor. You can find out more about these changes at our website at crowdstreet.com.
These thresholds are intended to protect those who may not possess enough capital investing
experience and or knowledge and keep them from taking on undue risk in private securities which are actually less heavily regulated than public equities on the stock market.
There are four common commercial real estate investment risk profiles, core, core plus, value add, and opportunistic. Core deals are often considered the least risky commercial real estate investment typically fully leased with high quality tenants. These properties need few repairs or improvements and are often in major metros. They may generate lower returns overall but are much more likely to have monthly or quarterly cash flow.
Core plus investments are high quality properties that are mostly occupied but have set aside some of the monthly income for future maintenance and upgrades. Meaning there's less stable cash flow for investors when compared to core properties. Value add investments are projects that aim to significantly increase cash flow in the value of the property over time by making dramatic improvements to the property.
Opportunistic deals are usually the riskiest investments. The sponsor may be executing a complicated business plan like rehabilitating or developing a property and investors are counting on many things going right. But the higher risk can mean a higher reward when the property sells.
Finally, what's the sponsor and what do they do?
So in commercial real estate, the sponsor is an individual or a company in charge of finding, acquiring and managing the real estate partnership on behalf of investors.
The sponsor is usually expected to invest anywhere between five and 20% of the total equity required for the investment to show that they have some skin in the game and that's it. So I hope you were able to answer some of your questions if you'd like to learn more, you can always feel free to visit our website at www.crowdstreet.com/resources where you'll find more videos, more articles and other helpful resources to help you understand commercial real estate better. And of course, you can always reach out to us at IR@crowdstreet.com.
