How to Passively Invest in Commercial Real Estate
12 Ways to Passively invest in commercial real estate:
Construction & Development
Crowdfunding
ETFs
Hard Money Lending
Hiring a Property Management Company
Mutual Funds
Owner Financing / Debt
Real Estate Company
Real Estate Investment Trust (REIT)
Real Estate Notes
Syndication
Transactional Funding
Now that you have an idea of the 12 different ways you can passively invest in commercial real estate, let’s take a deeper dive:
Investing in Commercial Real Estate
A Guide to Building Passive Income
It’s no secret that real estate offers one of the best wealth-building opportunities today.
There are no other investment vehicles like it.
Not only is real estate a tangible asset, but you can utilize leverage to purchase above and beyond what you could afford alone.
And beyond leverage: equity.
Equity makes the world of commercial real estate investing go ‘round.
The amount of capital a group can raise ultimately determines whether or not they can move forward on purchasing or developing any given project.
That’s where investors come into play.
And their investment is completely passive - aside from contributing cash, there’s no further expectation to acquire, manage, or dispose of the asset for an investor.
Once you understand how to passively invest in commercial real estate, you’re probably going to sell off your residential portfolio.
I’ve seen it happen over and over.
Whether you’re looking to learn so you can run your own commercial real estate deals, or you’re just interested in building up your passive income, here’s our guide on how to passively invest in commercial real estate.
First, What Is Commercial Real Estate?
Commercial Real Estate (CRE) is defined as any property used primarily for business purposes.
Simply put: pretty much anywhere you wouldn’t rest your head at night as the owner. There is a slight exception, though, with multifamily and hospitality real estate, but those are still a commercial use.
Commercial real estate may be owner-occupied, meaning the owner of the property operates their business at that location, or may be leased to tenants who wish to live / work there.
This category of real estate ranges from small neighborhood coffee shops to massive city skylines.
Included in commercial real estate are retailers, office spaces, hotels (and often short-term rentals), shopping malls, restaurants, hospitals, and convenience stores.
Looking through the lens of an investor, commercial real estate can encompass any kind of property, which includes land (though we won’t cover that here), which is income-producing, or has the potential to do so.
In this guide to passive real estate investing, we’ll be covering five primary asset types of commercial real estate: multifamily, office, industrial, retail, and hospitality.
Commercial Real Estate Zoning and Classifications
In many cities and townships across America, commercial real estate has its own zoning code.
This code is intended to keep property types of similar use clustered together, which creates commercial districts and residential districts.
Another intent of this zoning is to determine where heavy manufacturing - an often polluting and noisy industry - may locate.
It would certainly be difficult to sell a home next door to a distribution facility, but other warehousing uses wouldn’t mind it.
These five primary classifications may further be characterized as Class A, B, or C.
Class A Properties:
The highest quality buildings in their market and area. They are generally newer properties (built within the last 10 to 15 years) and offer first-rate amenities, are occupied by high-credit tenants, and have low vacancy rates. These buildings are well-located in the market and are typically professionally managed by both a property manager and an asset manager. Being the cream of the crop, Class A properties typically demand the highest rent in the market with little or no deferred maintenance issues.
Class B Properties:
A step below Class A and are generally older (about 10-20 years) and offer a solid amenity package, tend to have a mix of low to high-credit tenants, and can have slightly higher vacancy rates than Class A. For the most part, Class B buildings are well-maintained but still offer a “value-add” investment opportunity through renovations and common area upgrades. Rental rates are generally lower than Class A and buyers may have to deal with some deferred maintenance issues.
Class C Properties:
Typically, more than 20 years old and, as such, can be the least desirable product for both investors and tenants. They likely lack in terms of amenities, will be occupied by lower-credit tenants, and can have the highest vacancy rates of all the classes. Because of their location in the market and deferred maintenance, Class C buildings will usually have the lowest rental rates in the market.
What Are The Benefits of Passively Investing in Commercial Real Estate?
Commercial real estate investing has many benefits that other investment vehicles, like stocks and bonds, wish they had.
As an investor, you will not only receive passive income and appreciation from the property, but also tax benefits, stronger buying power, and more.
Here are a few of the benefits of investing in commercial real estate:
Increased Buying Power Through Leverage
The most outstanding benefit of investing in commercial real estate, in my opinion, is your ability to increase your buying power through leverage.
Leveraging means utilizing borrowed capital (debt) to make an investment.
The investor’s expectation is that the profits from owning and operating the property will be greater than the payable interest. As long as that statement is true, you can put down a smaller percentage of the purchase price, typically around 20-25%, finance the remainder, and go on to invest in more properties in the same way.
For example, if I had $100,000 cash and the property I was looking to buy cost $100,000, I could only buy that single property.
However, by taking advantage of leverage, I am able to put $20,000 (20%) down on that property and go buy four more.
And as a passive investor in commercial real estate, you pool your money with other investors to buy an even larger, more stabilized asset than any of you could likely afford or care to risk alone.
Who wouldn’t want to buy more with less money?
Sure, you will have a mortgage to pay by using leverage, but if you buy right, you’ll still have cash flow and risk diversification.
2. Risk Diversification
Diversification can be an investor’s best friend.
And there are many ways to diversify your portfolio as a passive commercial real estate investor.
More tenants = less risk.
Think about it - if you have a single-family home and your tenant moves out, you now have a 100% vacancy rate.
However, if you own a 50-unit multifamily complex and one tenant moves out, you won’t hardly notice the impact on your bottom line.
And if you’re investing with an established real estate operator, you’ll be able to select which asset type, where the asset is located, and proposed project type.
Different operators have different buy-in minimums, typically around $100,000, to be an investor in their deals.
If you’re looking to invest $500,000, instead of buying in with a single operator on one project, you could spread that cash over five projects with five operators to reduce any management or asset risks.
There is nearly an unlimited amount of different types of passive investments you can make in the commercial real estate realm.
3. Forced Appreciation
In commercial real estate, an asset’s value is directly correlated to its Net Operating Income (NOI).
By raising a property’s net operating income, you can increase the value significantly to any potential investors.
This intrinsic appreciation is largely due to the commercial real estate industry’s use of capitalization rates (cap rates).
A cap rate is the net on investment of any given property if you paid all cash.
For example, if you paid $100,000 cash for a property and it netted you $10,000 per year, that would give you a 10% cap rate.
Investors use this metric on a cash basis because each investor group’s financing will vary from one to the next.
In commercial real estate, you have far greater control of a project’s destiny, whereas investments like stocks and bonds don’t allow you to have much more influence other than buying and selling based on the market.
4. Investing with seasoned professionals
If you don’t know what you’re doing, find someone who does.
That statement rings true for just about anything in life.
If you’re looking to passively invest in commercial real estate, you’re going to be placing that capital (hopefully) with a group that has an outstanding track record and an experienced team.
Not only will investing with seasoned professionals reduce your risk as a passive real estate investor, but you will also be able to learn how these deals are operated, if you’re so inclined.
I know many commercial real estate developers and syndicators that started their career by investing with and learning from an already established group.
Better to learn and make money than it is to learn and lose it!
5. It’s a Tangible Asset
Unlike stocks, bonds, and other investment vehicles, commercial real estate has value in both the land itself and the improvements on the property, such as structures, infrastructure, and landscaping, in addition to the value created by the income.
So, even if your income falls to zero and you’re unable to replace those tenants, you’ll still have some assets to fall back on and protect your downside.
Commercial real estate is also relatively stable, as it offers housing (apartment complexes or mobile home parks), services (retail or office space), or storage and production (industrial warehouses).
Because of these factors, commercial real estate will not fluctuate and experience the massive ups and downs that the stock market will.
6. Tax Advantages
Commercial real estate provides investors with a number of tax advantages.
You will be able to deduct the interest payments you make on your mortgage, meaning not only are you utilizing someone else’s money to purchase a larger property, but you can also write off their cut for providing you with that cash.
Buildings also begin to depreciate the minute that you buy them.
The IRS allows commercial properties to be depreciated over a 39-year schedule, but you can speed up this process by taking advantage of accelerated depreciation if you do a cost-segregation study.
Essentially, you get a write-off just for owning the property!
Other deductions include any renovations, maintenance, ongoing upgrades, or any other out-of-pocket expenses related to owning the property.
After you sell the property, you’ll also benefit from capital gains tax, which is significantly lower than most investors’ ordinary income tax, and you can even 1031 exchange those proceeds into another piece of real estate without paying taxes at all.
7. passive income!
Passive income is the entire reason you’re here, right?
The most beautiful part of investing in commercial real estate is the passive income opportunity. You place your capital into a deal and let that capital work for you.
If you’re reading this article, chances are good that financial freedom is one of your goals. To be able to take that trip whenever you feel like it. To buy that new car. To never wake up in the middle of the night worried about paying your bills again.
And not only will passive income help you reach that point of stability in your life, it’s taxed differently than your ordinary income, so your path to building wealth is accelerated.
Why Commercial Real Estate vs. Residential Real Estate
Purchasing a single-family home is an easy first step into real estate investing.
The lower cost of entry is very attainable for most first-time investors and the process isn’t too overwhelming.
After all, over 60% of Americans will own a home in their lifetime, so a majority of people have experience purchasing a home.
However, for investors seeking a more diversified, balanced, and scalable approach to real estate investing, curating a portfolio of passive commercial real estate investments is the path to take.
Compared to residential investments, a passive investor in commercial real estate can typically expect:
Better Quality Tenants
Sure, you can certainly find high quality tenants to rent a single-family home.
But do they have regional or national credit?
Commercial tenants tend to be businesses, corporations, etc., which not only have stronger credit than individuals, they tend to respect the property more.
There are also zero rules regarding fair housing on the commercial front.
When qualifying tenants, you can ask for tax returns, personal financial statements, bank statements, profit & loss reports, balance sheets - you name it.
And if you don’t like what you see? You can deny them because of it without having to worry about the law.
Fewer Expense Obligations
It’s very rare that your residential tenant will cover your property taxes, insurance, and building maintenance.
In commercial real estate, however, it’s rather commonplace, depending on the type of property and lease structure.
Retail, along with some industrial and office properties, often have what’s called a Triple Net (NNN) lease.
And while many investors have a different definition of what NNN actually means, they are an extremely valuable asset for commercial real estate investors.
In a triple net lease scenario, the property owner is not responsible for paying any expenses, such as taxes, insurance, utilities, etc. on the property.
If the lease is Absolute Net, the tenant will also take 100% responsibility for maintaining the building structure, including roof and foundation. Like this project one of our clients purchased in Chattanooga.
Larger corporations, such as Starbucks, will sign this type of lease so that they may maintain their brand’s look and feel without having to rely on a landlord to make those decisions.
Landlords will solely be responsible for paying their mortgage on the property.
Talk about a win for the investor.
Forced Appreciation of Value
One of the biggest differences between residential and commercial real estate is how property values are determined.
Residential real estate is largely influenced by comparable properties, so your single-family investment will only go up in value as properties nearby sell for a higher price.
And that can be a grind when residential appreciation is historically 3-5%.
Commercial real estate, on the other hand, is directly valued on the property’s revenue.
Simply put, the higher the cash flow a commercial property generates, the higher the property’s value will be (see above 3. Forced Appreciation).
By curating the right tenants and leases, you can create stronger cash flow and higher values.
Higher Expected Returns
Commercial real estate can be more on the risky side, and “with greater risk comes greater reward.”
Compared to typical returns from residential investments, cash flow and appreciation are far more attractive in commercial real estate.
Businesses can afford to pay much higher rents than individuals and sign longer term leases, so less consistent turnover for commercial investors.
The stock market offers an average annual return of around 10%, slightly below that expected of residential real estate, while REITs, one of your options as a passive real estate investment, have averaged 12.99% annual returns, according to the MSCI U.S. REIT Index.
Longer Lease Terms
Residential lease terms tend to be in the 6 to 12-month range, while commercial leases can be 3, 5, or 10+ years.
As an investor, commercial property can give you lower turnover costs and vacancy rates.
These long lease terms give you more reliable passive income and less of a headache by not having to market a property from year to year.
Sure, it’s also possible that you could end up with less than desirable tenants for extended periods of time, but if you properly vet your incoming tenants with lease applications, financials, and background checks, you can avoid these long-term issues.
What Are The Different Types of Commercial Real Estate You Can Invest in?
There are five primary types of commercial real estate that you can invest in: multifamily, office, industrial, retail, and hospitality.
1. Multifamily
When transitioning from residential to commercial investing, multifamily properties are often an investor’s first step since the tenant base is more familiar.
The multifamily asset class includes everything from a duplex with two tenants to apartment buildings housing hundreds.
Duplex / Triplex / Quadplex
Like their names imply, duplexes, triplexes, and quadplexes are two, three, and four-unit properties, respectively.
These types of units are fairly commonplace in all markets across the United States and may have been originally constructed for multiple tenants or renovated over the years for such accommodations.
Garden Apartments
Garden apartments are typically 3-4 story walk-ups with anywhere from 50-200+ units.
This type of multifamily is often found in the suburbs where they can be spread out and offer surface parking.
There is usually a collection of these apartment buildings on single property, which may share a yard and other amenities.
Mid-Rise Apartments
Mid-rise apartments are typically between 4-11 stories and house anywhere from 30-100+ units.
These projects are found closer to the urban core, where a developer can justify elevator service and garage-style parking.
Amenities and local conveniences often drive demand for mid-rise apartments.
High-Rise Apartments
High-rise apartments are typically 12+ stories and can house 100+ units.
These apartment buildings are found in the urban core of larger markets, often in and around the heart of the Central Business District.
Like mid-rise apartments, these projects are heavily amenity driven with elevator service and garage-style parking.
Student Housing
Just like the name implies, Student Housing projects are designed to house college and university students.
As such, they are located near educational centers and may be owned by an investment group, as well as universities and colleges.
This type of multifamily, like Senior and Assisted Living, has a very different model than the other products in this asset class and requires specialized knowledge.
Senior / Assisted Living
Senior and Assisted living is designed to provide housing for the elderly and aging population.
These projects offer their tenants a higher level of support than other types of multifamily, such as on-call or in-house medical professionals, housekeeping, meal service, etc.
2. Office
Office investing can be more capital intensive than other types of commercial real estate due to the cost of turning over and building out space for incoming tenants.
However, because of the cap rate valuation on commercial real estate, offices can command some of the highest values.
Central Business District (CBD)
Office buildings located in a central business district are intended to house some of the city’s largest companies - such as Amazon, Bank of America, etc.
These buildings are often mid to high-rise buildings with structured parking and naming rights on the building.
A number of professional services companies prefer to locate within these buildings due to the convenience and walkability factors.
Commercially Zoned Homes
Commercially zoned homes are often a favorite for smaller, local professional services companies.
Here, you’ll have a strong base of accounting firms, law firms, and other businesses that prefer to forgo the “corporate” feel that a traditional office building may bring.
Tenants are also able to lease these on a standalone basis, so they won’t have to deal with the constant interruptions from other tenants.
Medical Office
Medical office space is professional space designed around the needs of the medical field and can be the most valuable and stable in the office world.
Tenants here can be any business from your local dentist to major surgery centers and hospitals.
Since medical tenants often need more plumbing, larger elevators, and other specialized amenities, these leases tend to be 7-10+ year.
Suburban Office Buildings
Suburban office space is built outside of the core and typically service parked.
These buildings may or may not have elevator service and can be as large as a mid-rise.
Similar to garden-style apartments, suburban office can assemble into office parks with several different mid-rise buildings situated in a campus-like setting.
3. Industrial
Industrial properties widely range in size and use.
This asset class has taken off over the last economic cycle thanks to the rise of delivery.
Bulk Warehouse
Bulk warehouse properties are the largest industrial product and are typically in the 50,000-1,000,000+ square foot range.
These properties are usually regional distribution for various types of products and require strong accessibility for trucks entering and exiting the highway systems.
Flex Warehouse
As the name implies, flex space is a flexible industrial product that may easily accommodate a wide range of uses.
These warehouses usually have at least some portion of office space connected to the warehouse and can widely range in size to fit your small mom and pop plumber to regional granite distributors and more.
Heavy Manufacturing
Heavy manufacturing space is often isolated within the most intense industrialized areas of municipalities due to its use of heavy machinery, chemicals, and power necessities.
Think of General Motors and DuPont as tenants for this type of industrial product.
These properties are often heavily customized for the current user and their specific requirements.
Light Assembly
Light assembly industrial has a fair amount of crossover with flex space
Unlike heavy manufacturing, light assembly space isn’t typically utilized to manufacture materials, simply to assemble them and ship them out to distribution centers.
Like flex space, light assembly can also be used for storage and office space (call centers, data centers).
Refrigeration / Cold Storage
Cold storage and refrigeration warehousing are exactly what it sounds like: refrigerated warehousing intended to store perishable food and products.
With the rise in consumer demand for fresher food and grocery delivery, cold storage has increased significantly since 2000.
Similar to heavy manufacturing, these spaces are build-out intensive and tenant retention can be high.
Showroom
Industrial showrooms are a bit of a hybrid between retail and warehousing.
This product allows manufacturers to showcase their goods in a more retail setting while having shipping and distribution, too.
Showrooms are often situated along interstates where they can achieve high visibility and easy access for consumers.
Storage (Indoor / outdoor)
Storage units are an interesting, almost hybrid of industrial and multifamily, which is very attractive for many investors.
These assets can be both outdoor and indoor (climate controlled) and can be rented by tenants to store any number of items, from sentimental family mementos to trailers.
Outdoor units need space to sprawl, so they’re typically located further outside the city while climate controlled is often multi-story with elevator access.
4. Retail
Retail real estate is intended to house any business that sells products and services directly to consumers.
This real estate asset can range from single, standalone restaurants to massive regional shopping centers.
Community Retail Center
Community retail centers are often found in the range of 150,000-350,000 square feet.
These centers are occupied by one or more big-box retail anchors, such as Kroger, Target, Best Buy, etc.
Several smaller retailers will fill in the gaps between these larger anchors, hoping to draw in the same shoppers.
Outparcel / Single-Tenant Net
Retail outparcels are often standalone, single-tenant pieces of real estate.
These projects are often located out front of large shopping centers with massive draws or situated at high-traffic corners.
Outparcels can house restaurants, pharmacies, etc.
Power Center
A power center is a shopping center that is very heavily anchored by a major regional retail, such as a Wal-Mart or Bass Pro Shops.
These power centers are often 300,000+ square feet and located with convenient interstate access.
In addition to their in-line shoppes, power centers typically have multiple out-parcel buildings.
Regional Mall
Regional malls can be both indoor and outdoor and feature more specialty, high-end shoppes along with entertainment and restaurants.
These projects can range from 400,000-2,000,000+ square feet and are also located along major thoroughfares near interstate access.
Strip / Neighborhood Shopping Center
Strip centers are smaller retail properties, often serving as neighborhood retail, that may or may not be large enough for anchor tenants.
These neighborhood shopping centers will typically contain a mix of national, regional, and local small shoppes retail.
5. Hospitality
Hospitality real estate largely exists to serve travelers, both for business and pleasure.
These assets can range from your typical drop-in motel to large resorts.
Budget Hotels
Budget hotels can often be found just off interstate exits and are intended to capture drivers in need of a cheap place to stay for the night.
Extended Stay Hotels
Extended stay hotels have larger rooms with small kitchens, intended to serve travelers staying for a week or longer.
Full-Service Hotels
Full-service hotels are often located within the central business districts or tourist areas and offer a number of amenities, such as room-service and fitness centers, for travelers.
Limited Service Hotels
Limited service hotels don’t typically provide the amenities found in full-service hotels and are intended to be an affordable option for the business traveler.
Short-Term Rentals
Short-term rentals, often found on Airbnb or VRBO, are residential units that operate like a boutique hotel that give travelers a more “local” taste of the city.
Important Questions to Ask Before You Begin Investing Passively
When investing your capital into any venture - whether with a money manager or passively in commercial real estate, you should be asking as many questions as you possibly can to ensure that you fully understand the deal.
While you may not be able to ask these questions directly of an operator depending on the type of deal you’re investing in, you’ll at least want to ponder them and do some research.
Is the Operator investing personally?
Simple: what is the promoter’s stake in the deal?
Are they putting their own capital into it? Are they placing at least their minimum ask?
If a real estate operator is looking to raise capital for their deal on a $100,000 minimum, they better be putting at least that much capital into the project.
If not, they likely don’t have the experience to be working on a project of that scale or don’t believe it will succeed.
As a passive real estate investor, you want to be sure that your operator has skin in the game.
It shouldn’t be easy for them to just walk away should anything goes wrong.
What Are the Upfront and Ongoing Fees?
When it comes to investing in general, fees are everything.
A deal may look amazing at first glance until you realize all of the fees that the operator is taking for themselves.
Fees like a loan guaranty fee, an acquisition fee, an asset management fee, a disposition fee, etc.
While these are fairly commonplace for these types of investments, it’s important that you understand what these fees are intended to cover and that the operator’s financial incentives are aligned with your success.
What is the exit strategy?
Every great investment begins with multiple exit strategies.
Sure, you can buy right.
But if you can only sell that project to a very specific end user, chances are good that you won’t end up with quite the payday you were expecting.
Make sure that your operator has a plan for how you will be exiting the project, whether it’s a buy and hold, sale, refinance with a capital event, etc.
You need to be on the same page with the operator with respect to the goals of the deal before you enter an investment.
What will the capital be used for?
What are your dollars going towards?
If you’re investing in a value-add operation, you want to make sure that capital is being utilized to its max potential.
Your operator better have a very clear plan for how every dollar will be utilized during an acquisition - and if they don’t, that’s a major red flag for you as the investor.
Don’t be afraid to question why the operator has decided to allot capital for any specific project.
Just because they’re the “experienced” one here doesn’t mean they know everything.
If you feel uneasy about the project improvements, say something.
What’s Their track record?
A real estate operator’s track record will give you a good indication as to how your project will go.
If they have a run of successful projects in a similar manner, chances are good that your investment will end up in the black, as well. However, if they’ve had a couple shaky deals recently, you may want to reconsider your position.
Inexperienced operators tend to make mistakes with investment capital, as they have less experience managing projects, budgets, and timelines.
What Are the comparable properties?
Take the comparable properties your operator gives you with a grain of salt.
You should definitely do some digging yourself, as it’s easy in real estate to pull comps that fit the narrative of the operator.
While comparable properties aren’t everything, they will certainly give you a ballpark idea of whether or not your project will work.
If your operator feels he can get $3.00/sf on his apartment units and comps are at $1.10/sf, you’re in scary territory.
What’s the loan to debt ratio?
Leverage is an investor’s best friend.
It can also be the inexperienced investor’s worst enemy.
Debt will certainly help you acquire more property than you could on your own, but too much debt isn’t always a good thing.
If the deal is marginal and only works with an excessive amount of debt, it’s not a deal.
Don’t overpay for a property - if banks refused to finance it under normal circumstances, chances are the deal just won’t work.
Who is involved in the deal?
The team you have working on a deal is just as strong as that team’s track record.
What does each individual involved bring to the table?
It’s important to have a diverse group here that can attack the project from every angle.
You don’t want too many acquisitions guys and not enough operational partners.
Be sure that your real estate operator’s team is well-balanced and curated for the project that you’re investing in.
How to Become a Passive Commercial Real Estate Investor
1. Construction & Development
New projects are being developed and built all the time.
As long as our country continues to grow and real estate needs shift, there will always be demand for new construction projects.
In the Southeast, for example, there’s a limited inventory of housing since the population has been growing significantly in recent years.
You could invest with a local group of contractors and developers that are building anything from single-family residential homes to office towers.
2. Crowdfunding
Online fundraising has become quite popular in the last decade.
Platforms like Fundrise and Realty Mogul allow individuals to invest in commercial or residential real estate investments and receive cash flow distributions in return.
Similar to investing in a REIT, investors may place as little as $500 and pool their cash with other investors in order to take down these larger projects. Ultimately, investors get the benefit of cash flow (dividends and distributions), as well as long-term appreciation of the properties you “own.”
One of the more attractive features for new or younger investors is that you don’t have to be an accredited investor to take advantage of these passive real estate investing platforms.
3. Exchange-Traded Funds
An exchange-traded fund (ETF) is a grouping of stocks or bonds into one single fund. ETFs come with similar diversification and lower costs like index and mutual funds.
These ETFs may invest in stocks issued by real estate investment trusts (REITs) that own office, retail, hospitality, etc. This diversification certainly helps lower the risk of investing in real estate.
4. Hard money Lending
If you’re sitting on a pile of cash but don’t necessarily want to invest in your own deals, you could become a hard money lender.
Real estate investors utilize hard money when they can’t qualify for a bank loan or need faster capital in order to make necessary improvements to refinance. Hard money is also an option for these investors if they’re just looking to rehab and flip a house fairly quickly.
Hard money lenders typically charge an upfront fee (in the 2-3 points range) plus 10-12%+ annual interest on the loan.
Not bad for a passive investment!
However, you do need to be careful in these lending scenarios and be sure to fully vet not only the group receiving the loan, but also the project they’re taking down. After all, if you end up having to foreclose on the property, you want to be sure it’s a project you feel will be successful.
5. Hire a property manager
If you want to invest in commercial real estate near you but aren’t interested in having any partners, hiring a property manager may be the way to go.
While you’re still technically an “active” investor, having the right full-service property management company in place will help make any project a passive real estate investment.
Property managers are here to do all the heavy lifting.
Commercial property managers typically charge anywhere from 4% to 10% of gross rents collected, depending on the size of the project. They run the day to day for your investment - any minor repairs, touring and vetting prospective tenants, collecting rents, and so much more.
The strategy here is to ensure that the commercial investments you’re making can, of course, afford to pay a property management company. Even if you decide to run your commercial real estate investment yourself, if you don’t have enough cash flow to pay for management, you should probably walk from that deal.
6. mutual funds
Similar to investing in real estate ETFs, you can also passively invest in real estate mutual funds.
Mutual funds are often a low-cost alternative to other passive real estate investment options. It’s very easy to find a mutual fund’s track record, which will give you confidence about future returns.
In addition, mutual funds are often run by economists and seasoned veterans in the commercial real estate world, so chances are good they know what they’re doing.
7. Owner Financing / Debt
Don’t want to run your own projects? Become the lender for someone else’s!
Similar to hard money lending, you can act as the bank in an operator’s commercial real estate investment. This option is an excellent route to take if you already own the real estate, enjoy maintaining that passive income, and want to avoid paying hefty taxes.
Just like a bank would, you take anywhere from 10% to 20% down with an amortization schedule between 15 and 30 years at a predetermined interest rate. Most of the passive investors that I see taking this route will have a 5 to 7-year balloon on the mortgage.
As the financier, you retain 1st position on the deal, so if the buyer ever defaults on their mortgage, you can foreclose and recapture the property.
8. real estate company
If you’re looking to keep it local, you could invest directly with a commercial real estate company in your area.
Not only will you be able to drive by and see the projects at your convenience, you can also have input on future acquisitions thanks to your knowledge of the market.
Companies that are focused on real estate can include hotels, office parks, shopping centers, and commercial real estate developers, for example. The beauty here is, again, you get the choose the types of projects you’d like to invest in passively.
I highly recommend that you conduct substantial due diligence before you buy shares in local companies, but this option is solid if you’re looking for exposure to a specific type of real estate investment and are able to research the company and their past projects.
9. Real Estate Investment Trust
Just like ETFs and mutual funds, you don’t actually own anything when you invest in a real estate investment trust. REITs can also help you diversify your portfolio, as they will invest in multiple different asset classes.
Like other stocks and bonds, REITs have plenty of the long-term data to offer, which will help dispel any uncertainty about the ups and downs of the real estate market.
It’s recommended that if you decide to invest this way that you stay away from non-traded REITs and aim only for publicly-traded REITs. Non-traded REITs have become notorious for their lack of liquidity, higher fees, and lack transparency, creating unnecessary risk for investors.
10. real estate notes
Similar to owner financing or debt, real estate notes are promissory notes secured by a specified mortgage loan. Essentially the mortgage that already exists on a property.
When purchasing real estate notes through a bank, you’re usually buying debt at prices that are well below what a retail investor would pay.
If you decide to real estate notes are the passive investment for you, I recommend that you be very thorough due diligence. You should know with absolute certainty what you’re getting into, whether you invest with a bank or a real estate investor, because you may end up with that property one day.
11. syndication
A real estate syndication is simply the pooling of funds from numerous investors for the purpose of acquiring various types of real estate projects. Similar to some of your options above, a syndication can be as small as a few investors buying a small office building to fifty plus investors taking down a shopping center.
The capital raised can be used for acquisition, renovation, construction, development, tenant improvements - pretty much anything within the project.
Passive investors in a syndication, called “Limited Partners,” typically see some sort of preferred return on their capital (passive income), as well as equity in the project.
12. Transactional Funding
Transactional funding is similar to hard money and debt financing, but you’re only financing the project in-between closings.
This funding is typically a very short-term lending solution for other real estate investors who plan to be in and out of their real estate deals quickly.
Wholesalers, especially, take advantage of transactional funding to help them keep their double-closings separate.
For example, you, as the transactional money, would help them close on a property in the morning and they pay you off when they double-close in the afternoon.
Just like your other passive real estate investment options, it’s imperative that you thoroughly understand the project, as it’s very easy to see how these deals could get sideways and you end up owning a new piece of real estate.
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About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville. Learn more at www.TylerCauble.com
Quick Recap
Types of commercial real estate you can passively invest in:
multifamily
office
industrial
retail
hospitality
Benefits of being a passive real estate investor:
buying power through leverage
risk diversification
forced appreciation
investing with professionals
tangible asset
tax advantages
Passive Income
How to become a passive real estate investor:
Construction & Development
Crowdfunding
ETFs
Hard Money Lending
Hiring a Property Management Company
Mutual Funds
Owner Financing / Debt
Real Estate Company
Real Estate Investment Trust (REIT)
Real Estate Notes
Syndication
Transactional Funding