Why Passive Commercial Real Estate Investing is The Wave of the Future
August 19, 2022
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Real estate investing is a great way to diversify a portfolio and increase your net worth. Commercial real estate investing is the key to incredible growth, but not everyone can afford to buy commercial properties.
Fortunately, passive commercial real estate investing opportunities allow everyday investors to take part in the earnings commercial real estate offers.
Passive Income vs. Active Income
Before you consider commercial real estate investing, it's essential to understand the difference between passive real estate investing and active real estate investing.
So what is passive income?
Passive income is money you earn for doing nothing except funding an investment. Here's how to make passive income.
After you choose the investment opportunity and pay for it, you sit back and let your money grow. Most passive income investment opportunities have a fund manager or manager handling the investment on behalf of the investors.
Active income is money you earn for actively participating in an investment. In other words, you do the leg work instead of sitting back and letting a fund manager handle the investment. Take, for example, real estate property. Active investors buy the property, manage it, and own it until you sell it. All responsibilities fall on your shoulders.
A good investment portfolio combines passive and active investments to increase your chance of reaching your financial goals.
Passive Investing in Commercial Property
Passive real estate investing means you invest money in real estate, but someone else manages it. Generally, you invest with many other investors, pooling the funds together to buy properties or lend to real estate investors who use the funds to purchase properties.
Knowing how to make passive income with commercial real estate investing can be a game changer when reaching your financial goals.
What Is Commercial Real Estate
Commercial real estate is a business or property used for business purposes. In other words, it's anywhere you invest that you don't live.
Here are some simple examples:
- Multi-family properties - Properties with multiple units are commercial real estate properties. You rent them out to tenants, acting as the landlord, collecting rental income each month, and using the money to cover the cost of operating the building.
- Apartment buildings - Mid-rise and high-rise apartment buildings are commercial real estate investments that you rent to multiple tenants. The owner or landlord manages all units in the property.
- Student housing - These are homes, apartments, or multi-family properties near a university or secondary school that rent to students. They offer more services than apartment buildings because they cater to younger people.
- Senior or Assisted Living - Senior living is apartments or units for independent seniors. The facility may offer other services for the demographic, including housekeeping and medical support.
- Office properties - Properties you rent to businesses to run their operations from that don't require a storefront are office properties.
- Industrial - Facilities used for warehousing, manufacturing, or light assembly are industrial facilities.
- Retail - These properties include shopping malls, storefronts, and strip centers for multiple stores.
- Hospitality - These properties cater to their clients, usually temporarily, such as hotels or short-term rental properties.
Types of Passive Commercial Real Estate Investments
Today there are many opportunities to earn passive income with commercial real estate investments.
- Crowdfunding - Think of crowdfunding as online fundraising but to buy properties. You invest as little as $500 in an investment and own a prorated amount of the property. You earn rental income and capital gains according to the percentage of the property you own, and your funds are pooled with other investors.
- ETFs - You can indirectly invest in real estate by buying exchange-traded funds in the real estate industry. ETFs are automatically diversified but are passively managed, so they have fewer fees than mutual funds.
- Hard money lending - If you have a large amount of money and don't want to invest in a property's equity, you can be the 'hard money lender' and provide the financing for real estate investors and developers. You can charge an upfront fee and require interest payments for monthly cash flow.
- Hire a property management company - If you have the capital to buy a property or leverage it with a mortgage loan, you can hire a property management company to manage the property, making it a passive real estate investment.
- Mutual funds - You can indirectly invest in real estate with mutual funds in the real estate industry. Watch your fees, though, as mutual funds have high load fees since fund managers actively manage them.
- REIT - A real estate investment trust is an investment in a real estate company that buys, operates, and sells real estate properties. You purchase shares of the company and indirectly own real estate through them. The REIT determines which properties they'll buy and how they operate them, and they pay investors 90% or more of their profits.
- Real estate notes - You can buy existing promissory notes, taking on the debt financing from the existing lender. Use caution with this method since you could end up possessing the property if the borrower can't make their payments.
- Syndication - A real estate syndication is a group of real estate investors with the same goal, to invest in real estate. You pool funds together to purchase, renovate, or operate a commercial property.
The Wave of the Future: Appeal of Commercial Passive Income Investments
As you can see, there are many opportunities for passive real estate investing. But, you might wonder, what's the advantage of passive real estate investing versus active real estate investing?
Low Upfront Investment Options
Many of the best passive income investments have low upfront minimums. Take, for example, REITs through Concreit. You can invest with as little as $1 and become a real estate investor. Of course, the more money you invest in real estate, the higher the rewards you might earn, but like any investment, there's no guarantee of a profit.
Extensive Real Estate Knowledge Not Required
In many cases, you don't need to understand real estate in depth. While every investor should know what they're putting their money in, you don't have to be a real estate expert. Reading the fine print and understanding what's at risk or what you might gain with the investment is essential, but you don't need to know all the real estate lingo or have any special certifications.
Diversifying your risk is the key to successful investing and reaching financial freedom. For example, a passive real estate investor diversifies his investment when he chooses commercial real estate because there are typically more tenants, which reduces the risk of a loss when you have just one tenant.
For example, investing in an apartment building can be less risky than investing in a single-family property. In the apartment building, if a couple of tenants default on their rent, you won't lose everything because you have other tenants pulling their weight. With single-family residential homes, though, you have nothing to offset if the tenant defaults.
Investing in an income-generating asset gives you something tangible. For example, if you invest in an office building, you own the building or a part of it, depending on how you invested. On the other hand, when you invest in stocks, you get a piece of paper showing your ownership, but you don't have any tangible assets.
Commercial real estate investors have many tax advantages, including depreciation, mortgage interest deductions, and deductions for business costs. Even if you have a passive commercial real estate investment, you may be eligible for certain tax deductions. Talk with your tax advisor to see what tax benefits you might have.
Commercial real estate's value depends on the asset's net operating income. The higher the NOI, the more the property is worth, helping investors earn more money. The higher a property's value, the more profits investors make.
A passive investment is more liquid than if you actively purchased commercial real estate. This is because when you own real estate, you are stuck with it and responsible for it until you sell it, which could take months or years. However, certain passive real estate investments, like real estate investment trusts, are liquid, usually after one year.
Passive investments require little to no time from you. The most time you'll spend on the investment is learning about your options and choosing the right one.
How to Decide the Best Passive Commercial Real Estate Investment for You
The best passive income investments are those that meet your criteria. This requires careful research and soul searching. Figure out your risk tolerance, timeline, and financial goals. What do you want to achieve with your investments?
Once you know what you want to achieve, compare your options. It's best to diversify your portfolio with several commercial real estate investments to increase your chances of reaching your financial goals.
Passive Investing in Commercial Real Estate FAQ
Is Passive Income Taxable?
Just like any other income you earn, passive income is taxable. However, you might be able to lower your tax liability with certain deductions depending on how you earned the income. Your tax advisor is the best person to discuss your taxable income with to determine how to minimize your liabilities and keep more cash in your pocket.
What Are Some of the Risks for Passive Commercial Real Estate Investors?
Like any real estate investment, passive real estate investment opportunities have risks. For example, if the tenants default or the borrowers don't make their payments, you could lose money. You could also lose money if you choose a passive income investment run by a manager that doesn't handle it properly.
Can You Get Rich as a Commercial Real Estate Investor?
With the proper steps and adequate diversification, you can reach your financial goals as a commercial real estate investor. The key is to diversify your portfolio to increase your chances of higher earnings. However, there isn't any guarantee that you'll get rich or even make money investing in real estate.
Passive Commercial Real Estate Investing: The Bottom Line
Passive commercial real estate investing can greatly add to your investment portfolio. Diversifying your capital across several asset classes can offset the risk of a total loss and increase your chances of reaching financial freedom.
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.