Guest Post By Realty Mogul
“Passive” investing is when you try to separate your investment income from any significant time commitments – you’re not actively working on the project, like you are at your “day job,” for example. Active investments, on the contrary, might involve you spending the time to find the opportunity in the first place and then being actively involved in the project’s management – and in real estate, this often means getting involved with tenants, toilets, and trash.
If you’re not prepared to devote a significant amount of time to your real estate investments, it may make sense to leverage the work of professionals in this area and to let them do the bulk of the work. Here are six reasons why passive real estate investing may be right for you.
#1 – Better Access to Quality Deal Flow
In commercial real estate, there are many different sectors – multi-family apartment buildings, retail shopping centers, self-storage facilities, and office buildings, to name a few – that offer opportunities for investment. Unless you specialize in one of these areas, though, and have developed good deal sources in one or more of these areas, it’ll be tough to develop a good pipeline of potential projects.
Established real estate companies not only review closely the multiple listing services, but also tend to have developed strong relationships with brokers and local banks. These ancillary professionals are constantly on the lookout for potential transactions for their client companies. It’s difficult for most people not so “plugged in” to be able to access such potential deals, and this lack of access itself makes it difficult to make knowledgeable comparisons of competing possible transactions.
Investing alongside established real estate companies Partnering up with an investment platform that features property listings and the necessary stats that go with them can allow investors to participate in some of these potentially “better” deals, rather than missing out on them completely.
#2 – Lower Minimum Investment Amounts, with Crowdfunding
Commercial real estate projects tends to involve relatively large properties – retail centers, office buildings, apartments buildings with more than 50 units, etc. A major disadvantage for smaller investors find when competing in the market is the sheer size of investments that sponsoring real estate companies might be looking for with such projects. A sponsor looking to raise $5 million, for example, is likely to not be interested in an investor unless that investor can bring $100,000 to the project.
Crowdfunding allows investors to pool together smaller investment amounts into a single larger investment that is attractive to a sponsor. A smaller individual investment amount means that a greater number of investors will be able to participate in these larger property transactions. Alternatively, even those who might be able to afford a larger investment amount may instead prefer to diversify their investments across different properties.
Crowdfunding for real estate makes it easier for investors to “throw their hat in the ring” and to participate in these larger commercial projects, thus widening the scope of the investor’s opportunities.
#3 – Avoiding Banks and Closing Issues
In addition to the difficulties involved with finding suitable properties, the closing process isn’t so easy either. Bank financing on commercial properties can be complicated and involve a fair amount of paperwork. It’s a relatively slow process, often requiring relatively lengthy lead times in getting everything approved by the bank’s investment committee.
This is another area where leveraging the expertise of professionals may not be a bad idea. Professional real estate companies have been down the financing / closing road many times and are familiar with the property reports that the banks will likely ask for. Many have pre-existing relationships with certain banks. It’s not a bad chore to let someone else handle.
#4 – No Management Headaches
This goes to the heart of passive investing – let someone else deal with the day-to-day management issues! Are you really in a position to deal with 2am calls about leaky faucets or broken gates? Do you really want to have to meet the handyman when he comes by to let him into the problem apartment?
Property management means being on-call and responsive (or else there will be unhappy tenants). Tenants, toilets, and trash; someone has to deal with them. If you’re up for the tasks, more power to you; but it’s no crime to not want to delegate these chores to someone else. Again, it’s sometimes better to leave these matters to people who are paid to be on top of them.
#5 – The Investment Continues to Work for You While You Sleep
For any investment, you need to do some diligence and sign legal agreements at the outset. Once a cash-flowing property has been acquired, however, it’d be unusual for all the tenants to move out or for similar catastrophes to occur. Generally, tenants continue to pay rent and the sponsor continues to work to improve the property’s overall operations.
This income component of commercial real estate generally helps to temper its volatility as compared to asset classes like stocks, where price movements constitute a bigger portion of overall return rates. Despite the Great Recession, commercial real estate business cycles are often less pronounced; rental lease terms generally help to mitigate economic fluctuations and their impact on income. Over time, commercial real estate has generally exhibited relatively good stability -- more akin to bonds than to stocks or even publicly traded REITs.
Commercial Real Estate Income Generally Leads to Lower Volatility
(Chart Measures Q2 1983 to Q1 2013)
#6 –Tax Benefits
The tax benefits of direct participation interests in commercial real estate can be attractive. If properly structured, deductions related to depreciation, interest expense, and other items help to shelter or defer the taxes on cash distributions. Some or all of these tax benefits may be recaptured at the time of the property’s sale, but in the meantime investors may have tax-free use of the distributed cash.
Passive real estate investing is definitely not for everyone, as it involves handing over control to the sponsoring real estate company, and investors count on that sponsor to make all of the decisions related to the investment. This type of investing thus requires that you find honest and capable operators to work with due to the possibility of fraud and mismanagement (although these risks can be somewhat reduced where background checks are performed and with the right investment structure). Passive real estate investments are also typically much less liquid than stocks and bonds, and an investor’s shares cannot easily be sold. But if investors conduct thorough due diligence for each opportunity and diversify across many sponsors and investment types, then passive real estate investing may be for you
By: Lawrence Fassler
General Counsel | Realty Mogul
IMPORTANT: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.
About Realty Mogul
Realty Mogul is an online peer-to-peer marketplace for real estate investing, connecting borrowers and sponsors to capital from accredited and institutional investors. Backed by Canaan Partners, Realty Mogul gives investors tools to browse investments, do due diligence, invest online and have 24/7 access to an investor dashboard to watch how their investments are performing. Realty Mogul is licensed in California under BRE license #01926613, and offers equity securities through WealthForge, LLC, a member of FINRA/SIPC.
For more information on how to become a real estate investor or to seek capital through the Realty Mogul marketplace, please visit www.RealtyMogul.com.