Work Less & Earn More | 3 Passive CRE Investment Strategies

Most people begin investing in real estate to earn more money while spending less time actually working.  In other words, people generally pursue real estate investing as a means of generating passive income, not to become a real estate professional.   

This isn’t to say that working full-time in the real estate industry doesn’t have its advantages - it certainly does.  Rather, I recognize that a large number of investors simply look for passive returns without the time commitment of a day job in commercial real estate.  

As such, in this article, I’ll discuss some strategies investors can use to passively invest in commercial real estate.  Specifically, I’ll dive into the following topics:

●      Characteristics of Passive Commercial Real Estate Investing

●      Commercial Real Estate Syndication Overview

●      Passive CRE Investment Strategy #1: Passive-Passive Investing

●      Passive CRE Investment Strategy #2: Active-Passive Investing

●      Passive CRE Investment Strategy #3: Either Strategy via Crowdfunding

Characteristics of Passive Commercial Real Estate Investing

While people frequently throw around the phrase passive investing, I want to outline some of the characteristics unique to passive investing in the commercial real estate world. 

Broadly speaking, passive commercial real estate investing is characterized by the following:

●      Giving up control of a deal (con) while also eliminating day-to-day management responsibilities (pro). 

●      Trading some return on investment for the convenience of no managerial involvement.

●      Receiving most of the tax benefits that active investors receive, so long as you join a syndication or direct investment fund.  

●      Leveraging someone else’s commercial real estate experience to build wealth without needing to quit your day job. 

●      Making significant returns in this asset class without needing to tie yourself to a specific location or portfolio of properties - a key advantage in retirement.

Commercial Real Estate Syndication Overview

Having outlined these elements of passive investing, I now want to discuss a phrase I touched on above - syndication.

In a commercial real estate syndication deal, the syndicator (or deal sponsor) acts like a general partner, with the investors (you, the passive investor) serving a role similar to a limited partner.  In other words, the sponsor finds and manages the deals, and the investors - as the title suggests - provide the capital for an ownership portion in the deal.

This syndication model allows fully passive ownership - and associated returns - as passive investors rely on the sponsors and their commercial real estate expertise to analyze, execute, and manage deals.  Consequently, syndication serves as a key vehicle for passive commercial real estate investing. 

And, in the next three sections, I’ll discuss three commercial real estate investment strategies built around syndication. 

Need help connecting with reliable commercial real estate syndicators? Drop us a note!

Passive CRE Investment Strategy #1: Passive-Passive Investing

With this strategy, investors still need to put in some significant front-end syndication-related legwork. 

Unfortunately, not all syndication sponsors will be great fits for your passive investing goals.  Their general experience may not meet your quality standards, or they may just be focused on commercial projects that don’t fit your investment goals.  

As such, passive investors need to undertake a rigorous due diligence period to vet potential sponsors prior to actually investing with them. 

Meet them face-to-face.  Run background checks.  Look at their deal history.  Talk to investors from previous syndication deals they’ve sponsored.  Dive into the audited financials of other deals.  Bottom line - do your homework. 

That’s the up-front portion.  Once you’ve thoroughly vetted a sponsor, you can then choose not to thoroughly analyze each subsequent deal.  You trust the sponsor and likely don’t have the time - or expertise - to review the details of every deal. 

Once you establish this relationship, you put your investments on cruise control, providing the capital and trusting the sponsor to drive successful deals (hence passive-passive). 

Passive CRE Investment Strategy #2: Active-Passive Investing

Ceding the above level of control won’t work for everyone.  Some passive investors still want the warm and fuzzy of personally reviewing every deal.  Or, some just like the educational experience provided by diving into every syndication they join. 

For passive investors who fall into one of the above categories, active-passive investing is a great strategy.  With this approach, investors still need to conduct the same level of vetting for the deal sponsors (investors should thoroughly vet anyone they’re trusting to handle their money). 

But, this approach differs in that passive investors still perform in-depth reviews of every deal a sponsor puts before them. 

With this approach, investors remain passive in so much as they’re not involved with actually developing or managing a property.  However, active-passive investors closely supervise both the sponsor and the specific deals.  While not an all-inclusive list, some of these supervisory tasks for each deal include:

●      Physically touring properties.

●      Analyzing pro forma financial statements.

●      Conducting your own market studies.

●      Confirming zoning restrictions and requirements.

●      Reviewing the actions of competitors.

Clearly, this level of involvement won’t work for all passive investors.  Some people won’t have the time or expertise to conduct this level of review.  But, for investors who want a passive strategy with more control, this is a great model. 

Feel free to drop us a note if you need help analyzing commercial real estate syndication deals.  This analysis can seem challenging, and we’re happy to help!

Passive CRE Investment Strategy #3: Either Strategy via Crowdfunding

This strategy really serves as more of a vehicle to pursue either of the above strategies, and it hinges on the Jumpstart Our Business Startups (JOBS) Act, passed in 2012.  This act significantly loosened crowdfunding rules for real estate syndicators.

In a nutshell, crowdfunding allows online portals to list potential syndication deals posted by sponsors, and investors can review A) the sponsors and B) the specific deals.  For sponsors, these portals vastly increase the pool of potential investors for every deal.  For investors, the portals create a one-stop-shopping mechanism for passive investing in commercial real estate deals. 

Furthermore, many of these deals allow for a smaller capital commitment than traditional syndication models.  As such, you can potentially diversify your risk pool, investing smaller amounts in multiple deals rather than tying up all of your cash in a single project. 

However, while crowdfunding portals provide investors the convenience of accessing a variety of potential deals in a single place, do not assume that these platforms have thoroughly vetted every sponsor and deal. 

Instead, regardless of whether you pursue an active-passive or passive-passive strategy via crowdfunding, make sure you conduct the same level of due diligence when it comes to vetting sponsors. 

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We recognize that, even after outlining the above information, breaking into passive commercial real estate investing can seem daunting.   

That’s why we’re here to help.  The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!