How to Decide If You’re an Active or Passive Commercial Real Estate Investor
We hear the terms “active investor” and “passive investor” all the time.
And, we hear them for good reason.
As a commercial real estate investor, the choice you make between those two terms will affect your life (and lifestyle) more than almost any other decision you’ll ever make!
Sound a little dramatic? I get it, but it’s true. I’ve had first-hand experience of both realities and though the outcome can be very similar, the “getting there” are vastly different stories.
And let me be clear, though I have a strong preference for one over the other (we’ll get into that in a minute), both active and passive commercial real estate investing are legitimate and potentially generationally lucrative.
It really boils down to two things:
What type of person you are
How you want to spend your time on this earth
So, let’s take a look at both paths, take a little quiz to help you determine which way you should go, and then I’ll wrap this article up with – you guessed it – my opinion on the matter…
What Does Active Commercial Real Estate Investing Look Like?
In a word? Difficult.
The “active” commercial real estate investor must be -- or become -- a professional.
There are simply too many pitfalls, details, and legal and financial hazards that confront the commercial real estate investor, for that person not to be a professional in his or her field and in his or her particular market.
Hundreds of hours of specific study, professional licensing, hundreds of hours more of studying your particular market, and finally, the constant, full-time search for acceptable/profitable deals.
Did I use the word “difficult?”
Now, all that said, it’s certainly not impossible to become an active real estate investor, but I think it’s wise to see the path ahead of you.
And there are many different ways to enter the market on your own, including via ground up development (likely the most difficult), value add investing, and the use of triple net stabilized assets … to name just a few.
So, if you’re looking for a full-throated and robust career that keeps you extremely busy and in the trenches, active investing is definitely for you. It is an extremely interesting choice that allows the investor to make full use of her skills in many different arenas… all at once!
But, if active investing seems like just too much hassle and work, but you’re still looking for commercial real estate investment deals, what’s an investor to do?
I might have the answer for you ...
What Does Passive Commercial Real Estate Investing Look Like?
I would never categorize any real investment strategy as easy, but passive commercial real estate investing -- when working with a reliable, smart, and ethical operator -- probably comes closest to that definition.
In short, passive investing in commercial real estate gives you a ton of the benefits of active investing, without a lot of the drawbacks.
Essentially, instead of becoming the professional yourself, you (and your money) work with that reliable, smart, and ethical professional operator I mentioned above to find and execute deals that stabilize and grow your investment over time.
In this scenario, you do not need to be an expert in commercial real estate deals (though you can be, I mean, it is a fun hobby). You merely need to work with a trustworthy someone who is.
From syndication, to raising capital, to the use of REITs, the structure of passive commercial real estate investing can look almost any way you need it to, and are comfortable with.
If that doesn’t answer your question, maybe it’s time to run through a little checklist, almost like a personality quiz for CRE in a way, one that might help you make your decision?
A 7-Point Checklist: Are You an Active or Passive Commercial Real Estate Investor?
If you’re still a little confused about this question, the short checklist below might help you understand a little more about each of these investing methods, and which one you’re more suited to.
Let’s go!
Do you want to spend days and weeks touring properties and speaking to contractors, attorneys, and accountants OR do you want to lean on a trusted expert to do all of that work on your behalf?
2. Do you want the sole risk of investing large amounts of your capital in an investment property OR would you rather spread out that risk within a pool of other investors?
3. Do you want to handle all the renovations, repairs, and build outs of an asset yourself OR do you want to place your capital with a trusted expert and leave those responsibilities to him or her?
4. Do you want to handle tenant relationships and issues OR have a trusted expert handle tenants for you?
5. Do you want to manage all the financials of your investment yourself OR would you rather a trusted and experienced expert handle the mountains of paperwork for you?
6. Do you want to be responsible for ALL unexpected costs that come up on your property OR would you rather invest an exact amount of capital that never exceeds your wishes?
7. Do you want to master ALL aspects of becoming a commercial real estate investor OR would you rather a professional commercial real estate investor with a proven track record take it all off your plate?
So which side of these questions did you land on?
It’s probably obvious to you, but if you chose the latter of each of those questions, you’re probably a passive commercial real estate investor my friend.
Whichever side of this coin you’re looking at, before you dive in completely, allow me to give you my completely biased (though thoroughly experienced and honest) opinion on this matter…
Why (I Think) Passive Commercial Real Estate Investing is The Smart Choice
Commercial real estate investing has many benefits that other investment vehicles, like stocks and bonds, wish they had.
As a passive investor, you will not only receive passive income and appreciation from the property, but also tax benefits, risk diversification, increased buying power, and more.
The benefits of passive real estate investing are abundant.
As long as you research the individuals or groups with whom you plan to invest, you will watch your passive income and wealth grow exponentially while taking advantage of all of the ancillary perks, as well.
So, should you become an active or passive commercial real estate investor?
I won’t hedge, in my years of professional experience, passive real estate investing -- when done right -- is a far superior opportunity for most investors.
As a passive investor, you will not only receive passive income and appreciation from the property, but also tax benefits, stronger buying power, and more, you’ll also be given time to pursue other interests, hobbies, and entrepreneurial ventures.
And, maybe most importantly? Passive commercial real estate investors experience a lot less headaches and hassles!
Here’s a quick list of just a few of the benefits of passively investing in commercial real estate:
Increased Buying Power Through Leverage
Risk Diversification
Forced Appreciation
Investing With Seasoned Professionals
It’s A Tangible Asset
Unbelievable Tax Advantages
Passive Income!
The opportunity to build up more passive income from your investments than you make during your day job is one of the most attractive aspects of investing in commercial real estate. You place your capital into a deal and your money works for you.
If you invest properly, you’ll get paid while you’re on vacation. You’ll receive income while you sleep. And eventually, you may even get to a point where you don’t have to actively work again. Unless, of course, you intend to continue building your portfolio.
And not only does passive income help you achieve financial stability in your life, it’s taxed at a much lower rate, up to 20% of your income, compared to ordinary income, which is taxed up to 37%!
Paying close to half your active income tax rate will certainly help you build wealth faster.
Sound like a good deal?
Ready To Start Creating Truly Passive Investment Income?
We hear it all the time … passive income is the best income.
The only problem is, there are very few investment vehicles that are truly passive AND that have a realistic shot at making you serious money (or, at the very least, protecting your money) over the long term.
I get it, you’re already incredibly busy with your life and your work, you don’t have the time to figure out this real estate stuff, much less become a pro at it.
So why not let us handle all of those headaches for you?
If you want to find out how this might work, we’d love to talk.
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