Commercial real estate investment can be intimidating for new brokers or investors because of the large price tag to invest and the work involved in choosing the right commercial buildings. Those who take the leap find that there are many advantages to investing in commercial real estate, including the opportunity for multiple income streams, high income potential, and the ability to pass on certain expenses to tenants such as repairs that must be paid by residential property owners.
If you are ready to make your first investment in commercial real estate, you may have already realized that it takes time and effort to find, purchase, and manage a commercial rental property. There are actually two ways to invest and it comes down to who is going to handle the daily management.
What is the difference between passive and active commercial real estate investments?
As a real estate investor, you will have to decide whether to invest in a passive or active commercial real estate investment. There are benefits and risks associated with either option so investors must consider them carefully to decide which one is best suited to them.
In a passive real estate investment, individual investors are “limited partners” who purchase shares in an LLC that owns the property. The investor essentially partners with an investment manager or firm to provide capital but has no control over management decisions. The investor receives periodic income in the form of an equity split, preferred return, or dividends but otherwise has no involvement in the day-to-day operations of the property.
In active commercial real estate investments, an individual or group of individuals comes together to purchase a property directly. The investor is “actively” involved in the process of finding, purchasing, and managing the property. While the investor takes on all of the risk and liability of the investment in this scenario, in many cases, active commercial real estate investments produce higher income than passive ones through rental income cash flow or by adding value to the party.
How To Decide Between a Passive or Active Commercial Real Estate Investment
Here are four factors to consider when deciding between a passive or active commercial real estate investment:
- Do you want control over management decisions?
If you care about having control over day-to-day management decisions, then you will need to purchase a property directly in an active property investment. If you go the passive route, there will be a “general partner” in the corporate structure of the LLC who controls the asset. Consider your preference.
- Do you have the skills required to analyze cash flow and make management decisions?
There is considerable skill involved in analyzing commercial property cash flows and making smart management decisions that will lead to a solid investment return. To be a successful active investor, you will need to be a skilled financial analyst with knowledge of property management best practices. Passive investors do not necessarily need to be experienced real estate professionals in order to succeed because they are putting their investment in the hands of a company such as a real estate investment trust (REIT) or private equity firm that is capable of handling this work.
- How much time do you have to commit?
Active real estate investors must make a significant time commitment to find and manage their properties. If you do not have or want to commit a significant amount of time to managing your commercial properties, a passive arrangement is better because most of the work is done by someone else.
- How much risk are you comfortable with?
Any investment comes with some level of risk and that is true for both passive and active real estate investments. But active investment comes with more risk by the investors who purchase the property. Passive investors have the advantage of spreading the risk around with the general partner and the other investors in the deal.
Who is suited to active commercial real estate investment?
An active real estate investment strategy is typically best suited to individuals with large amounts of capital to invest and the ability to wait on return on investment. They must also have the skills, expertise, and time to find, purchase, and manage properties themselves.
Who is suited to passive commercial real estate investment?
Passive investments are better suited to high income earners who have the funds to invest but lack the time, knowledge, or network to find, purchase, and manage properties on their own. With passive investing, they can outsource these tasks to experts.
The bottom line is that individual real estate investors have their own preferences, skills, return objectives, and risk tolerance. Each of these factors must be considered when deciding which investment strategy is the best fit.
Turn to Windermere for real estate done exuberantly right.
For 50 years, Windermere has used our extensive knowledge of local markets to offer a full range of services that match your commercial real estate needs. Whether you’re a business looking to buy or lease space, or an investor interested in private capital or institutional properties, you’ll benefit from our experience in all phases of commercial real estate, including leasing, business development, brokerage, property management, and consulting.
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Windermere Commercial has established connections with highly reputable brokers throughout the nation. We also have the benefit of being affiliated with Windermere Real Estate, so you aren’t simply hiring a broker; you’re hiring an entire company with an extensive team of dedicated professionals whose highest priority is to help you reach your commercial real estate goals.
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