The Preferred Investment of High-Net-Worth Investors

by Ryan Moeller

Whether you’re a seasoned investor or just getting started, single-family rentals are not your only option for real estate investments.

For investors just starting out in real estate, the default option is usually single-family rentals because of affordability, ease of acquisition, and it’s what the people on TV are telling you. The down payment and lending criteria for single-family properties are less restrictive compared to commercial real estate, so it’s easier to get started in single-family for those eager to jump in.

Commercial real estate, on the flip side, seems out of reach for many investors, both from an economic and analytics standpoint. There’s so much data to process. Unlike commercial real estate, single-family investing is not rocket science. The analytics are much simpler because of the relatively small scale compared to commercial real estate. With a commercial asset, it’s easy to get lost in the data and overanalyze because there are so many factors that go into evaluating a good opportunity.

Factors to consider include:

  1. Property Details (location, number of units, square footage, etc.)
  2. Cost (purchase price, cost of rehab. Improvement, etc.)
  3. Financing (loan amount, down payment, interest rate, closing costs, etc.)
  4. Income
  5. Expenses
  6. DemographicsOnce you’ve got a handle on the factors that go into evaluating a deal, next comes the projections. Formulating financial projections based on the relevant factors is essential in determining whether a deal is good or not.

Important financial projections include:

  1. Cash Flow
  2. Rates of Return (ROI, Cash-on-Cash, IRR, etc.)
  3. Capitalization Rate (Cap Rate)

All of this is why single-family rentals are the fallback option for many investors who don’t have the money, the time, or the knowledge to dive into commercial real estate. Single-family investments are far easier to understand and afford simply because of scale. Although the financials of commercial real estate are more appealing, it just seems out of reach for many investors.

But what if there was a way for investors to be involved in commercial real estate without the high cost of entry and without the analytical headaches?

What if you could lean on the expertise and experience of others while pooling your funds with other like-minded investors to make a win-win for everyone?

There is a way to accomplish this through passive investing. Passive commercial real estate investing allows an investor who doesn’t have the capital, time, or expertise to reap the benefits of commercial real estate investing not available with single-family rentals.

The economic benefits of single-family rentals pale in comparison to commercial real estate investing.

| Returns Limited to Appreciation |

Because most single-family rentals are leveraged with mortgages, they produce little to no cash flow in most markets. As a result, investors are almost entirely dependent on appreciation for a return on their investment. With average growth in home prices at 3.4% in the past 20 years, according to JP Morgan Asset Management, and inflation averaging around 2% during that time, returns on single-family homes were minimal. Even when without factoring in inflation, appreciation in home prices only beat the best CD rates by a single point.

| Limited Diversification |

Owning one or two rentals limits diversification and prevents the spreading of risk across tenants, business lines, and properties, as you’re able to do with commercial real estate. A leaky roof, a cracked driveway, a broken furnace can sink cash flow and profitability when there aren’t multiple tenants to spread the costs across.

Costly Management

Owning a single asset doesn’t make hiring third-party property management feasible, so the only option is to manage the asset yourself. This is time-consuming stealing time and resources away from your more productive activities.

| Occupancy Risk |

With multifamily and commercial real estate occupancy hovering above 95% since 1990, tenant movement has minimal impact on cash flow. With a single-family residence, vacancy for just a month means a month of covering the mortgage yourself, which has a significant detrimental effect on long-term profitability.

The inherent risks, along with limited financial gain, make single-family rentals hard to justify as part of a long-term investment strategy, especially for building wealth. Passive commercial real estate investing, on the other hand, can satisfy an investor’s financial goals without the time and financial barriers inherent in direct commercial real estate investing.

By deferring to the expertise and experience of others through investment in a private fund specializing in commercial real estate, you can avoid the prospecting, analyzing, financing and acquiring headaches associated with investing in a commercial property directly. It’s much simpler to choose the right fund instead of going through all the metrics that go into evaluating a good commercial investment deal.

Instead of analyzing a hundred different factors, you can focus on just the half dozen or so factors most relevant to your decision including 1) the experience and expertise of the people managing the private fund, 2) the rate of return, and 3) the exit strategy. And by pooling your resources with other like-minded investors, everyone can participate in commercial real estate investing without the high costs of doing it by yourself.

Don’t fall into the same trap as millions of novice real estate investors and believe the myth that single-family rentals are your only option when starting out in real estate investing. Building wealth requires being proactive, but not in the traditional real estate investing sense. It doesn’t require a lot of blood, sweat, and tears like with single-family rentals, but it does require being proactive in seeking out the funds and fund managers that align with your investment and wealth goals.

It’s just a matter of attaching yourself to seasoned and experienced professionals who have already been successfully investing in real estate. Finding promising deals suddenly becomes much simpler, which, in the long term, will serve to grow the wealth you’re seeking to build.

Join other like-minded savvy investors today enjoying the more appealing economic returns of commercial real estate investing.