CRE Investments - Most Passive to Least Passive

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• CRE Investments - Most Passive to Least Passive

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CRE Investments - Most Passive to Least Passive

Commercial Real Estate investing is amazing because any type of investor can participate.

Whether you’re looking for a place to park cash and collect mailbox money for the next 20 years, or undertake a huge Value-Add project so you can 3x your money in a year (or lose it all)

There’s a wide variety of risk levels, passivity of income, and every deal is so different. So today we are going to break down our top 5 CRE investments and just how passive they shape out to be.

We’ll narrow the investments to exclusively retail buildings to keep everything simple.

1. Ground Leases

There is nothing, and I mean NOTHING more passive than owning a piece of dirt that is leased out.

You, as the owner, have to do practically nothing as the business leasing your land covers 100% of the costs/maintenance and even building construction… then sends you a check every month.

Typically you’ll see a convenience store or a QSR (Quick Service Retail) occupy these. The lease is anywhere from 15-30 years long.

In trade for the passivity, cap rates for ground leases are generally very low at around 4-6%. Perfect for a passive investor that also wants tax benefits of owning real estate.

Oh, and the best part? Once the tenant’s lease expires or terminates, then the Landlord retains 100% ownership of the building and improvements that the tenant paid for.

2. Corp. Guaranteed NNN Lease

While the ground lease requires no oversight from the Landlord, a NNN lease works a bit differently. The landlord is now technically renting the building and has to maintain any major building components.

So instead of the tenant being responsible for 100% of all costs related to the property, instead they are only responsible for the property taxes, insurance, and common area maintenance. If something major happens like a roof needing replacing, Landlord is responsible.

Then if the tenant is a corporate user such as a Dollar General, Starbucks, or other user of a large company, there’s additional security on payment of their lease.

The lease will have a section called a “corporate guarantee”, meaning if the tenant defaults on rent, then the Landlord has recourse to collect rent from the parent company.

And since it’s a corporate guaranteed NNN Lease, there’s really 2 risks to watch out for on this investment.

The first risk being that these leases are typically less than a ground lease, sometime only 5-15 years. Meaning if the tenant lease expires, then you have to find a replacement.

The 2nd risk is what we discussed earlier, which is the Landlord being responsible for any major maintenace or repairs.

Given there’s a bit more risk and less passivity, you’ll see these deals trade for closer to 5-7% cap rates.

3. Multi Tenant Retail (Fully Stabilized)

Now we are looking at a more complex type of commercial real estate investing.

This example could be a local 10,000 square foot retail strip mall. All the tenants are paying market rents, have long leases in place, and have overall been stable tenants.

The term “Stabilized” means the property is maxed out on the income it can produce and there’s no way to make immediate improvements.

But now since we have multiple tenants, and there’s no corporate guarantee, the risks have increased. If a tenant defaults, there’s less options to ensure they pay the rent owed.

On top of that, the Landlord is tasked to find replacement tenants which can be very costly.

It’s also a less passive investment because you’re now managing multiple tenants instead of just one. Meaning more turnover and more costs.

Because of the extra risk and responsibility… you’ll see cap rates for these as high as 10%.

4. Multi Tenant Retail (Value-Add)

Similar to our last Investment, this is a retail strip, yet does not have any long term leases in place or may not be fully leased to begin with.

The challenge here is the property needs a ton of work. With short leases, tenants could be leaving upon expiration.

The Landlord needs to fill the vacant spaces in the building. Costs to lease could be substantial with broker commissions and building improvement allowance.

Investors like to take on these types of deals because they will sell for much less than fully stabilized deal.

Then if Investors can successfully fill the building with strong tenants on long term leases, they’ll have a much more valuable property in their hands.

The cap rate these investments trade at can vary across the board depending on how much work and time is needed to optimize their cash flow. Perfect for anyone looking for plenty of upside!

5. Retail Development

And finally… the biggest challenge and lease passive of them all… constructing a new building.

It goes without saying this is the going to be the most intense form of investing. You have no tenants and no building, nothing has been done for you.

Now you have to coordinate permitting, building, financing, projecting, leasing, and much more all into one package of a real estate deal.

The list of things that could go wrong are 10x as much, because there’s now 10x as many variables.

Only the savviest real estate investors should take this on. It will give you the most upside but with heavy risk and lots of factors outside of your control.

Well there you have it! Most passive to least passive real estate investing.

If you’re considering getting into your first CRE investment, get in touch with us! We’d love to see if there’s anything we can do to help.