Why Passive Real Estate Investing Trumps Buying Directly

TruePoint Capital

The Internet age has given rise to a certain do-it-yourself ethic that has encouraged people to fix things or build things on their own to save a few bucks.

Count me among one of those people. Thanks to YouTube, I now know how to replace the headlight bulb in my car – that was easy. Need to replace an alternator? Well, not so easy. After hundreds of dollars, hours of frustration, and skinned knuckles, I gave up and decided to leave it to an expert – my mechanic.

With real estate investing, some things are better left to the experts. I know the seminar circuit is all about the do-it-yourself ethic, but the reality is most investors give up after wasting tens of thousands of dollars, hours upon hours of frustration, and skinned knuckles trying to do it on their own.

Consider the following scenario:

You have 1 million dollars to invest in commercial real estate. Do you acquire a local commercial property and do everything yourself, from renovating to managing, or do you go the passive investing route and invest in one or more private commercial real estate funds?

In response to that question, here are my reasons why passive real estate investing trumps buying and managing a property on your own:

You’re at an Information Disadvantage. Real estate investing is all about finding values – finding off-the-radar properties nobody else knows about.

In every market, you’ve known of that person or persons who have a knack for finding those sweet properties nobody else seems to know about. It’s not luck. It’s from years of networking and knowing the right people.

The right opportunities are highly relationship-driven, and novices don’t have access to the best deals.

Why Reinvent the Wheel? Successful commercial real estate investors have been around the block. They know how to analyze every minute detail of a potential deal, including cap rates, market demographics, and indicators, expenses, zoning, renovations, financial projections, property management, personnel, exit, etc..

Novice investors are typically at a disadvantage when it comes to the complexities of deal-structuring and often do not have access to or knowledge of the data sources applicable to their specific asset class.

Experienced investors apply sophisticated and often proprietary processes for analyzing and managing deal flow. This is hard to compete with.

Diversification. When investing directly, commercial real estate investors tend to put all their eggs in one basket in one property in a specific asset class in their home market. This exposes the investor to financial risk that can be market-specific, asset-specific, or even property-specific.

For example, you own a single-tenant property that is specifically designed for retail. What happens when the local economy tanks, your tenant goes bankrupt, or you can’t find a replacement retail tenant? Because you’ve put all your eggs in one basket, you’ve put yourself at potential financial risk.

Why not invest in commercial real estate assets across a variety of markets, asset classes, and funds? Diversifying your risk away while collecting monthly or quarterly checks, while expert management oversees everything, sounds good to me.

I get it. The American way is about rolling up your sleeves, getting your hands dirty, and reaping the rewards.

Do you know what else is the American way? Capitalism.

Capitalism, to me, means maximizing my money-making opportunities, and to me, passive investing provides the most unobstructed path to making money in real estate investing.

Why spend years of your life banging your head and tens of thousands of dollars of money to learn something in your local market to do something mediocrely (Is that even a word? You know what I mean.)

Through passive investing, you can partner with successful, skilled, and experienced real estate fund managers across the country (and even globe) who take all the guesswork out of real estate investing.

This is why passive real estate investing trumps buying directly every time.