Many commercial real estate investors begin their careers by investing in single-family houses as rental units, because it’s a model they’re familiar with, and because equity will continue to grow in the units. However, to balance out your approach to commercial real estate investing, it might be wise to include some passive commercial real estate investments as well.
Here are some reasons that passive real estate investing might be a better strategy than single-family units.
Single-family units
It is a known fact that single-family units generate very little sustainable cash flow in most cases, and that places considerable risk on the investor, if the market were to take a downturn. In addition, capital expenditures such as heating and cooling systems, driveways, and roofs can literally wipe out any profits. Statistically, the occupancy rates of single-family units has hovered at around 91% over the last 25 years or so, whereas multi-family units have enjoyed upwards of 95% occupancy.
There is also a need to manage your single-family units or to pay someone to do it for you, which represents another investment either of time or of cash. It’s also true that because most commercial real estate investors prefer to oversee their single-family units, those units must be nearby and accessible to the investor. That rules out the possibility of remote properties which might be more profitable.
Advantages of passive real estate investing
When you decide to embark on passive real estate investing, you can seek out mature groups that have established track records, thereby mitigating risk to yourself. Diversification is a big factor in passive real estate investing, because it allows you to pick and choose your projects without regard to asset type, business plan, or geography.
When you invest in passive real estate, your losses are limited to the amount of your actual investment, as opposed to virtually unlimited losses which are possible with single-family units. Lastly, the competitiveness of commercial real estate is closely associated with rational factors such as accessibility, proximity to transportation, nearby amenities, etc. This makes it much easier to predict the potential performance of an asset, as opposed to the potential embodied by a single-family unit.
Commercial real estate investments with Flex Capital
If you’ve been held back on investing in that next commercial real estate project by a lack of funding, we at Flex Capital may be able to help.
Contact us at your earliest convenience, and let us know all about your upcoming project, so we can discuss some financing options.
