March 12, 2024 • 12 mins
In this episode, Patrick and Noelle discuss the difference between active and passive investing in commercial real estate. They highlight the level of work and effort required for each approach and emphasize the importance of knowing what you want as an investor. They also explore the various avenues to enter the commercial real estate market, including real estate investment trusts (REITs) and crowdfunding platforms. The hosts emphasize that there is no right or wrong way to approach investing and that it depends on individual preferences and goals.
Key Takeaways:- Active investing in commercial real estate involves actively sourcing, vetting, acquiring, and managing properties, while passive investing involves providing capital to active investors to deploy on your behalf.
- Passive investing requires less work and day-to-day involvement compared to active investing.
- There are different avenues to enter the commercial real estate market, including investing in REITs, crowdfunding platforms, and directly with syndicators.
- It is important to know what you want as an investor and to align your investment approach with your goals and preferences.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:02):
Hello and welcome to the passivecommercial real estate investing show
brought to you by the one and only schoolof commercial real estate investing.
I'm Patrick.
And I'm Noelle.
And this is episode number three.
Hello and welcome to the active commercialreal estate investing show brought to you
(00:23):
by the one and only school of commercialreal estate investing.
I'm Patrick.
And I'm Noelle.
And this is episode number three.
And on today's episode, we are talkingabout something that is very important for
your journey.
There are different ways of going aboutinvesting in commercial real estate.
(00:43):
I think so often we might know one path orthe other, but it's important to know that
depending on your season of life and whatyou're interested in, you have options.
So those two options that you have arebeing an active investor or a
being a passive investor.
And I do think it's important to talkabout the difference because your level of
(01:06):
work or effort that you might wanna putinto something for the return is going to
look very different than someone else'sdesire for the level of effort that they
wanna put in.
So think about what...
work you're willing to do and what yourpersonal journey looks like to discover
what path or what mixed route you mightwant to take between active and passive
(01:31):
investing.
Absolutely.
So with active investing, as indicated bythe name, you are the investor or set of
investors who are actively sourcing,vetting, securing debt, and acquiring,
renovating, renting the properties.
(01:52):
You're doing all of that work, whichrequires active effort from you and your
fellow investors.
These folks are also called
General Partners or GPs is another phraseyou hear a lot that is more often than not
synonymous with active investor in thecommercial space.
(02:13):
On the flip side of that, passiveinvestors, as indicated by their name,
oftentimes just provide the money or thecapital for active investors to go out and
deploy on their behalf.
The neat thing about passive investing isthat
It requires substantially less work.
Yes, you as a passive investor still needto do your due diligence.
(02:37):
If you're giving someone anywhere from$100 to $100,000 to a million dollars to
$10 million, you need to be confident thatwhat you're investing in is going to
provide a good return for you and that youhave full confidence of the people
investing it on your behalf.
If you don't, don't invest in thatparticular deal or with that particular
(03:00):
team.
or in that particular vehicle.
So I wouldn't say that passive investingis 100% passive because you should still
be doing your own due diligence in thatwork.
But once your money is deployed, you'renot having to worry about manage tenant
expectations or deliver K-1 tax reports orforms or anything like that at the end of
(03:25):
the year.
So your day-to-day involvement issignificantly reduced.
compared to active investors.
Another.
like we know a lot of people who wantthat, right?
You say, OK, I have X amount of cashsitting around, but I really don't want to
take the energy to put, like to go andfind the deal, to figure out what the deal
(03:49):
should be.
Like, I would much rather give this tosomeone that I trust and I know is going
to bring me a better return than if I wereto put it in the stock market, let's say,
or invest in something else.
And that's OK.
You're still going to get a return.
like with your GP like there is a goodchance that you're making an incredible
return that you probably never would havegotten in a different type of venture or a
(04:12):
different type of investment.
But then there's other people like no, Iwant that control.
I want to go out.
I want to find it.
I want to put my blood, sweat and tearsinto it.
You know, I want to be able to findvendors and someone to manage and I want
to be able to, you know, find an agentwho's going to find me the right tenants.
And that's okay too.
Like
depending on what you want to do, somepeople have the drive and want that
(04:35):
control and others want to be able to kicktheir feet back a little bit more and get
some money at the end of the day that theyprobably wouldn't have otherwise.
That's absolutely true.
And I think there's also different, youknow, both of these types of investing
provide different avenues to enter thecommercial space.
So if you have personally been investingin something like single family homes and
(04:59):
you have experience of being a landlordand you're familiar with the buying and
selling of real estate at that level, youmay be more likely to want to start to be
an active investor in commercial realestate.
And you may have a, an elevated level ofknowledge from your experience that helps
you get into that game a little bit moreefficiently.
(05:22):
On the other hand, if you're entering realestate investing without any experience
and you don't know where to start goingfull blown into multifamily syndication
may feel like a really big jump for you tomake depending on how fast you want to
make it, it's not impossible by any means.
but there's a lot to learn in a very shortamount of time, depending how fast you
(05:43):
want to get started.
On the flip side of that, there are a lotof avenues on the passive side that are
attractive and have a much lower barrierof entry, right?
So one of those is you can actually go toyour 401k or your Roth IRA or your general
brokerage account, and you can invest inthings called real estate investment
(06:04):
trusts.
So real estate investment trusts, alsoknown as REITs,
effectively a form of passive investing incommercial real estate.
You can often select if you wanted a, uh,if you want to invest in a blend, uh, or
if you want to invest in a certain assetallocation, um, or, or certain asset class
of commercial real estate through thattrust.
(06:26):
And so a lot of those you can buy for lessthan a hundred dollars a share.
And then you can sell whenever you want,which is a beauty of it.
It's, it's quick in, quick out.
And often the cost of entry issubstantially lower than investing
passively in syndication, for example.
A level up from that, I would say, notnecessarily in terms of outcomes or
(06:50):
returns, but just a higher level of duediligence is required on your end as a
passive investor is investing in some ofthese more popular crowdfunding platforms
where they're effectively companies thathave formed.
And our syndicators at scale.
So they're doing a massive amount ofmarketing.
They're getting a huge amount of dollarsput in, and then they're going as the
(07:13):
active investors and deploying thatcapital into commercial real estate.
And so you can, you can invest directlywith them, set up an account, vet them and
let them put your money to work.
The third tier, which I would say requiresthe highest level of due diligence is, is
investing directly with a syndicator.
(07:35):
You just want to make sure that they havethe experience you're looking for, or that
you have a good enough judge of theircharacter to trust that they're going to
take your money and deploy it effectivelyand make good on their word.
Because while there are certainly laws andregulations around what the GPs and active
(07:57):
investors have to do from a fundraisingperspective
on the actual deploying of that capitalside of things, you don't have as much
regulation, right?
Like, so if someone's not a good operator,they could cause the property to not
(08:17):
generate the income it needs, which meansyou're losing your money and there's no
recoiling from that.
Like you've just lost your money.
So I'm not trying to scare anybody frompassive investing.
It's important.
And investing with...
syndications and GPs directly can be afantastic way to make great returns.
Um, I'm just saying that always do yourown due diligence.
(08:42):
Always.
Yeah.
And know what you want out of what, whereyou want to put your investment to.
Like know if you want to be in the detailsof what's going on.
You know, a good active investor who isgetting money from others to be able to
put into their investment is going to giveyou reports.
They are going to tell you what's going onthe property and they're going to make
(09:05):
sure that you're in the know.
But if that's not enough for you, take ahard look in the mirror and say, am I
really wanting to be a passive investor inthat case?
Like if I want to know the details, do Ijust want to be leading those details
instead?
Both are great avenues, and both get youinto generating
wealth for you, for your family, allowsyou to be making a little bit more money
(09:30):
that you can then apply the percentageeffect on gaining increases and value and
being able to have more money to put intobigger things, which ultimately will
generate more wealth for you in the longrun, regardless of which route you go,
which I think is very important.
Another interesting component to all ofthis that I think is worth mentioning,
(09:50):
especially on this episode, is thatthere's no right or wrong way to go about
this.
It's, it's as Noelle said earlier, it'sall about where you are in your stage of
life and what you're looking for in termsof your investment.
And I think it's important to note thatthere are different stages in your life
where you may be.
(10:12):
interested in different approaches.
So there may be a phase in your life whereyou are just wanting to get into the game.
And so you want to invest passively with alower cost to entry and less work day to
day so that you can really start to learnwhat commercial real estate is all about.
Then as you go on, you may decide, Hey,I've scaled up my investments here.
(10:38):
I actually know a lot about the space andI want to take...
you know, try my hand at investingactively.
It's also possible to do the reverse ofthat, where when you're young and you've
got some more energy, you wanna go all inon the active side of things, and then
maybe you do well for yourself and youwant to convert to being more of a passive
investor and free up your time a littlebit more.
(11:00):
You can also do a hybrid, where maybeyou're investing actively in multifamily,
you're interested in industrial or adifferent asset class, but you don't have
as much expertise or knowledge there.
So you take some of the profits you earnfrom actively investing in multifamily and
give that to a syndicator or GP or fund inthe industrial space and let them put your
(11:21):
money to work in that space for you.
Right.
So there's, there's no right or wrong wayto approach this.
It really is sitting down, taking a lookat what you want out of it and figuring
out where you are in your life and whatmakes sense for you.
I love that no one size fits all.
You can do one or all avenues.
So that's great.
(11:42):
And I think that's a great way to wrap up.
This is obviously a very short episode,but as we talk about active investing
versus passive investing, and if youfollow it along, you know we have one
show.
or both shows currently out.
We are working on one to be able to putout the other as well.
So we want you to know that as you'relooking at more of the active route, that
(12:05):
will be geared towards the activeinvestors.
Our passive route will be geared towardsthe passive investors.
And if you're a hybrid, you're going tojust have to listen to both, I guess, so
that you can get the best of both worlds.
But we're excited to have you on thisjourney with us.
And we're excited to share moreinformation in each of those realms to
help you along your journey.
(12:26):
Yes.
With that, be sure to subscribe, staytuned for upcoming episodes.
And if you haven't visited the websiteyet, please head over to SchoolOfCREI.com
for more.
Hello and welcome to the passivecommercial real estate investing show
brought to you by the one and only schoolof commercial real estate investing.
I'm Patrick.
And I'm Noelle.
And this is episode number three.
Hello and welcome to the active commercialreal estate investing show brought to you
(00:23):
by the one and only school of commercialreal estate investing.
I'm Patrick.
And I'm Noelle.
And this is episode number three.
And on today's episode, we are talkingabout something that is very important for
your journey.
There are different ways of going aboutinvesting in commercial real estate.
(00:43):
I think so often we might know one path orthe other, but it's important to know that
depending on your season of life and whatyou're interested in, you have options.
So those two options that you have arebeing an active investor or a
being a passive investor.
And I do think it's important to talkabout the difference because your level of
(01:06):
work or effort that you might wanna putinto something for the return is going to
look very different than someone else'sdesire for the level of effort that they
wanna put in.
So think about what...
work you're willing to do and what yourpersonal journey looks like to discover
what path or what mixed route you mightwant to take between active and passive
(01:31):
investing.
Absolutely.
So with active investing, as indicated bythe name, you are the investor or set of
investors who are actively sourcing,vetting, securing debt, and acquiring,
renovating, renting the properties.
(01:52):
You're doing all of that work, whichrequires active effort from you and your
fellow investors.
These folks are also called
General Partners or GPs is another phraseyou hear a lot that is more often than not
synonymous with active investor in thecommercial space.
(02:13):
On the flip side of that, passiveinvestors, as indicated by their name,
oftentimes just provide the money or thecapital for active investors to go out and
deploy on their behalf.
The neat thing about passive investing isthat
It requires substantially less work.
Yes, you as a passive investor still needto do your due diligence.
(02:37):
If you're giving someone anywhere from$100 to $100,000 to a million dollars to
$10 million, you need to be confident thatwhat you're investing in is going to
provide a good return for you and that youhave full confidence of the people
investing it on your behalf.
If you don't, don't invest in thatparticular deal or with that particular
(03:00):
team.
or in that particular vehicle.
So I wouldn't say that passive investingis 100% passive because you should still
be doing your own due diligence in thatwork.
But once your money is deployed, you'renot having to worry about manage tenant
expectations or deliver K-1 tax reports orforms or anything like that at the end of
(03:25):
the year.
So your day-to-day involvement issignificantly reduced.
compared to active investors.
Another.
like we know a lot of people who wantthat, right?
You say, OK, I have X amount of cashsitting around, but I really don't want to
take the energy to put, like to go andfind the deal, to figure out what the deal
(03:49):
should be.
Like, I would much rather give this tosomeone that I trust and I know is going
to bring me a better return than if I wereto put it in the stock market, let's say,
or invest in something else.
And that's OK.
You're still going to get a return.
like with your GP like there is a goodchance that you're making an incredible
return that you probably never would havegotten in a different type of venture or a
(04:12):
different type of investment.
But then there's other people like no, Iwant that control.
I want to go out.
I want to find it.
I want to put my blood, sweat and tearsinto it.
You know, I want to be able to findvendors and someone to manage and I want
to be able to, you know, find an agentwho's going to find me the right tenants.
And that's okay too.
Like
depending on what you want to do, somepeople have the drive and want that
(04:35):
control and others want to be able to kicktheir feet back a little bit more and get
some money at the end of the day that theyprobably wouldn't have otherwise.
That's absolutely true.
And I think there's also different, youknow, both of these types of investing
provide different avenues to enter thecommercial space.
So if you have personally been investingin something like single family homes and
(04:59):
you have experience of being a landlordand you're familiar with the buying and
selling of real estate at that level, youmay be more likely to want to start to be
an active investor in commercial realestate.
And you may have a, an elevated level ofknowledge from your experience that helps
you get into that game a little bit moreefficiently.
(05:22):
On the other hand, if you're entering realestate investing without any experience
and you don't know where to start goingfull blown into multifamily syndication
may feel like a really big jump for you tomake depending on how fast you want to
make it, it's not impossible by any means.
but there's a lot to learn in a very shortamount of time, depending how fast you
(05:43):
want to get started.
On the flip side of that, there are a lotof avenues on the passive side that are
attractive and have a much lower barrierof entry, right?
So one of those is you can actually go toyour 401k or your Roth IRA or your general
brokerage account, and you can invest inthings called real estate investment
(06:04):
trusts.
So real estate investment trusts, alsoknown as REITs,
effectively a form of passive investing incommercial real estate.
You can often select if you wanted a, uh,if you want to invest in a blend, uh, or
if you want to invest in a certain assetallocation, um, or, or certain asset class
of commercial real estate through thattrust.
(06:26):
And so a lot of those you can buy for lessthan a hundred dollars a share.
And then you can sell whenever you want,which is a beauty of it.
It's, it's quick in, quick out.
And often the cost of entry issubstantially lower than investing
passively in syndication, for example.
A level up from that, I would say, notnecessarily in terms of outcomes or
(06:50):
returns, but just a higher level of duediligence is required on your end as a
passive investor is investing in some ofthese more popular crowdfunding platforms
where they're effectively companies thathave formed.
And our syndicators at scale.
So they're doing a massive amount ofmarketing.
They're getting a huge amount of dollarsput in, and then they're going as the
(07:13):
active investors and deploying thatcapital into commercial real estate.
And so you can, you can invest directlywith them, set up an account, vet them and
let them put your money to work.
The third tier, which I would say requiresthe highest level of due diligence is, is
investing directly with a syndicator.
(07:35):
You just want to make sure that they havethe experience you're looking for, or that
you have a good enough judge of theircharacter to trust that they're going to
take your money and deploy it effectivelyand make good on their word.
Because while there are certainly laws andregulations around what the GPs and active
(07:57):
investors have to do from a fundraisingperspective
on the actual deploying of that capitalside of things, you don't have as much
regulation, right?
Like, so if someone's not a good operator,they could cause the property to not
(08:17):
generate the income it needs, which meansyou're losing your money and there's no
recoiling from that.
Like you've just lost your money.
So I'm not trying to scare anybody frompassive investing.
It's important.
And investing with...
syndications and GPs directly can be afantastic way to make great returns.
Um, I'm just saying that always do yourown due diligence.
(08:42):
Always.
Yeah.
And know what you want out of what, whereyou want to put your investment to.
Like know if you want to be in the detailsof what's going on.
You know, a good active investor who isgetting money from others to be able to
put into their investment is going to giveyou reports.
They are going to tell you what's going onthe property and they're going to make
(09:05):
sure that you're in the know.
But if that's not enough for you, take ahard look in the mirror and say, am I
really wanting to be a passive investor inthat case?
Like if I want to know the details, do Ijust want to be leading those details
instead?
Both are great avenues, and both get youinto generating
wealth for you, for your family, allowsyou to be making a little bit more money
(09:30):
that you can then apply the percentageeffect on gaining increases and value and
being able to have more money to put intobigger things, which ultimately will
generate more wealth for you in the longrun, regardless of which route you go,
which I think is very important.
Another interesting component to all ofthis that I think is worth mentioning,
(09:50):
especially on this episode, is thatthere's no right or wrong way to go about
this.
It's, it's as Noelle said earlier, it'sall about where you are in your stage of
life and what you're looking for in termsof your investment.
And I think it's important to note thatthere are different stages in your life
where you may be.
(10:12):
interested in different approaches.
So there may be a phase in your life whereyou are just wanting to get into the game.
And so you want to invest passively with alower cost to entry and less work day to
day so that you can really start to learnwhat commercial real estate is all about.
Then as you go on, you may decide, Hey,I've scaled up my investments here.
(10:38):
I actually know a lot about the space andI want to take...
you know, try my hand at investingactively.
It's also possible to do the reverse ofthat, where when you're young and you've
got some more energy, you wanna go all inon the active side of things, and then
maybe you do well for yourself and youwant to convert to being more of a passive
investor and free up your time a littlebit more.
(11:00):
You can also do a hybrid, where maybeyou're investing actively in multifamily,
you're interested in industrial or adifferent asset class, but you don't have
as much expertise or knowledge there.
So you take some of the profits you earnfrom actively investing in multifamily and
give that to a syndicator or GP or fund inthe industrial space and let them put your
(11:21):
money to work in that space for you.
Right.
So there's, there's no right or wrong wayto approach this.
It really is sitting down, taking a lookat what you want out of it and figuring
out where you are in your life and whatmakes sense for you.
I love that no one size fits all.
You can do one or all avenues.
So that's great.
(11:42):
And I think that's a great way to wrap up.
This is obviously a very short episode,but as we talk about active investing
versus passive investing, and if youfollow it along, you know we have one
show.
or both shows currently out.
We are working on one to be able to putout the other as well.
So we want you to know that as you'relooking at more of the active route, that
(12:05):
will be geared towards the activeinvestors.
Our passive route will be geared towardsthe passive investors.
And if you're a hybrid, you're going tojust have to listen to both, I guess, so
that you can get the best of both worlds.
But we're excited to have you on thisjourney with us.
And we're excited to share moreinformation in each of those realms to
help you along your journey.
(12:26):
Yes.
With that, be sure to subscribe, staytuned for upcoming episodes.
And if you haven't visited the websiteyet, please head over to SchoolOfCREI.com
for more.
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