With the tremendous advantages commercial real estate can have over its residential counterpart, you would think that every investor would want to move into the commercial space. But, the time and energy commitments just seem too high for many investors, a concern that prevents most people from reaping the benefits of commercial real estate.

It doesn’t have to be this way! There are plenty of ways to invest without devoting all of your attention to actually operating commercial properties or becoming a real estate professional.

In this article, we’ll discuss 10 options to passively invest in commercial real estate.

Option 1: Transactional Funding

As with residential, not all commercial real estate investments are long-term deals. Instead, many deals require short-term financing.

Often, commercial wholesalers acquire a property and turn around and sell it a short time later.

These sorts of deals require funding to bridge the gap between the initial purchase and subsequent resale, and this provides an opportunity for passive investors to make a quick return.

While these sorts of deals require established relationships with commercial real estate wholesalers, once these relationships are built, the actual transaction becomes a quick and hands-off opportunity for the investor providing the funds.

Option 2: Syndication

Here’s another outstanding option for passive investors to enter the commercial real estate world with an equity stake in a project.

With real estate syndication, the syndicator (or sponsor) acts like a general partner, with the investors serving a role similar to a limited partner.

The sponsor finds and manages the deals, and the investors - as the title suggests - provide the capital for an ownership portion in the deal.

This model allows fully passive ownership - and the associated returns - in commercial real estate.

Option 3: Real Estate Notes

Similar to residential real estate, most commercial projects are debt-financed. The loans that are used to purchase a property, known as mortgage notes, represent an outstanding opportunity to invest in commercial real estate without the headaches of being a landlord.

Banks or other lending institutions make these loans, but they often then sell the notes to investors to either free up cash flow or limit interest-rate risk associated with long-term loans.

And the real beauty for investors looking to buy these notes? Banks typically sell them at a significant discount, meaning that a passive investor can gain a debt stake in a commercial project at less than market value.

However, it’s important to note that, when purchasing a note, the investor assumes the responsibility for collecting the borrower’s principal and interest payments so should have a solid grasp of debt servicing tasks.

Option 4: Invest in a Commercial Real Estate Firms

This is a way to both “buy local” and passively invest in commercial real estate.

Local real estate firms - and businesses, in general - often look for new sources of funding via local investors. While these may not be widely publicized deals, establishing relationships with local commercial real estate firms will open doors to passive investments.

Once you’ve invested with a local firm, you now have the two-fold benefit of both investing in your local community and having market-specific subject matter experts maximizing the returns on your investment with commercial projects.

Drop us a note for recommendations on connecting with quality commercial real estate firms in your area.

Option 5: Provide Owner-Financing for Your Own Properties

This option is less for people looking to enter the commercial real estate world and more for people looking to partially leave it.

If you own and operate a commercial property, the time, energy, and headaches can be enormous, all of which make scaling back your involvement an appealing option.

By selling your property to real estate investors with an owner-financing clause, commercial property owners can remove themselves from the hassle of property management and create a de facto annuity over the course of the owner-financing relationship.

Furthermore, if you realize a gain in the sale, this technique may qualify for installment-sale recognition of that gain, meaning you won’t have a massive tax bill in the year of the sale.

Option 6: Transition to a Property Management Company

This technique is similar to the owner-financing option, but it allows property owners to retain their equity in a project.

If you own and manage a commercial property, your daily management responsibilities are likely a full-time commitment. To free up time and transition to a more passive ownership role, hiring a property management company is a great option.

While hiring a management company certainly cuts into your bottom line, the free time you receive in return can more than compensate for this additional monthly expense.

Option 7: Provide Hard Money Lending

Put simply, hard money lending is a path to borrowing outside of traditional mortgage lenders.

For real estate professionals who either need to close a deal on an extremely tight timeline or just don’t qualify for traditional financing, hard money represents a crucial funding lifeline. As such, acting as a hard money lender provides quick return opportunities for investors looking for a more passive approach to commercial real estate investing.

Hard money lenders secure their debt with the property being financed, so they concern themselves more with the value of that collateral than the borrower’s ability to repay (recourse for a typical hard money lender is taking control of the property and selling it).

By its nature, hard money lending is riskier than traditional lending, but as such, it typically commands up-front points and higher interest rates. So, for individuals looking for a short-term way to passively invest in commercial real estate, hard money lending is a great option.

Option 8: Public Options

Several public options - similar to buying mutual funds or shares in a public company - exist for investing in commercial real estate.

● Real Estate Investment Trusts (REITs): REITs are companies that own and operate income-producing real estate, typically focusing on a particular niche, and are legally obligated to return a portion of their earnings to investors as dividends. By purchasing shares of a commercial real estate REIT, investors gain access to returns without any management responsibility.

● Mutual funds: Like your typical fund that purchases shares in underlying equities or debt, real estate-focused mutual funds own shares in REITs and other real estate ventures. Purchasing these funds offers a low-cost, low-hassle opportunity to invest in commercial real estate.

● Exchange Traded Funds (ETFs): Like their counterparts composed of multiple underlying shares, real estate ETFs invest in underlying REITs and real estate industry-specific companies.

Option 9: Crowdfunding

Crowdfunding raises capital for projects - including real estate - from individual investors around the world, often with relatively low minimum investment thresholds.

For non-accredited investors, browsing through crowdfunded projects for a specific real estate niche serves as a path to passive investment in large-scale commercial deals.

These deals are somewhat similar to syndication (Option 2), where the property developers and other active players receive funds for a project from a variety of passive investors. Crowdfunding simply expands the pool of potential investors via the internet, making the process far more accessible for the average investor.

Option 10: Construction & Development Partnerships

This is the traditional commercial real estate model for passive investors.

Typically structured as either an LLC or LP, a managing member or general partner drives the entire real estate development, construction, and management process while requiring capital from passive investors to fund the equity portion of the deal (with the remainder debt-financed).

For investors looking for a hands-off commercial real estate investment, this model provides the benefits of both direct ownership in a project and no management responsibilities.

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We recognize that, even after outlining the above options, entering the commercial real estate market can seem daunting to new investors.

That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!

10 Options to Passively Invest in Commercial Real Estate