We’ve all scrolled past numerous articles claiming such success stories like, “Investor In Her 20’s Makes $150,000 Passive Income A Year,” or “He Started At 18 With One Unit, and Now This 25-Year-Old Manages 150 Units Making $200,000 A Year Passive Income.”
But grand claims require grand evidence.
Is it really possible to generate life-changing passive income through commercial real estate investments? The honest answer is sure, it’s possible—if not likely. But how realistic is it for a 20, 30, or 40-something who is already working a full-time job to switch gears entirely by learning the ins and outs of a new industry and suddenly make three times the amount of money by performing none of the work?
If it sounds ridiculous…
There is nothing passive about real estate investing. Successful real estate investing necessitates hard work. There is property research, risk assessments, contract and lease negotiations, questions of development, and management to consider.
For real estate investing to turn a profit, someone has to do all of this hard work. Whether or not that is you depends on the type of investor you want to be and how you choose to invest.
A gross oversimplification is in order—there are two types of investors: active investors and passive investors. Most people mean being a passive investor when they say generating passive income. They want to do as little of the work as possible and see the maximum amount of returns. However, don’t misinterpret:
This isn’t a slight against passive investors—it’s a real strategy. Many non-professional investors are preoccupied with their day jobs and other obligations, so they invest in companies whose job it is to do all the difficult work—all of the research, risk assessment, contracts, and negotiations. They simply provide the capital.
Even accredited investors choose to invest in private equity firms and real estate investment trusts (REITs) because doing all the legwork is labor-intensive and time-consuming. Perhaps passive investors have rationalized that pooling funds together into a business whose primary function is to do the dirty work allows for greater returns than if they were to go it alone.
By investing in a real estate private equity firm, REIT, or REIT ETF, you get the benefit of having a more ‘hands-off’ approach, but you end up paying for the services those investment firms provide in the forms of fees. If you aren’t a professional investor and you are looking to grow your wealth over time through commercial real estate investing, then the fees are well worth it.
According to Nolo, commercial real estate tends to return between 6% – 12% per year on the original purchase price. However, this range is based on averages across the commercial real estate industry, which covers a large swath of property types, each with different earning potentials and risks.
With that ROI average in mind, let’s consider a little scenario. You have some savings that you are looking to invest—let’s say $5,000. You’ve checked out several different options—from investing in a crowdfunding CRE platform like Fundrise to investing in a REIT ETF on the stock market. For this scenario, it doesn’t matter which option you choose.
Splitting the average ROI down the middle, let’s say you earned 9% on your $5,000 investment after one year. Now your investment is worth $5,450, which is excellent! But, taxes and withdrawal restrictions aside, $450 isn’t enough to live off of for one month, let alone one year. And a 9% increase is extremely favorable.
If you are looking to see the kind of gains you read about in those clickbait articles mentioned above, then you’ll need to invest a whole lot more. And at that point, if you have that much spare cash, why are you even worried about passive income? The real way to win in commercial real estate—besides being extremely wealthy—is to play the long game. $450 in one year might not seem like a lot. But if you hold for ten years? You’ve nearly doubled your initial investment. Twenty years? You are looking at almost a 3x.
You can definitely make money in real estate investing, but you need to dispel the myths and the hype to do so seriously. Whenever you see an article boasting how one 20-something makes $10,000 a month passively by doing nothing, something isn’t right.
About the Author
Roni Davis is a writer, blogger, investor, and legal assistant operating out of the greater Philadelphia area.