How to invest $0.5M in CRE

Question

Hello community,

I am a fairly new investor in real estate and currently own 1 multi family and 1 condo unit. I wanted to ask how can I invest $0.5M in commercial real estate that can generate passive income for me and my family. I am open to investing in small businesses as well (like self storage, laundry, gas station etc.) as long as I don't have to actively participate in day to day operations.

Any help will be greatly appreciated.

Jim Pfeifer · Answer

You indicated that you don't want to actively participate in the day to day operations.  If that's the case, I would not recommend buying properties or a business.  You will need to manage the property managers or your business managers.  In my experience, that will require a lot of active management on your part - certainly in the beginning and will only reduce if you can find quality people to manage the real estate or business for you.  Quality managers are very difficult to find.

If you truly want passive income and you have $500,000 to invest, I would recommend looking into passively investing in real estate syndications.  You will own real estate, but instead of finding the properties and buying them yourself and hiring a property manager - You  find a syndicator and hire them to buy and manage the asset for you.  It is not passive to start - you need to vet the sponsor and analyze the deal - but once you send your wire to the syndicator, then the deal is out of your control and is completely passive.  There are disadvantages - these are long-term, illiquid investments and you do not control how they are managed or when they are sold. But the returns meet and often beat what you get trying to be passively active.

The cash flow is much less lumpy and the appreciation is as good as it was when I was active and trying to be passive.  I am sure someone who is truly active - actually in the business of real estate can beat my returns, but I never wanted to be totally active and it sounds like you don't either.

When trying to decide how to allocate your $500k in capital, I think the first thing you need to figure out is how active you want to be and be realistic about how active you will actually need to be based on the strategy you select.

Glen Gallo · Answer

I am not sure any investment is completely passive. A property management firm can do the heavy lifting for about 10 percent gross. Commercial has a wide range. Single building single occupant. Retail Medical Office Industrial Restaurant and many more. A ground lease single occupant would be the easiest and hardest to find and most likely most expensive. You need to wrap your arms around cap rate so you can recognize when it is being manipulated. Next you need to decide which type of property falls into your range. Next which type of space you are comfortable with. Loopnet is a good place to start. You should hire a seasoned broker that can also be helpful in either providing property management or has a vendor in pocket that they are comfortable with. Commercial is not more difficult per say as all investment property has a learning curve. There is more to process to start as we all live in homes and understand them. Commercial is a different species.

Best of luck

Michael K Gallagher · Answer

I got to 100% agree with @Jim Pfeifer it really comes down to how passive you want it to be, and you'll need to have realistic expectations about the returns for that level of passive-ness.  You can't have it be completely passive but still expect double digit annual returns.

Rohan Jain · Answer

I'm in MA but open to suggestions.

Joel Owens · Answer

Rohan we know NOTHING about your families overall net worth or global annual cash flow.

I disagree with those saying NNN investing 500k to own yourself is great. 2 million NNN property is like a 100k house. 1,000 buyers looking for the pretty one in good area with strong tenant and when it comes up 10 cash offers. So if you have finance and not the ability to pay all cash and do finance thereafter you are stopped before you start.

Some will say WAIT there are properties in the lower ranges. Sure in more weaker type areas and the tenants are not that great. So the NNN lenders pass with the best rates and you are left with crappy local banks with onerous terms.

I have had to be now where I tell buyers you need AT LEAST 1 million down looking at a 3 million NNN property to find quality investment grade tenant in a good area. Do some occasionally pop up from 2 to 3? Sure but they get tons of cash offers. A recent one in a great (A) location for 2.4 million received about 20 offers in 48hrs.

Return for 500k for NNN off of down payment might be 5% starting out or 25,000 annually and with mortgage paydown about 8 to 10% total return but about half is trapped in equity build up so not useable cash flow.

If you are wanting passive look at syndications. Most might pay 7% preferred return and hope to double money every 7 to 10 years. Some multifamily during the bubble cycle with them have exited out within 3 to 4 years at 1.8 to 1.9 equity multiple but not common. I do retail value add NNN. Take dark building and re-tenant it in typically under 1 years time. When new tenant in typically highest value. So nothing guaranteed but usually at least double the money in short time frame. No cash flow at all until new tenant in. Only for accredited investors.

When investing in syndicates you have to see what type of investor you are. Some need that preferred return right away with very little upside if at all over time. Others get the preferred return with some upside. Then others have no cash flow until stabilized but then typically high cash flow and equity multiple. Be careful and thoughtful with your money.

John McKee · Answer

I agree with Terri.  NNN lease properties all day long!  Why stress with the mess.  Make the upgrade now.  You can PM me for advice if need be.

How to invest $0.5M in CRE

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