Passive income in commercial real estate - how much?

Question

I have my own business, but would like to work on diversifying a bit so I can have more passive income.  We have no bills (aside from $3k a month for electricity, food, insurance, etc.) I think if I work hard over the next year or so, we can save up $100k to invest.  Would it be possible to get into commercial real estate with that kind of cash in hand to generate some good passive income that we can live off of?

Jon Holdman · Answer

A rule of thumb financial planners use is that you can take out 4-5% of your next egg each year.  So, if you want $50K a year, and use the more aggressive number, you'll need about a million dollar nest egg.  That doesn't mean a million dollar building with a 10% down payment, but an actual million in investments.

If you were to agressively invest with SFRs that actually generated $100/month/property, you'd need 30 of those to make your $3K a month.  Tax advantages mean you would pay little tax on that income.  If you were to invest in a lower price market where you really could find $25K houses that would rent for $500 each, then your total would be only $750K.  With some diligent work, busting your hump for a few years, and being in the right place I think you could actually work $100K into such a situation.

With a commercial property, your earnings are basically the cap rate, as Caleb describes, on your down payment plus the difference between your loan rate and the cap rate on the loan amount.  You're looking at 25-30% for a "conventional" commercial loan.  So, ignoring costs and reserves, you could maybe get a $400K property.  If you can get financed at 7% (no idea if that's feasible right now or not) and found a property with a 10% cap rate, you'd make 10% on the $100K down payment and 3% on the remaining $300K.  That's $19K.  And that would be a pretty good deal.

If you're looking at a truly passive property, a triple net or NNN property where the tenant pays all taxes, maintenance and insurance, then I don't think you could touch most of those for $100K.  Somehow I've gotten on a mailing list where they offer this sort of property. A recent example is a Walgreens in Camp Verde AZ.  Price is $4.5M and their claimed cap rate is 8%.  If you put down $1.125M and finance the rest at 7%, you'll earn $123,500 a year.  For 30% of a deal like that, you could hit your $36K a year.  But you'd need $325K.

J Scott · Answer

It sounds like your question boils down to:

Can I generate $3K per month of passive income (after taxes) given a $100K investment into commercial real estate?

Earning $3K per month means earning $36K per year post-tax.  Accounting for taxes, it's closer to $50K per year that you'd need to make.

So, you'd need a purely passive 50% return on your $100K to achieve your goal.

Is that realistic?

Not in my opinion or my experience.  Now, if you have some experience and put some effort into it, you should be able to generate 50% return if you are willing to deal with active investment options, but not purely passive investments starting from nothing.

Just my $.02...

Will Barnard · Answer

I'd have to go with the response from J Scott. You stated "passive income" and that will not generate a 50% ROI.
You could certainly do that with aggressive and active investments, but that is a job in itself.

Account Closed · Answer

$100k,  I am sure you can get into a commercial property with that, but there are a few considerations.
                              
                              Your question was "how much do you need?" but the question you should be asking is "what is a reasonable return on investment?"
                              
                              A very simple return is based on Net Operating Income (NOI).  Which is calculated as such.
                              
                              Potential Rental Income
                              â€“ vacancy & credit losses
                              = Effective Rental Income
                              + other income (collectables)
                              = Gross Operating Income
                              -total operating expense
                              = Net Operating Income
                              
                              You can then apply that to a capitalization rate.  This is done only for the past years NOI.
                              
                              NOI/Purchase Price = Capitalization Rate
                              
                              A good barometer I like to use is a 10% capitlization rate, but every investor has their own rate that they like.  Most seasoned investors take it far past capitalization rate to IRR after taxes, but that is for a different thread.
                              
                              You shouldn't be looking to accomplish your investment goals with one transaction, but instead look to build up to those goals, whatever they might be.  Supposing you have $100k, you can easily leverage that into a better returning property, but there is also risk that you have to take into account and as it sounds like this might be your first investment property I would keep it as simple as possible and stay away from being too leveraged.
                              
                              I am rambling on, and apologize if I didn't answer your question.
                              
[LINK REMOVED]

Will Barnard · Answer

The last comment was over a year ago and teh OG poster never came back. This thread is dead, no need to post about active options the OG poster did not want.

Champak Shah · Answer

Hello
Yes- everyone thinks of Commercial as  - Apartments or retail / office-- But how about a 
Business with RE -- I am talking about Hotel / Motel --an Independent - Non Franchise Hotel on beach or mountains or even some cities--
20 to 25 rooms - older properties still available at $20,000 per unit-- With SBA loan at 90% -
Only 10% down payment required -- as well owner can take 10% second mortgage- can generate $3000 plus income and stay FREE --run  as business for three or four  years and then have manager run it --- or sell and move up -- many Indians own hotels and make good
 living --

David J. · Answer

I see many investors buy beat down properties for a beat down prices and then rehab and refinance their money out of the property and still clearing the $100 per door model. This lets them control properties without plugging capital long term. I guess they just recycle their capital for each sfr and then replace their capital with the bank's capital. This would let you control the 30 properties you need with the 100k investment. Not an overnight plan but could get you there in a matter of time.

Brandon Turner · Answer

I agree, you would need a more active investment to pull this off. Or just get real lucky.

I like to think like this:  If my standard is to pull off 100 per door in cash flow with property management in place, I would need to get 30 units to reach $3000 Per month.

So you could use your $100,000 to put down 20% on a $500,000 property. But is it possible to buy 30 units for 500,000? Maybe, but probably not in a good or even fair condition. So maybe if you bought an amazing deal, hired the right contractors and great property management, you might be able to pull it off.

Sounds like a fun challenge to me. But again, its not going to be real "passive" at the start.

Passive income in commercial real estate - how much?

Most Popular Reply