Gaining long-term financial security is a realistic goal, and commercial real estate investments can help you get there. Most investors, however, lack the resources necessary to create their ventures from scratch. Luckily, another option exists passive investment. More specifically, you invest and reap the rewards while a developer manages the project daily. Accordingly, this essay details the steps necessary to make a passive investment in a property development venture.
In particular, we’ll delve into the following issues:
- Why It Makes Sense to Engage in Passive Investment in Commercial Real Estate Development
- Passive Investment Opportunities in a Real Estate Development Project
- Concluding Remarks
Why It Makes Sense to Engage in Passive Investment in Commercial Real Estate Development
Prospects and Dangers in Real Estate Development
There is a wide variety of approaches to investing in real estate. The profits from real estate development stand out among these. So, real estate agents who can take an idea for a site and turn it into a stable property earn a lot of money. This fact greatly improves the allure of investing in development projects for inexperienced individuals.
High returns are possible, but they are proportional to the danger taken by the developer. A deal can go awry at any point in the development process, from initial site evaluation to securing financing through building completion and stabilizing operations. When this happens, there’s a chance that the developers will lose a lot of money.
As a result, new investors typically don’t start in the real estate development industry. However, most people participate in these ventures through passive investment. Three reasons why it’s a good idea to invest passively in a real estate development project:
- Experience
Above, we discussed the high stakes of investing in real estate development. Dealing with this risk needs a great deal of expertise. As a rule, aspiring real estate developers should put in some time at an established firm first, learning the ropes and getting some guidance from more seasoned colleagues before striking out on their own.
No need to stress over meeting this condition when you invest passively. To evaluate an investment, you should be familiar with the financials involved, but you shouldn’t have to know how everything works.
- Capital Needs
Real estate ventures need substantial investment and seasoned professionals. The size, breadth, and location of a transaction determine the appropriateness of a cash contribution, which may be in the hundreds of thousands or hundreds of millions.
As a passive investor, you need not supply (or solicit) the full amount. Instead, you make a cash contribution to the total, and the developer is responsible for raising the rest.
- Time Allocation
The time spent on development research, planning, and supervision is also substantial. If you’re a passive investor, all you do is put up the money and don’t get involved otherwise. Put another way; you can generate passive income from a deal while still focusing on other endeavors (like running a business, working, or investing).
Passive Investment Opportunities in a Real Estate Development Project
Option 1: Crowdfunded Projects
With the latest changes from the Securities and Exchange Commission, property developers can now utilize online crowdfunding as a viable source of capital. Through online platforms like Fundrise and Crowdstreet, developers list deals open to individual investors.
After the online platform has prescreened the underwriting of a deal, the deal details can be reviewed by investors. If a certain offer satisfies your investment criteria, you can donate cash for an ownership stake in that development project. The deal sponsor (the responsible developer) then runs the show and pays you, the passive investor, a return on your investment.
Option 2: Cooperate with a Real Estate Developer
A further option for investors is to form partnerships with construction firms. For this, you can either rely on your existing network of acquaintances or make use of the connections that many CPAs have with builders looking for passive investors.
Working with someone you know establishes a foundation of trust (or whom a trusted individual referred). Crowdfunding platforms provide a preliminary screening process, but this route does not involve that. Consequently, passive investors that interact directly with developers need a more nuanced grasp of deal analysis.
Option 3: Invest in Real Estate Investment Trust Shares
A passive investment in a single real estate development project may be preferable, but this alternative offers similar advantages. REITs, or real estate investment trusts, are investment instruments that enable investors to pool their resources for various real estate ventures. The REIT’s management team handles deal screening, execution, and day-to-day management, and all you have to do is acquire shares. After meeting certain requirements, REITs must distribute at least 90% of their taxable revenue to their shareholders as dividends.
Equity REITs invest in shares of real estate companies rather than debt. As a result, if you’re interested in commercial real estate development, you can choose to put your money into an equity REIT. You can avoid the hassle of cultivating new contacts with developers by investing passively in development through a publicly traded business.
Agent
Option 4: Communicate to a Commercial Real Estate Agent
If you want to invest in a real estate project without actively participating in it, a commercial real estate broker can help. Relationship building with developers and investors is a priority for teams like ours. Therefore, brokers are always in a position to know about a developer seeking more funding to close a contract. You can choose the best developer for your needs by working with brokers; you need to specify A) how much money you have to invest and B) what kind of offers you’re interested in.
Final Thoughts
Real estate development success ranks high on the recommended techniques for long-term financial security. However, most new investors face significant barriers preventing them from launching their development ventures right once. The alternative is passive investing, in which investors provide funding without actively participating in the project’s management in exchange for a return on their investment.
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