Pivot Into Commercial To Access True Passive Income

Let’s face it, personal finance is boring for most people. it’s complex, it’s dry.

One hot topic right now is the stock market, it seems everyone is getting in on the action given the easy access to free fees investment applications platforms. There is nothing wrong with a little splurging but ask yourself this question? Will it consistently give you access to passive income no ifs ands or buts…? The answer can vary vastly depending on your portfolio and access to funds. For the small entry level investor you’d probably be better suited to invest in other channels. One such channel is yes you guessed it: “Real Estate”.

It’s no secret that real estate offers one of the best sure shot wealth-building channels if done right .

There’s simply no other investment channels like it. It's not only a tangible asset, but you can utilize leverage to re-invest and purchase over time.  

And beyond leverage let’s not forget the importance of: equity.

With that being said, there are different types of real estate investing and although residential real estate is a very solid investment channel it can sometimes be overwhelming if you do not have the means and the expertise to manage properties.

Buying and renting out a single family home, a cottage, a duplex, maybe a triplex or even a small multi-unit apartment can generate passive income however the income earned with little to no effort may not be a true passive investment if you're involved with the ongoing property management of the property. Nonetheless, this passage is usually required to move on up the ladder of bigger and better real estate opportunities.

So let’s look into this next investment opportunity channel, aka Commercial Real Estate and see if you can’t PIVOT.

It’s been proven time and time again that passiveI income and equity makes the world of commercial real estate investing go ‘round.

Since the amount of capital one can access ultimately determines whether or not you can move forward on purchasing or developing any given commercial project, it ultimately makes it more profitable. 

That’s where past real estate investments come into play.

Once you understand how to passively invest in commercial real estate, you’re most likely going to want to sell off your residential portfolio. For the simple reason that usually these commercial investments are more passive. I speak from experience, when I say a commercial tenant is 10X more independent and usually will handle little plumbing issues or live with the fact that there’s a small crack in the concrete polished floor.

Higher Expected Returns 

It’s well known that commercial real estate can be more complex however with greater risk comes potentially greater reward.

Compared to typical returns from your typical residential investments, cash flow and appreciation are far more attractive in commercial real estate.

Business tenants can afford to pay higher rents than individual residential tenants and sign longer term leases, so less consistent turnover in commercial real estate.

Now if you compare the stock market, it offers on average an annual return of approximately give or take 10%, slightly below that expected of residential real estate, while commercial real estate is much higher when you consider all of the appreciation, equity etc.

Looking through the eyes of a commercial real estate investor it can encompass any kind of property, which includes land (though we won’t cover that here), which is income-producing, or has the potential to do so.

Risk Diversification with Industrial Real Estate

The most outstanding benefit of investing in commercial industrial real estate, in my opinion, is your ability to increase risk diversification

Diversification is proven to be an investor’s best friend.

And there are many ways to diversify your portfolio as a passive commercial real estate investor.

More tenants = less risk.

Think about this for a second - if you have a single-family home and your tenant decides to pick up and go, you now have a 100% vacancy rate.

However, if you own a 5,6,7,8,9,10 tenant “cooky cutter” industrial rental complex and one tenant moves out, it won’t have a substantial impact on your bottom line.

There are several types of passive investments you can make in the commercial real estate arena but personally I have found that the industrial arena works best for me given that I also occupy space in the same units

Forced Appreciation

In commercial real estate, an asset’s value is directly correlated to its Net Operating Income (NOI). By successfully raising a property’s net operating income, you can increase the value significantly. In commercial real estate, you have far greater control, whereas investments like stocks don’t allow you to have much more influence other than buying and selling based on the market.

Unlike stocks, commercial real estate has value in both the land itself and the improvements on the property, in addition to the value created by the income. So, even if you have one or two vacant spaces you’ll still have the asset to fall back on and protect your downside.

Depending on location Industrial commercial real estate is also relatively stable therefore it will not fluctuate and experience the massive ups and downs that the stock market will. As an example, even through this worldwide pandemic this investment channel has proven to be robust and sustainable given that many of our tenants are considered essential services and kept their respective businesses in operations.

Passive income is the entire reason you’ve continued reading up to here, right?

The most beautiful part of investing in commercial real estate is the passive income opportunity. You place your capital into a commercial property and let that capital work for you.

If you’re reading this article, chances are good that financial freedom is one of your goals and not only will passive income help you reach that point of stability in your life, it’s taxed differently than your ordinary income, so your path to building wealth is accelerated.

So let’s recap,

Why Commercial Real Estate Vs. Residential Real Estate

Purchasing a single-family home is an easier first step into building wealth through real estate investing. The lower cost of entry is very attainable for most first time investors and the process isn’t too overwhelming.

After all, most Canadians will own a home in their lifetime, so a good chunk of the population have experience purchasing a home.

However, the next level for a more scalable and diversified approach to real estate investing is to start curating a portfolio of passive commercial real estate investments. Compared to residential investments, a quality passive commercial real estate portfolio can create the following: 

Better Quality Tenants

Sure, you can certainly find high quality tenants to rent a single-family home.

But do they have 10, 20, 30, 40 years in business and almost bullet proof credit track records. It’s not to say that all industrial tenant will fit this criteria but if you have one or two of these anchor tenants it will offer your investment added value and security

Simply put, commercial tenants tend to be businesses, corporations, etc., which not only have stronger credit, they tend to respect and actually maintain the property more than individual residential tenants.

One of the biggest differences between residential and commercial real estate is how property values are determined.

Residential real estate is largely influenced by comparable residential properties, so your residential investment will only go up in value as properties nearby sell for a higher price. Industrial commercial real estate, on the other hand, is directly valued on the property’s actual revenue.

Conclusion:

At the end of the day if you can find a way to PIVOT and venture into the commercial real estate arena... just do it. True passive income is not too far behind.