of Passive Real Estate Investing

Austin Bowlin, CPA – Partner at Real Estate Transition Solutions It is called the Amazon Effect—and you’ve probably heard a lot about it. The ecommerce giant has reshaped, well, nearly everything, from the way that consumers think about shopping and accessing goods to the global supply chain. For institutional investors, the Amazon Effect has squarely placed industrial properties as the darling of the commercial real estate market, and Amazon tenants are among the most coveted. The insatiable demand has encouraged Amazon to seek alternative properties as well. Many analysts predict that Amazon could repurpose obsolete and vacant big-box department store properties into industrial distribution centers, another sign of the soaring demand for these spaces. While investors are targeting the broad ecommerce market, Amazon is arguably the most desired and top-tier credit tenant for these properties, and property owners are happy to lock in long-term triple net leases, which help to reduce operating expenses for the owner. Like most industrial properties, Amazon operates facilities on triple net leases, meaning that they pay for most operating expenses, including common area maintenance fees, insurance, and property taxes. The benefits of this trend aren’t for institutional capital alone. Small and mid-sized investors can tap into the earnings potential of Amazon industrial assets through tax-deferred 1031 exchanges and passive real estate investing.

First, What Is Passive Real Estate Investing?

Passive investing simply means that the investor does not take an active role in the property or business. It includes equity assets, like stocks or mutual funds, or real estate assets, like REITs or Delaware Statutory Trusts. When it comes to real estate, there are direct and indirect styles of passive investment.

Direct Passive Real Estate Investing

Real estate is generally considered a passive income asset, but anyone who has ever self-managed an apartment property knows that isn’t always true. Owners with a professional property management firm that handles the day-to-day operations, maintenance and leasing of the property, or commercial owners with tenants on triplenet leases—a lease where the tenant pays for the majority of the operations costs—have a more passive investment experience. Leveraging this strategy, a property owner simply collects the income each month while playing a minor role in the operations of the property.

Indirect Passive Real Estate Investing

The indirect style of passive real estate investing is completely hands-off. An investor can buy into any number of real estate equity vehicles, gaining fractional ownership in the asset or portfolio of assets. Other than the initial capital investment, the investor plays no role in the operations of the property but shares in the profits or income.

The Benefits of Passive Real Estate Investment in CRE

Passive real estate investing has grown tremendously in commercial real estate, and today, there are more opportunities than ever before to place your money in a high-quality, hands-off equity vehicle. Commercial real estate provides stable income and strong appreciation, but these assets also come with a high-barrier to entry and require expertise to successfully execute the business strategy. Passive investing, however, can unlock the tremendous financial and wealth-building benefits of commercial real estate assets.

Three Passive Investment Vehicles to Own CRE

Today, there are a lot of ways to place capital in real estate through an equity vehicle. Some methods are new—like crowd funding or opportunity zone funds—and others are tried and true, like Delaware Statutory Trusts, REITs and real estate funds, which are among the most popular and proven vehicles.

Delaware Statutory Trust

A Delaware Statutory Trust or DST is a type of business trust that owns and operates real estate property. A real estate firm, known as the DST sponsor, acquires a property with its own capital first, then structures the property in a DST and brings it to the market through an official offering. Investors buy a fractional or concurrent ownership stake in a quality, professionally managed asset and receive monthly income in proportion to their ownership stake. DST’s have increased in popularity over the last decade because they qualify as a replacement property in a 1031 exchange.

REITS

A real estate investment trust—or REIT as it is more commonly known—is a company that acquires, owns, and operates real estate assets. There are public and private REITs, as well as traded and non-traded REITs. Private non-traded REITs work typically with institutional capital sources, but public both traded and non-traded REITs are registered with the SEC and shares are either traded in the public exchange markets or available for direct purchase from the issuer. Historically, they pay healthy dividends of 5% on average, much higher than the average stock dividend of 2%.

Real Estate Funds

An alternative to investing directly in a single REIT, funds such as a real estate interval fund invest in a variety a REITs, providing investors greater diversification. Some real estate funds trade in public exchange markets and others can be purchased directly through the fund. Unlike DSTs and REITs, real estate funds (continued on page 8)