There are many different ways your clients can potentially benefit from including commercial real estate in their investment portfolios.
Real estate investors enjoy a host of tax advantages that come with owning and operating investment properties that can reduce their exposure to taxation by reducing their total reportable income. Investors also may enjoy stable cash flows from monthly rental payments, as well as asset appreciation.
Rest assured, you won’t have to advise clients who want to own commerical real estate (CRE) that they’ll have to become landlords. Passive real estate investments mean your clients won’t ever have to fix a clogged toilet or interact with tenants. Although some passive real estate investments don’t offer the tax advantages associated with direct property ownership, they still may be viable investment options for clients seeking exposure to CRE.
Let’s take a look at some of the ways your clients can get into passive real estate investing and the potential benefits they may enjoy. Lastly, we’ll discuss the importance of creating an overarching plan since investing in real estate can bring on additional risk.
There are two primary ways your clients can be involved with real estate investment properties: Passive and active ownership (though you also can blend the two: active ownership with ongoing passive property management).
Active owners work in the weeds with their tenants by taking a “hands-on” role in the management and operation of their investment properties. Responsibilities may include property maintenance and repairs, lease negotiations, tenant relations, marketing, bookkeeping, and other duties required to manage the property and strive for tenant satisfaction. A few of the more active property ownership strategies include fixing and flipping rental homes, or buying dated C-class apartment properties in an attempt to increase asset value through targeted renovations, improved management, and operational synergies among similar properties in an owner’s portfolio.
Passive investing in real estate is a strictly “hands-off” approach – your clients have very little, if any, involvement in the property. In essence, you are handing off management duties to someone else while still enjoying the potential benefits associated with real property ownership.
Here are three common forms of passive real estate investing. Each has its own unique benefits and drawbacks.
Now that we’ve identified the primary ways your clients can dip their toes into passive real estate investing, let’s take a look at some of the potential benefits that may result from this method of property ownership.
Passive real estate ownership can come with many potential benefits. Among them:
Passive property ownership has the potential to provide your clients with steady streams of income from sources that require little more than their investment capital. However, because these types of investments may bring about increased risk, it’s important to create an investment strategy that suits each client’s needs and objectives.
The passive real estate investments highlighted above, all have vastly different investment criteria. Initial client discussions should center around their financial goals and tolerance for risk since those two elements will help you craft individualized investment plans that align with their objectives, comfort level, and liquidity needs. These investments also can come with a host of unique tax concerns, so there are tax planning and strategies they’ll need to account for as well.
Your clients won’t have any control over their passive real estate investments, but at the same time, these investments don’t require them to put up millions of investment capital or have decades of experience as landlords. With proper planning and due diligence, you can help your clients add passive real estate investments to their portfolios while attempting to manage their exposure to risk.
Full disclosure. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.