Commercial real estate investing can be all-consuming or it can be as easy as buying a stock. Many factors combine to determine the management intensity of a CRE investment. Among these factors, I consider the following the greatest time and energy consumers.
- Sourcing
- Operations
- Construction
- Capitalization
My list may be a little different than others. Still, I think most people would agree that these general categories separate the most from the least management-intensive CRE investments.
Most Management Intensive
1. New Construction
Real estate development, regardless of the asset class, takes a lot of work in all four categories.
Sourcing involves finding the right location, negotiating a favorable contract, and planning the construction. Novice real estate investors don’t understand the major challenges that go into this process.
Consistent follow-up is probably the biggest challenge that most rookies get wrong. These deals usually don’t happen quickly in a marketed process, like with an existing asset. You’ll usually spend weeks finding the right contact only to be brushed off initially. Thereafter, you need to follow-up without being too much of a pest.
Beyond sourcing, the other three functional areas also require a solid team and reliable systems to be effective. These evolve with hard lessons learned and tireless persistence.
2. Repositioning
Repositioning an existing asset is a lot like new construction. The management intensity here also comes in all areas but with slightly reduced risk depending on the asset quality.
An asset repositioning plan may encompass various aspects of the property – physical, revenue, expenses, capital, etc. You are basically pursuing a business turnaround plan. Real estate is just the vehicle for that turnaround.
3. Specialty Assets
Big Four CRE asset classes – industrial, office, retail, and multifamily – make up the vast majority of commercial real estate square footage. They also comprise most transactions. This volume and related liquidity provide a tremendous opportunity for anyone entering commercial real estate investing.
That said, Big Four CRE investors often look to specialty asset classes to diversify their portfolio or boost portfolio returns.
I like to think of specialty assets as those that are more operationally intensive than the Big Four. Most of them are businesses with a real estate component rather than the real estate with a business component. Think high churn tenancy, heavy sales and marketing, intensive tenant demands, etc.
Common specialty assets include hotels, senior living (especially when memory care is involved), student housing, entertainment complexes, and so on.
Least Management Intensive
1. Public REITs
Publicly traded real estate investment trusts (REITs) are easily the least management-intensive CRE investments. You have no management responsibility, and you’re playing in a very liquid market.
Market and stock research is the most intensive part of managing a public REIT portfolio. Of course, to do it well, this is not an easy task. Additionally, you’ll probably rebalance your portfolio periodically to align with your strategy.
Aside from those relatively routine tasks, public REIT investing is the way to go if you just don’t have the time for more management intensive CRE investments.
2. Private Placements
Private placements act similarly to investment in public REITs. You don’t have any control over management so sourcing is your primary challenge. I consider private REITs to be part of this category, as they are basically a private placement with special tax treatment.
Successful private placement investors take a proactive approach to building their deal pipeline. They go into the world to find high-quality deal sponsors, stay in touch, and get on a shortlist for when great opportunities pop up.
This takes work, and it doesn’t happen overnight.
3. Net Lease Properties
You don’t own the real estate directly when investing in either of the public or private options above. A special-purpose entity (SPE), which is usually a limited liability company (LLC) that owns the real estate. The deal sponsor manages the SPE, and you are an investor in the SPE or some feeder entity that invests in the SPE.
An investment in net lease properties allows you to directly own and control a piece of real estate. Basically, you buy real estate that is operated and maintained by a tenant with very little requirements from the owner.
This is clearly more management intensive than the previous two because you must establish the legal and capital structure. Still, you don’t have to worry about property management, and asset management requirements are minimal.
Sourcing is still a big task here, but it’s a very liquid market with many exceptional professionals to lean on.