Passive Investments In CRE: Do They Really Exist?

by: Senior Living Fund

Summary

There's a mad rush toward passive investing--within the market and outside of it.

Commercial Real Estate is the next big frontier with private equity, REITs, ETFs, and crowd-funding.

But are those investments as passive as they seem?

There has been a tremendous rush toward passive investments in recent years—both on the market, and in the world of alternative investing. One of the most attractive areas of the continued “passive boom”: commercial real estate (CRE). The wealth of new crowd-funding opportunities in CRE is just the latest addition to a long line of traditional equity funds, REITs and ETFs already offering investors the chance to invest without the high upfront cost traditionally associated with a direct CRE investment. It sounds easy, right? But how truly “passive” are these opportunities?

First, let’s define the term “passive investment.” While many associate passive investing with the S&P 500 and other funds that automatically buy and sell based on index performance, the definition has expanded greatly. Private equity funds, crowd-funding, and REITs all offer investors the chance to “invest it and forget it”—enjoying the benefits of large CRE investments—and any range of other venture capital projects—without having to make specific day-to-day choices about the investment itself. The option is appealing for many reasons. For one thing, even the least savvy investor can get involved in a promising real estate venture in senior housing or self-storage for incredibly low investment thresholds. For another, in many cases, investors don’t even need to be knowledgeable about the specific CRE asset class in which they are investing. They simply rely on the fund manager to choose the projects that will perform best.

The only problem with passive investing in CRE? Pure 100 percent passive investing doesn’t exist. REITs, ETFs, crowd-funding, and private equity funds can all help diversify investment funds, and offer a nice reprieve from active trading. But all investments require an active commitment from the investor. The following are just a few ways investors must play an active role in their passive CRE investment.

Understand the Variables of Real Estate Investing

Real estate is, in general, one of the most highly variable investments one can make. CRE is no exception. No CRE investment has a clear, standard definition of good or bad. All will vary by a huge range of factors, including industry performance (retail, hospitality, etc.), geographic region, demographics, political issues, and general market factors. Making any investment in CRE demands some level of knowledge of the chosen investment market—at least if one hopes for that investment to be successful.

Understand the Market

Even within sub-classes of CRE—and within certain geographic regions—there are many subtle issues that can impact the market. For instance, in senior housing, general market studies stating supply and demand not always accurate. Says one fund manager, “It is important to remember that ‘supply’ does not equate to ‘quality supply.’” In senior housing, for instance, many of the current ‘supply’ of facilities are outdated and lacking the amenities needed to keep our aging happy and fulfilled. The local population, in that case, may be hungry for a new community to be built. It’s important to find a fund manager who understands these nuances and can make the investments that make the most financial sense in real life—not just on paper.

Research the Fund or Company

Every degree of passiveness enjoyed by the investor is taken over by someone else in the investment line. In the case of CRE, the active control is found in the company or fund making the decisions about your specific investment. As such, investors need to take time to do their research on the front end to ensure the company is reputable and performing in line with their estimated returns. Indeed, not all fund managers are created equal. In fact, of all active large cap managers in 2015, more than 65 percent underperformed the S&P 500 for a one-year period. That number grew to more than 80 percent at five years. In short, just because someone else is managing your investment, that doesn’t mean they are managing it well. If an ETF, crowdfunding platform, or fund is brand new, don’t be afraid to ask hard questions and do the dirty work of analyzing past performance. If you don’t do it—no one else will.

Remember: Investment Rules Still Apply

There is no short-cut to logic and good old-fashioned common sense when it comes to making a smart investment. That’s something that can never be handed off to a fund manager, no matter how smart they might be. Diversify your portfolio as much as possible, and find fund managers who are equally committed to doing the same

Lastly, let go of the concept of “passive” investing. Any successful investor will tell you true passive investing doesn’t really exist. The right investment for you will be one that complements your portfolio, fits your investment budget, and can turn to liquid cash in the time-frame you need it—whether it be one week, or five years. There is no computer program, fund manager, or index that can get those factors right for you. They are choices every investor actively needs to make.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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