One of the most common ways I have seen investors invest in real estate is to purchase and operate one or more single family houses as rentals. It’s a logical approach for many investors as it’s a process they understand, having purchased their own home. In addition, owning a second home can be attractive as the purchaser has likely witnessed the equity in their home grow over time.
However, for investors seeking a more diversified and balanced approach to real estate investing, they may be better off rethinking this strategy and, instead, opting to build a portfolio of passive commercial real estate investments.
Challenges Of Owning Single Family Rentals
Owning and operating single family rentals is tough work and riskier than most people realize. It presents numerous challenges as an investment vehicle, including:
These inherent challenges make single family rentals difficult to justify as a portion of a diversified portfolio strategy.
Passive Commercial Real Estate Investing As An Alternative
Once investors begin to understand passive commercial real estate investments, it’s not uncommon to see them move away from owning single family rentals to redeploy their capital across a number of deals. While it’s not impossible for an investor to become a direct owner/operator of commercial real estate, the specialization and amount of capital required to do so typically poses a formidable barrier to entry. As a result, investors can now opt to invest as a limited partner with commercial real estate operating companies. The following are some of the reasons I see investors choosing to do so:
Business Vs. Investment
My point is not to bash the concept of owning single family rentals — I have owned them myself and benefitted from the experience. Single family rentals can be a good place to start off in real estate investing. However, I advise investors to view them more as operating a small business than making an investment because that is what it will feel like a year into it. The extremely hands-on nature of owning rentals can easily morph the original intent of the purchase and leave investors with a valuable learning experience rather than a yield and a realized return. It all depends upon the path you wish to take in your journey to becoming a sophisticated real estate investor.
For investors looking to harness the true power of real estate and invest like the best and the brightest institutional investment managers, doing so means stepping up to commercial real estate assets.