The Private Equity Real Estate Podcast – Show 19
Summary
On this week’s episode, we will be discussing the pros and cons of both active and passive commercial real estate investing. with John Burson a financial writer that has written for many publications and who has been a real estate investor for the past 30 years.
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Speaker 1:
You’re listening to the Private Equity Real Estate podcast brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real world experiences so you know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.
Eric Murphy:
Hello, and welcome to the Private Equity Real Estate podcast, which is brought to you by First National Realty Partners. I’m your host, Eric Murphy, and on this program every week we’re going to sit down with experts in commercial real estate, and we’re going to talk about some different topics across the commercial real estate landscape. And this week we’re going to discuss the pros and cons, both active and passive commercial real estate investing. And our guest wrote a great article on benzinga.com about that very subject so we were eager to have him on the program. He’s a financial writer that has written for many publications, including the aforementioned benzinga.com and he has been a real estate investor himself for the past 30 years. John Burson, thank you so much for being on the program today.
John Burson:
Thank you, thank you very much.
Eric Murphy:
Good to have you here, John. So you are a financial writer, let me ask, how did you get interested, and what made you want to write about real estate specifically?
John Burson:
Well, I write about all types of financial investments and real estate just happens to be one of them, especially from the passive end. Like with any type of investing, passive real estate investing involves the same type of principles and due diligence.
Eric Murphy:
So before someone even decides how they are going to invest, whether it’s going to be passive or active in real estate, what do you think an investor should consider before they make any sort of investment?
John Burson:
I think the first thing they need to ask themselves, is how much of a risk they want to take? The nice thing about passive investing is it does lower the risk level. And the type of return on your investment, what type of return are you looking for? How much experience do you have in that field in investing? And if you don’t have the experience, are you willing to learn? And like anything else, are you willing to make mistakes and learn from those mistakes? Also, you have to ask yourself, what you’re willing to let someone else do all the work and make all the decisions, including selling properties and that kind of thing.
Eric Murphy:
We’re talking about passive and active real estate investing on the program today. And in the article that you wrote, you broke down some of the ways that one could invest passively, could you go over those for us?
John Burson:
Yes, there’s crowdfunding and crowdfunding is when a real estate group decides to do a project and they raise money, just like a big company does when they want to do a project, they raise money through stocks. They start a crowdfund, which recruits all these people to invest about maybe $500, $1000 into it. And so they raise money that way for the project, that’s crowdfunding. And the investor gets sometimes a dividend from it or returns from it, and that’s the advantage for the investor.
John Burson:
There’s also real estate REITs and they operate lot like mutual funds. And they have a manager and the manager it’s his or her discretion to invest in different types of real estate projects. It could be rentals, it could be commercial property, it could be all kinds. And the advantage of the REIT is more of an income producer, because 90% of the returns of a REIT have to go back to the investor, so you tend to get that in dividends. So if you’re looking for a steady income kind of investment than a REIT would be your choice, or possibly your choice.
John Burson:
Or the other way is you can get even more grassroots to the ground by partnering with an active real estate investor. So you’d be more like a silent partner, so you would put your money into the project and then the active investor would do all the choosing the property and all that stuff. And usually, they should be very experienced in buying property and selling property, understanding values of the property and that type of thing. So those are the three types.
Eric Murphy:
What are some of the pros of passive investing?
John Burson:
Well, like earlier, I alluded… The risk factor is a lot lower. The initial cash outlay is more control, you don’t have to put 20,000, $30,000 now, so you can control your risks that way. The main advantages is that you’re putting in your money and you don’t have to do all the sweat and involvement, but there’s a side to this. You do have to do your due diligence though. You have to understand the overall real estate market and your internal environment, the particular market that these investors are in. So it’s important to be involved that way, to know who you’re dealing with, the type of environment, the risks involved and what your return is. So it’s passive, but at the same time, that doesn’t necessarily mean that you can be uninformed, you have to be an informed investor.
Eric Murphy:
Do you think that’s a common misconception when people hear about passive investing?
John Burson:
Yes, I think that’s common with all investing. They think that once they put their money in they can just let it ride and the experts will do their thing, which is not necessarily the case because the markets change, the particular market in that area changes, and so you have to manage your risk just like any other kind of investment. You have to do your research into the properties, into that area and into the investors you’re dealing with, at [inaudible 00:05:24] you’re dealing with. So yes, it is ongoing like with any investing,
Eric Murphy:
What would you say would be some possible disadvantages?
John Burson:
The disadvantage is the liquidity, it’s the big thing. If you own a house or if you own property and you just want to liquidate it, you can go out and sell it on the current market. And right now that would be great because interest rates are low and supply is down, availability is down, so you can sell it and cash out. But with passive investing, that decision is left up to the active investors or the active company, so you don’t have control over when they sell property or not. So if you’re looking for that, if you’re looking for liquidity, if you could put money down and let it ride for quite a while, maybe not make money for quite a while, that’s something you can consider. That’s the biggest risk involved. If you’re risk adverse, then you might want to look into REITs. REITs are mutual funds, they’re safe pretty much. I mean, you still have to look into them and they pay dividends, so you get this straight income. So you can go a safe route by investing in REITs relatively safe.
Eric Murphy:
Okay. My guest today is financial writer, John Burson here on the Private Equity Real Estate podcast, which is brought to you by First National Realty Partners. A bit about our sponsor, First National Realty Partners is a rapidly growing commercial real estate private equity firm that owns and operates more than 3 million square feet of real estate throughout the United States. And with a portfolio valued in accessible over 400 million, FNRP focuses on expanding its portfolio by acquiring market dominant, well located commercial assets well below replacement costs. If you would like to find out more, you can contact them at info@fnrpusa.com.
Eric Murphy:
Okay, John, so we talked a little bit about the pros and cons of passive commercial real estate investing. Let’s move on to the active side of it, in your opinion, what are some of the pros and cons of active commercial real estate investing?
John Burson:
Now you get to make the decision, and… Oh, there’s another thing too about passive investing is the active investor is going to make a lot more than you because they’re putting in most of the money, most of the time and that type of thing. But you’re benefiting from their profits without having to do anything, so that’s basically… [inaudible 00:07:33] just like a corporation, Amazon’s going to make more than you, but if their stock goes up or their dividends go up then you reap the benefits, but not as much as Amazon.
Eric Murphy:
You mentioned this briefly in your article, do you see investors going the routes often of maybe active real estate, but with a passive management?
John Burson:
Well, they could do that, but they have to deduct that from their expenses, against their profits. It does come down to those types of decisions though, and that’s a good point. Like say if you’re planning to invest in property, how much involvement do you want to commit? How much do you want to put in? And if you don’t want to put in that much, how much you’re willing to pay somebody else to do it and cut into your profits in doing so.
Eric Murphy:
If you were looking to diversify your portfolio, do you think that passive or active investing would be a better option?
John Burson:
Myself, personally, I would take the passive route. In terms of diversifying my portfolio I would say if I have stocks and I have other things, I would definitely choose real estate as a way of diversifying my funds, especially like with a mutual fund, that type of thing. And real estate historically has higher returns than the market. I’ve known people who are and have been active real estate investors, and it is a lot of work, it’s a lot of time. And if you’re not full time at it then I don’t think you should be in it. And the stakes are high. If you invest too much in restoring a property and you can’t that price or if the market suddenly takes a dip or interest rates suddenly go up, then you’re stuck for a lot of money. I really don’t like being committed that much.
Eric Murphy:
Do you think that you are constrained at all geographically if you choose to go the active route in investing?
John Burson:
That too, and that’s an advantage of the passive, it gives you a wider range. With active real estate, for a number of reasons you’re limited maybe just from a transportation [inaudible 00:09:20], but just you knowing the area and you understanding how the market is in that area. So yes, it does limit you that way.
Eric Murphy:
This was something that you mentioned in your article, if you are looking to invest in passive real estate, a private equity firm is an option. What are some of the benefits of investing with a private equity firm?
John Burson:
Well, they have the know-how, they’ve done all the due diligence pretty much. So, especially if you find a reputable one, they’ve already done all the due diligence so that cuts down your risk factor and everything. And basically with them, it’s pretty much a low risk deal.
Eric Murphy:
In a situation like we are in now with the coronavirus and the pandemic, do you think more people will turn to passive investing or active investing?
John Burson:
Well, real estate’s really hot right now. I’m in California now so like I mentioned earlier, their interest rates are really low, inventory is also low. That makes for a great seller’s market. I think real estate is still, despite everything we’ve gone through this year, has just been booming. I wouldn’t hesitate for any reason because of what’s going on, unless something drastically happens within the next quarter in going into it and investing in real estate. I think it would be one of the most promising investments to go into right now.
Eric Murphy:
Before I let you go, John, do you have any parting words or maybe some advice that you would like to give to investors?
John Burson:
The thing I want to emphasize is that with any investment go into it being as knowledgeable as possible. If I had to say one thing about investing it’s learn as much as you can. And if you know someone who is good, I mean, not just someone who says they’re good, but who’s very knowledgeable, pick their brain, find out what they do. Take maybe an investment course or take an online course to help you along before you dive in with your own money. Research in a company, research an environment, even in the short, somewhat seems like a short market, like real estate, that would be my parting gift.
Eric Murphy:
John, if someone wants to get in touch with you, how do they find you on social media?
John Burson:
Yes, under my name, John Burson, LinkedIn, Facebook, Twitter.
Eric Murphy:
I really enjoyed the talk, thank you so much for joining us today, John.
John Burson:
Yes, yes, I’m glad to be here. I’m glad to help anybody if I can. I hope I’ve been able to do that.
Eric Murphy:
Absolutely. My thanks again to our guest financial writer, John Burson. If you would like to check out the article that he wrote about some of the pros and cons of both passive and active real estate investing, you can do so at benzinga.com. Thank you for listening to the Private Equity Real Estate podcast, which is brought to you by First National Realty Partners. You can find out more about First National Realty Partners by visiting their website fmrpusa.com and also featured on their website is an article that talks about some of the things that we discussed here in this program today, be sure to check it out. As always please subscribe, rate, and review the podcast if you haven’t had a chance to do so already. Thank you for listening to the Private Equity Real Estate podcast. I’m your host, Eric Murphy, and we’ll talk to you again next week.
