# Passive investing - commercial or residential



## 273455 (Jan 12, 2014)

So I'm looking for suggestions on what kind of real estate I should look at. I've read many of the threads here, so let me make my objectives clear.

What I'm looking for is an investment that will give me a steady income during retirement. I would like the property to be cash flow neutral - I don't want any income until it's paid off - and my time horizon is long term - like 20 years.

I've heard two different opinions from two knowledgable people - one said it's best to invest in multi-unit residential property, the other said it's best to do so in small commercial plazas with a few tenants who'd be there long term.

My day job is something totally unrelated to real estate, and so I'd be hiring a management company to manage the properties.


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## donald (Apr 18, 2011)

Depending where you live and the availability(and homework/common sense/investigating)
You could look into vacant land that is within city limits/has infrastructure)or lake/cottage country
It's a bit more speculative than standard re but could well pay off in 20+ yrs.
I know of a few people who had land(inherited mind you)that made near 10 fold.(pay off is in lump sum though)you won't make any money during holding period.


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## tygrus (Mar 13, 2012)

Nothing passive about either of those tactics. If I wanted to get exposure to real estate, I would buy a REIT and sleep like a baby while that 5% rolls in.


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## MoreMiles (Apr 20, 2011)

tygrus said:


> Nothing passive about either of those tactics. If I wanted to get exposure to real estate, I would buy a REIT and sleep like a baby while that 5% rolls in.


Yeah except they drop like dead flies when the interest rates go up. There was already a preview of it last spring and more to come in the next few years. It's like bonds. Holding a bond etf is not the same as holding a bond directly. Holding a REIT is also not the same as holding a real estate directly.

By the way, I am not sure if you have a baby but they sleep like 3 hours each time also some with colics and frequent feedings needed. I don't think you really want to sleep like a baby.


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## Just a Guy (Mar 27, 2012)

They are two different industries, each with their own risks...also both are overpriced in today's market. It's not a hands off kind of investment either...not saying it's a lot of work, but it's not hands off.


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## andrewf (Mar 1, 2010)

Passive income and direct real estate investing are not really compatible, unless you plan to hire a property manager.

Rising rates hurts real estate directly *not just REITs* because it drives up CAP rates.


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## marina628 (Dec 14, 2010)

It is very difficult to find good real estate properties these days ,they are out there but takes alot of research time.Personally we have found good properties in Georgia and a couple in Florida that are paying us 17-22% .


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## Cal (Jun 17, 2009)

MoreMiles said:


> Yeah except they drop like dead flies when the interest rates go up. There was already a preview of it last spring and more to come in the next few years. It's like bonds. Holding a bond etf is not the same as holding a bond directly. Holding a REIT is also not the same as holding a real estate directly.


Generally speaking the distributions will remain the same regardless of the interest rate. If one were so concerned about the value of the underlying security they could purchase some preferred shares, less fluctuation.

Holding RE directly is not that passive IMO.


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## humble_pie (Jun 7, 2009)

tygrus said:


> If I wanted to get exposure to real estate, I would buy a REIT and sleep like a baby while that 5% rolls in.


tyg. You already have real estate. It's that subsistence farm in the country where you have private security & an electrified perimeter fence. To keep the armed hordes from the cities from rampaging the countryside for food & other goods when society breaks down.

then you were thinking of buying an old house with no sprinklers or modifications & only one poor soul to cook, clean & deliver nursing services for 6-10 frail seniors 24/7/52.

on the other hand soon you'll be able to just print up a house using 3-D?

that's what you said ...


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## OhGreatGuru (May 24, 2009)

I don't think direct ownership of a small commercial or residential real estate property can be described as "passive" investing, even if you think a management company will do all the work for you. I agree a REIT would be the obvious passive way to do it.


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## 273455 (Jan 12, 2014)

OhGreatGuru said:


> I don't think direct ownership of a small commercial or residential real estate property can be described as "passive" investing, even if you think a management company will do all the work for you. I agree a REIT would be the obvious passive way to do it.


Why not?


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## OhGreatGuru (May 24, 2009)

1. You have to find and hire a management company that will give good service for the money you pay;
2. You may have to hire an auditor/accountant to make sure the management company isn't ripping you off;
3. You're still going to have to budget & pay for capital repairs, both planned and unexpected;
4. You're going to either spend a lot more time doing your taxes, or hire an accountant to do them for you; 
5. As owner, you will still have some liability for anything that goes wrong on the property, so you will need good liability insurance and the name of a lawyer.

Simply "hiring a management company" does not make it passive investing IMHO. You may not get the midnight calls to fix leaky plumbing, but you will still get the bill for the plumber the management company sen to fix it; you will be wondering if they hired their cousins to do it; you will have to account for these capital repairs in your taxes; and you will be named as co-defendant in any lawsuits by tenants who suffered water damage from the alleged faulty plumbing.


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## richard (Jun 20, 2013)

MoreMiles said:


> Yeah except they drop like dead flies when the interest rates go up. There was already a preview of it last spring and more to come in the next few years. It's like bonds. Holding a bond etf is not the same as holding a bond directly. Holding a REIT is also not the same as holding a real estate directly.


It takes a lot less work to keep the income from a bond coming in. While it's true that holding a single bond is different from holding a collection of them, some of the safety of the individual bonds is illusory (either the difference goes away over time or it comes with an opportunity cost). Other than the added diversification, a bond ETF is pretty similar to a single bond since they are both affected by the same market forces.

With bonds the duration is a useful way to check the risk. I'm not sure what the equivalent duration for an REIT or fund is but if it's less than 20 years and the yield is good it could be worthwhile. If you really want to recreate the real estate experience you can leverage your REIT purchase for a higher yield.


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## Ponderling (Mar 1, 2013)

From looking over reits' a year or more ago, there was one that specialized in the hum drum and drab rental apartment sector. It looked pretty stable to me. 

Interst rates could rise even a bit and a huge chunk of Canada's economy, tied up in real estate industry in some manner would grind to a halt. 
Existing home owners would be pushed to their cash flow limits trying to keep the house, and cut their discretionary spending, so a bunch of small businesses that fill up all sorts of strip malls everywhere would start to shut down. So there is the hit to commercial real estate. 

All sorts of people could be pushed to the wall, and there would still be a healthy rental real estate market, for basic apartments.


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## REInvestor (Mar 10, 2016)

No investment is passive. As far as RE I am not a big fan of the REIT's. Prefer bricks and sticks that I can touch. I like to think that if something goes bad with my real estate, I can impose my will on them to turn them around. ie if you have a bad tenant you can get rid of the tenant and find a good one. If the place is showing its age, you can give it a coat of paint or change the kitchen. 

My preference is small to mid sized residential properties. Not too big that it becomes hard to recognize your tenants, but big enough that you enjoy some synergies and economies of scale. Commercial has its benefits. If you want something close to passive, you need to pick up a commercial property with potential to lease to an investment grade tenant. LCBO, Tim's, Beer Store, etc... These kinds of commercial buildings offer an almost bullet proof revenue stream and very little oversight. Commercial requires more capital than residential but given your comments you may want to put down more to give yourself some breathing room.

Hope it helps. 
You can always reach out to me at (416) 571-4660.


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## Eclectic12 (Oct 20, 2010)

REInvestor said:


> No investment is passive. As far as RE I am not a big fan of the REIT's. Prefer bricks and sticks that I can touch. I like to think that if something goes bad with my real estate, I can impose my will on them to turn them around. ie if you have a bad tenant you can get rid of the tenant and find a good one. If the place is showing its age, you can give it a coat of paint or change the kitchen.


I think part of the problem with "passive investments" is that there are differences in skill levels that will drive what is considered "work".
Where one can find an investment that has mostly the items one likes doing ... it won't seem like work, despite the effort needed.


Cheers


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