If you’ve invested in residential real estate before, you have some important, basic lingo like rental income, mortgage interest, and amortization under your belt. When you step into the world of commercial real estate, you’ll begin to see other terms, like “cap rate”, thrown around as if everyone inherently knows what that means.
It’s okay if you don’t know what a cap rate is or what it’s used for. It can be challenging to understand and hard to calculate. As a passive investor, you won’t have to do any of the hairy work to calculate cap rates, but it’s helpful to have a very basic grasp on what they are.
Keep reading to find out what a cap rate is, how it’s calculated, what it’s used for, and what you need to know about cap rates as a passive investor in a real estate syndication.
Did you know that you could invest in real estate without the headaches of tenants, toilets, and termites? It’s true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.
In this article, you’ll see what passive real estate investing means and find out if you should be an active or passive investor.
What It Means To Be An Active Investor
When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an active role in the investment.
The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
What It Means To Be A Passive Investor
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
Once you decide to dive into the real estate investing world, it won’t be long before you hear the term “Accredited Investor.” Once you notice how many passive commercial real estate or crowdfunded investment opportunities are publicly advertised and therefore limited to accredited investors only, you may get curious.
Even if you’re a total newbie, it’s important to know the difference between a sophisticated investor and an accredited investor and if you’re one of them.
Neither of these titles requires an application or an approval process. You can find out whether you’re an accredited investor based on a few simple criteria.
What to Look For
To be an accredited investor, you must:
1. Have had an annual income of $200,000 (or $300,000 for joint income) for the past two years, and expect to earn the same or higher income this year.
2. Have a net worth of over $1 million, not counting your primary home.