This is the seventh post in the series Buying Real Estate for Cash Flow. To continue our discussion from the previous post:
How else do commercial real estate professionals generate cash flow?
They become selling insiders.
How do they do this?
Professional real estate investors will acquire properties with the business model of selling the ownership but retaining control of the property. They may purchase a quality class A property at a reasonable 10% cap rate. The next step is to sell ownership in the entity that holds title to the property (or properties) to passive investors.
Why do they do this?
Because it is profitable for them!
First, they generate commission and acquisition income for themselves. As the managers of the project they get to retain control of the property and collect management fees. In addition, on the exit (sale of the property), they typically earn a portion of the proceeds of the sale.
This strategy not only reduces their risk but also essentially gives them a low cost option on the future appreciation of the property (on exit), as well as an income stream while holding it.
Should you buy into this type of deal as a passive investor?
Well, it depends.
Like most things it depends on the deal, the structure, and your own goals. One main point is to make sure the management is properly incentivized to manage the property well and maximize returns for the passive investors, not just themselves as managers.
Summary
Bottom line: When a promoter of a this type of deal says it will produce cash flow, find out who it produces cash flow for. You or them?
