One of the most common principles in investing is diversification. For most people, that means holding a mix of stocks, bonds, and other securities, along with retirement accounts like a 401(k). Far fewer individuals explore alternative vehicles such as businesses and real estate.
Unfortunately, there’s often a stigma attached to real estate investing, the classic “tenants, toilets, and termites” concern that makes many hesitant. Combined with the popularity of HGTV flipping shows, people often assume the only path is single-family rentals or flips.
The reality is that commercial real estate investing provides an entirely different opportunity. Historically, it has been dominated by institutional investors and ultra-high-net-worth individuals due to high barriers of entry. However, with the passing of the JOBS Act in 2012 and a general increase in awareness, access to CRE (directly or through syndications) has expanded significantly for everyday investors.
What Is Commercial Real Estate Investing and the Role of a Sponsor Real Estate Team?
Commercial real estate (CRE) includes a wide range of asset types such as office buildings, retail centers, self-storage, hospitality, warehouses, and multifamily apartments. Each asset class carries unique pros and cons, which we’ll explore in more detail in future articles.
What makes CRE unique compared to single-family investing is the presence of a sponsor real estate team. Sponsors are responsible for sourcing, acquiring, financing, and managing commercial properties, allowing investors to participate passively without taking on the burden of property management. For many investors, this structure provides an efficient way to access CRE without needing specialized expertise themselves.
Challenges of Sponsor Real Estate Investments in CRE
It’s important to note that commercial real estate investing isn’t suitable for everyone. There are notable challenges, including:
Illiquidity due to long-term hold periods (typically 5+ years).
Significant upfront capital requirements, often $50K or more.
The need for specialized knowledge to properly evaluate opportunities.
However, for investors who adopt a long-term mindset and align with experienced sponsor real estate operators, these drawbacks are often outweighed by the potential benefits.
Top Benefits of Commercial Real Estate Investing:
The following are some of the top reasons we believe illustrate the power of Commercial Real Estate investing:
Consistent Income Stream: Most CRE investments drive cash flow through regular rental income that is predictable and have generally long leases. Examples of this include 5 year leases by office tenants, 12 month leases by apartment residents, etc. This regular cash flow helps reduce the volatility of the investment especially as compared to stocks. The chart below shows the S&P over the last 80 years and it’s clearly volatile.
However, it’s nearly impossible to adequately compare returns in private CRE investments to the stock market as there are so many factors to consider and the market efficiencies vary widely. But research has shown that stocks have provided a 10% annualized return (7% after applying inflation). Whereas, based on my experience passively and actively, the average annualized returns in private CRE investments are easily 16-20%+ and are generally consistent if you invest in stabilized deals with sponsors that have a proven track record.
Leverage Through Commercial Real Estate Investing: CRE financing, often 70–80% loan-to-value, enables investors to amplify equity returns. Passive investors further benefit by leveraging the expertise of sponsor real estate operators, who manage acquisitions and operations. Syndications, where multiple investors pool capital to access larger deals, are a common and effective way to invest passively in CRE.
Forced Appreciation by Sponsor Real Estate Operators: As I mentioned in a previous article regarding cap rates, CRE is valued based on it’s net operating income, which is a lot more controllable than single family real estate, which is valued based on comparable sales (i.e. market sentiment). There are strategies that can be employed, commonly called “value-add”, that experienced operators use to raise income or reduce expenses, that enable forced value appreciation. This appreciation is in addition to any market appreciation that can be had by investing in the right location, asset class, etc. Partnering with a capable sponsor real estate team is key to realizing these gains, which often exceed those available in single-family investing.
Tax Benefits in Commercial Real Estate Investing: Everyone’s tax situation is unique so the tax benefits will vary by individual and it’s important to seek CPA advice before investing. However, it’s no secret that real estate provides significant tax planning opportunities. Usually, paper losses via depreciation (which now can be accelerated under the new rules around cost segregation), result in investors having write-offs that offset the cash distributions received in the year. Essentially, investors are earning cash flow yet incurring no tax liability! Of course, when the property is sold (usually +/- 5 years later), there will be recapture of those taxes, but there are ways such as refinancing and 1031 exchanges that savvy investors can utilize to continue deferring the taxes!
Control: Investors have very little control on their investments after buying stocks or bonds, let alone any access to the key decision makers of large companies. However, with private CRE investments, investors have a lot more control over the sponsors they invest in, the asset type they invest in, the location they invest in, etc. Building a relationship with a sponsor real estate team also provides transparency and direct communication throughout the investment lifecycle.
Inflation Hedge: As a hard asset in limited supply there is true intrinsic value in real estate that provides a great hedge against inflation. Generally speaking, organic growth in rental income follows CPI providing the mechanism to offset inflation. Furthermore, most CRE is purchased with leverage (i.e. debt) that can be procured at very low current interest rates. This enables investors to pay off the debt in the future with dollars that have less purchasing power, thereby hedging inflation risk.
Summary: Why Sponsor Real Estate Matters in Commercial Real Estate Investing
These are only some of the high-level benefits of commercial real estate investing. While it has long been favored by institutions and ultra-wealthy investors, today’s environment makes it accessible to a wider audience through syndications and experienced sponsor real estate teams. Though not without risks, CRE should be viewed as a way to augment, not replace, a diversified portfolio. For investors seeking steady income, tax advantages, and long-term growth, commercial real estate provides a compelling opportunity to balance traditional investments with tangible, income-producing assets.
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