Matthew Bateman 2/18/26 Matthew Bateman 2/18/26

Stop Chasing Every Deal: Why Successful Investors Pick a Niche

How to choose your asset class, geography, and strategy—and why focus beats FOMO

Here's an uncomfortable truth: most beginning real estate investors fail because they chase every shiny opportunity instead of focusing on one niche.

Yes, there will be times to veer from your niche temporarily or even pivot entirely, but keeping focus will yield the best results in the long run.

Successful investing in real estate requires building expertise. Expertise is MUCH easier to build if you focus on a specific niche.

Why is this true?

Why not just look at a whole variety of opportunities and pick the ones with the best risk adjusted returns for you?

The answer: developing expertise takes focused repetition. Focused repetition is only possible if you pick a niche.

Let me explain.

What is a Niche?

In reference to real estate investing, let’s define a “niche” as a combination of (a) how you are going to invest and (b) what you are going to invest in.

The “how” was discussed in detail in 5 Ways to Invest in Real Estate (From $60 to All-In). Here is a quick recap of the ways, from least time consuming to most time consuming:

Owning shares of a REIT.
Investing as a limited partner (LP).
Buying a property by yourself.
Buying a property with someone as equal partners.
Buying a property as the general partner and raising money from LPs.

The “what” is new to our discussion. It is made up of three components.

Asset Class: 1-4 unit residential, apartments, office, industrial, retail.
Geography: where you plan to invest.
Strategy: core/turnkey, light rehab, value add (or fix and flip), house hacking.

When you combine these combinations, there are literally 100’s of niches to choose from.

It may seem overwhelming.

Help!!!!

Don’t worry.

As with any big issue, the key is to break it down into parts.

For this discussion, let’s assume the “how” of your niche will be to buy the property by yourself. This will allow us to focus on the “what”. Even if you decide to invest with a partner (or raise money) or invest as an LP, the same principles will apply in thinking about the “what”.

Asset Class

Choosing an asset class is probably the most foundational decision you need to make. I discussed asset classes in detail in Asset Classes Explained: Industrial, Office, Retail, Multifamily, and 1-4 Unit Residential. Here’s a short recap:

Industrial: Simple to operate, low ongoing capital needs, good cash flow.
Office: Complicated to operate, high ongoing capital needs, challenging cash flow.
Retail: Reasonable to operate, moderate ongoing capital needs, good cash flow.
Multifamily/Apartments: Intensive to operate, varied ongoing capital needs, good cash flow.
1-4 Unit Residential: Easier than apartments to operate, varied ongoing capital needs, good but lumpy cash flow due to the limited number of tenants.

If you are just starting out and have more limited funds, the most accessible asset classes will be:

1-4 unit residential.
A small industrial property.
A small single-tenant retail property.

The reason to pick one asset class is because each type has its own nuances and characteristics. If you jump from type to type, you will never develop any expertise. Without expertise you will miss opportunities and misjudge risk.

Geography

Geography is just as it sounds: where are you going to invest? Think of it in terms of:

Region: example coastal markets or the sunbelt states or the midwest.
Markets: a specific area within a region. Example: Charlotte, NC.
Submarket: this gets even more specific. What micro areas do you like in your market?

You don’t have to start with a submarket specifically. For example, maybe you have $30,000 to invest. You are limited to lower cost markets and can’t afford coastal areas.

You might pick the midwest U.S. as your region and then focus on Detroit over time. As you learn more about Detroit, you could then pick the submarkets you like.

Remember, you don’t have to limit yourself to the market you live in. You can find a good broker and property manager in another market who will do all the work for you while you direct the overall strategy. See You Don’t Have to Do Everything Yourself: Building Your Real Estate Team.

It is OK to have multiple geographies to focus on. It just means more areas to keep up with. I recommend starting with one. Or doing some research on two to three with the goal of ultimately focusing on one.

Strategy

Strategy is the approach you are going to take to operating your property. We will explore this in detail next week. For now let’s start with the following options:

Core/Turnkey: low risk, low return. You buy a property that is well leased and maintained. There is minimal work to do.
Light Rehab: medium risk, medium return. There is some work to do, but it is mainly cosmetic (paint, carpet, clean up). If you do the work, you can increase the rent and value of the property.
Value Add: high risk, high return. There is a lot of work to do. The property might even be vacant. You will be repositioning it and taking on a lot of risk for superior returns. You will either find a tenant once the work is complete or sell it (fix and flip).
House Hacking: this option only applies to 1-4 residential. You will live in one unit (or room) of the property and rent out the other units (or rooms), allowing you to live rent free or at a reduced cost.

Each strategy has its own pros and cons. There is no right answer.

You can see that choosing the right one for you depends on the time you have and your tolerance for risk.

Now let's see how this works in practice. Here are four real-world niche examples that combine these elements differently.

Creating Your Niche: Putting It All Together

Option 1: Good for a W-2 employee with no spare time who wants passive income.

Asset Class: Retail

Geography: Pacific Northwest

Strategy: Turnkey

You decide to buy single tenant leased fast food buildings that are leased long-term (ex. 10+ years). The tenants are responsible for maintaining the buildings so there is very little work for you to do. You have always liked the Pacific Northwest because you grew up there and saw businesses like Amazon, Costco, and Microsoft drive the economy.

Option 2: Good for a W-2 employee with limited time who wants passive income.

Asset Class: 1-4 Unit Residential

Geography: Southeast U.S.

Strategy: Turnkey

You don’t have a ton of free time, so you want to buy turnkey assets that don’t need a lot of work. You live in a more expensive coastal market, but can’t afford to buy there so you find a good broker and property manager who will find and manage your future out-of-state properties that will be in a more affordable market in the southeast. You are starting with a one or two unit residential property because that is all you can afford. Over time, you hope to assemble a collection of duplexes and four-plexes.

Option 3: Good for someone with time to be more active in managing their investment.

Asset Class: Industrial

Geography: San Antonio, TX

Strategy: Light Rehab

You like the simplicity of industrial. You are targeting an older, well located building that needs to be repositioned with some paint and new signage. You like San Antonio because it is near the fast growing market of Austin.

Option 4: Good for someone ready to give their evenings and weekends to fixing up the property.

Asset Class: 4 Unit Residential

Geography: Los Angeles, CA

Strategy: Value Add

You have lived in LA all your life and have seen that there is never enough housing. You have researched the rent control laws of California and understand how to navigate them. You scrape together all the money you have to buy a 50+ year old four-plex in West Los Angeles that needs a major rehab. You plan to hold this property forever and pass it on to your children.

Why Having a Niche Matters

As you can see, these four options are very different strategies.

Finding a property to invest in takes work. You will likely have to look at 10-100+ potential properties before you find one to buy.

It is through this repetition that you start to (a) learn more about your niche and (b) see the one or two properties that are a better deal than the others.

Without this level of focus and repetition, you are like an athlete playing many different sports. You may be adequate at each, but you will never develop expertise.

The most successful investors focus and become experts in their niche. If they have multiple niches it is because they mastered the first and expanded into additional niches.

How to Choose Your Niche: A Simple Framework

Ask yourself three questions:

Money: How much capital do I have to invest? (This limits your asset class and geography options)
Time: How much ongoing time can I dedicate? (This determines your strategy)
Interest: What excites me? (You are more likely to stick with what you find interesting)

Closing Thoughts

There are at least two ways to look at the concept of having a niche.

Feeling Constrained
Feeling a Sense of Freedom

Some will feel constrained. They are the type who have FOMO, feeling there are always better opportunities that they are missing out on. They hear of someone making a successful investment outside of their niche. They decide to pivot. 18 months and five pivots later, they have either failed to make an investment or worse, made an impulsive investment decision that may or may not work out.

Distraction is the enemy of progress.

I encourage you to view it from the other perspective, as freedom. By focusing on a niche you will have freedom.

Freedom to develop expertise.
Freedom to focus.
Freedom to ignore temptations outside of your niche.

Once you build expertise and momentum in your niche, you can expand and add to it.

I didn’t start with expertise in multiple asset classes, markets, and strategies. I developed and grew expertise over my 20+ year career in real estate and being an investor.

But ask me about a market I don’t have any experience in (ex. Miami or New Jersey) and I will acknowledge I don’t know much.

This is fine. Humility is a good thing.

What you don’t want to do is be an investor who makes bets without doing the research or having focus. You won’t be an expert on your first deal, but you will build momentum over time if you stick to a niche.

My Niche Evolution

Here’s how it evolved for me over the past 23 years of investing.

Stage I - No Niche: I made an LP investment in a hotel in Los Angeles without any investment focus. I made this investment because the GP was (and still is) my friend. Luckily, it worked out.
Stage II - Western U.S., Value Add, Industrial: For the 20 years I was at Westcore, we primarily focused on this niche. Yes we did some retail and office deals, but we were primarily focused on industrial. After 20 years we actively expanded our geography to Texas and further east while maintaining a focus on value add industrial.
Stage III - Western U.S., Value Add, Multifamily as an LP: In 2015, I started making LP investments with a multifamily GP. I actively pursued this focus to build up passive income and diversify outside of industrial. I even spent two years working for the GP and learned the operational side of the multifamily business.

In stage I, I was clueless. I was lucky to invest with a GP who was very capable and honest.

My time at Westcore (stage II) allowed me to develop real expertise in a niche.

It was only after 10+ years at Westcore that I added an additional niche as a multifamily LP investor (stage III). The expansion came after mastering the previous niche - not before.

Today, my personal investment portfolio is still industrial and multifamily with strategies I understand and in markets I know well. These are my niches. What happens when I see an office deal? I am a quick no.

Focus doesn’t mean you never change. It means you build expertise before expanding your focus.

Do you have a story you want to share of sticking to a niche or veering outside of it? Email me at bateman@creprofessor.org. I read every email and would enjoy hearing your story.

Professor BatemanHere's an uncomfortable truth: most beginning real estate investors fail because they chase every shiny opportunity instead of focusing on one niche.

Yes, there will be times to veer from your niche temporarily or even pivot entirely, but keeping focus will yield the best results in the long run.

Successful investing in real estate requires building expertise. Expertise is MUCH easier to build if you focus on a specific niche.

Why is this true?

Why not just look at a whole variety of opportunities and pick the ones with the best risk adjusted returns for you?

The answer: developing expertise takes focused repetition. Focused repetition is only possible if you pick a niche.

Let me explain.

What is a Niche?

In reference to real estate investing, let’s define a “niche” as a combination of (a) how you are going to invest and (b) what you are going to invest in.

The “how” was discussed in detail in 5 Ways to Invest in Real Estate (From $60 to All-In). Here is a quick recap of the ways, from least time consuming to most time consuming:

Owning shares of a REIT.
Investing as a limited partner (LP).
Buying a property by yourself.
Buying a property with someone as equal partners.
Buying a property as the general partner and raising money from LPs.

The “what” is new to our discussion. It is made up of three components.

Asset Class: 1-4 unit residential, apartments, office, industrial, retail.
Geography: where you plan to invest.
Strategy: core/turnkey, light rehab, value add (or fix and flip), house hacking.

When you combine these combinations, there are literally 100’s of niches to choose from.

It may seem overwhelming.

Help!!!!

Don’t worry.

As with any big issue, the key is to break it down into parts.

Asset Class

Industrial: Simple to operate, low ongoing capital needs, good cash flow.
Office: Complicated to operate, high ongoing capital needs, challenging cash flow.
Retail: Reasonable to operate, moderate ongoing capital needs, good cash flow.
Multifamily/Apartments: Intensive to operate, varied ongoing capital needs, good cash flow.
1-4 Unit Residential: Easier than apartments to operate, varied ongoing capital needs, good but lumpy cash flow due to the limited number of tenants.

If you are just starting out and have more limited funds, the most accessible asset classes will be:

1-4 unit residential.
A small industrial property.
A small single-tenant retail property.

Geography

Geography is just as it sounds: where are you going to invest? Think of it in terms of:

Region: example coastal markets or the sunbelt states or the midwest.
Markets: a specific area within a region. Example: Charlotte, NC.
Submarket: this gets even more specific. What micro areas do you like in your market?

You don’t have to start with a submarket specifically. For example, maybe you have $30,000 to invest. You are limited to lower cost markets and can’t afford coastal areas.

You might pick the midwest U.S. as your region and then focus on Detroit over time. As you learn more about Detroit, you could then pick the submarkets you like.

Strategy

Strategy is the approach you are going to take to operating your property. We will explore this in detail next week. For now let’s start with the following options:

Core/Turnkey: low risk, low return. You buy a property that is well leased and maintained. There is minimal work to do.
Light Rehab: medium risk, medium return. There is some work to do, but it is mainly cosmetic (paint, carpet, clean up). If you do the work, you can increase the rent and value of the property.
Value Add: high risk, high return. There is a lot of work to do. The property might even be vacant. You will be repositioning it and taking on a lot of risk for superior returns. You will either find a tenant once the work is complete or sell it (fix and flip).
House Hacking: this option only applies to 1-4 residential. You will live in one unit (or room) of the property and rent out the other units (or rooms), allowing you to live rent free or at a reduced cost.

Each strategy has its own pros and cons. There is no right answer.

You can see that choosing the right one for you depends on the time you have and your tolerance for risk.

Now let's see how this works in practice. Here are four real-world niche examples that combine these elements differently.

Creating Your Niche: Putting It All Together

Option 1: Good for a W-2 employee with no spare time who wants passive income.

Asset Class: Retail

Geography: Pacific Northwest

Strategy: Turnkey

Option 2: Good for a W-2 employee with limited time who wants passive income.

Asset Class: 1-4 Unit Residential

Geography: Southeast U.S.

Strategy: Turnkey

Option 3: Good for someone with time to be more active in managing their investment.

Asset Class: Industrial

Geography: San Antonio, TX

Strategy: Light Rehab

Option 4: Good for someone ready to give their evenings and weekends to fixing up the property.

Asset Class: 4 Unit Residential

Geography: Los Angeles, CA

Strategy: Value Add

Why Having a Niche Matters

As you can see, these four options are very different strategies.

Finding a property to invest in takes work. You will likely have to look at 10-100+ potential properties before you find one to buy.

It is through this repetition that you start to (a) learn more about your niche and (b) see the one or two properties that are a better deal than the others.

Without this level of focus and repetition, you are like an athlete playing many different sports. You may be adequate at each, but you will never develop expertise.

The most successful investors focus and become experts in their niche. If they have multiple niches it is because they mastered the first and expanded into additional niches.

How to Choose Your Niche: A Simple Framework

Ask yourself three questions:

Money: How much capital do I have to invest? (This limits your asset class and geography options)
Time: How much ongoing time can I dedicate? (This determines your strategy)
Interest: What excites me? (You are more likely to stick with what you find interesting)

Closing Thoughts

There are at least two ways to look at the concept of having a niche.

Feeling Constrained
Feeling a Sense of Freedom

Distraction is the enemy of progress.

I encourage you to view it from the other perspective, as freedom. By focusing on a niche you will have freedom.

Freedom to develop expertise.
Freedom to focus.
Freedom to ignore temptations outside of your niche.

Once you build expertise and momentum in your niche, you can expand and add to it.

I didn’t start with expertise in multiple asset classes, markets, and strategies. I developed and grew expertise over my 20+ year career in real estate and being an investor.

But ask me about a market I don’t have any experience in (ex. Miami or New Jersey) and I will acknowledge I don’t know much.

This is fine. Humility is a good thing.

My Niche Evolution

Here’s how it evolved for me over the past 23 years of investing.

Stage I - No Niche: I made an LP investment in a hotel in Los Angeles without any investment focus. I made this investment because the GP was (and still is) my friend. Luckily, it worked out.
Stage II - Western U.S., Value Add, Industrial: For the 20 years I was at Westcore, we primarily focused on this niche. Yes we did some retail and office deals, but we were primarily focused on industrial. After 20 years we actively expanded our geography to Texas and further east while maintaining a focus on value add industrial.
Stage III - Western U.S., Value Add, Multifamily as an LP: In 2015, I started making LP investments with a multifamily GP. I actively pursued this focus to build up passive income and diversify outside of industrial. I even spent two years working for the GP and learned the operational side of the multifamily business.

In stage I, I was clueless. I was lucky to invest with a GP who was very capable and honest.

My time at Westcore (stage II) allowed me to develop real expertise in a niche.

It was only after 10+ years at Westcore that I added an additional niche as a multifamily LP investor (stage III). The expansion came after mastering the previous niche - not before.

Focus doesn’t mean you never change. It means you build expertise before expanding your focus.

Do you have a story you want to share of sticking to a niche or veering outside of it? Email me at bateman@creprofessor.org. I read every email and would enjoy hearing your story.

Professor Bateman

Matthew Bateman 2/11/26 Matthew Bateman 2/11/26

You Don’t Have to Do Everything Yourself: Building Your Real Estate Team

How to assemble the right specialists so you can focus on what matters

In my previous post 5 Ways to Invest in Real Estate (From $60 to All-In), I discuss the passive and active ways to invest in real estate. A quick overview:

Passive: buying REIT shares or investing as a limited partner (LP) with someone that puts together and manages the investment - the general partner (GP).
Active: buying a property on your own, with a partner, or by raising money from multiple LPs.

Both are good ways to invest and, as with almost everything in life, they each have their trade offs.

Passive Investing

Passive investing requires minimal effort. Someone else does the work. Once you make the investment, you don’t have to do much. Read the quarterly reports. File your tax return. In exchange, you have little control and pay the REIT or GP to run the investment (we will get into the details of fees and promotes another week).

Active Investing

Active investing gives you more control and allows you to collect fees and promote. In exchange, you have to do all the work.

Unless you are part of a company that acts as the GP, this can be an overwhelming amount of work. Just like a business owner, you have to wear many hats and deal with a vast variety of issues.

The Many Demands of Owning a Real Estate Investment

Regardless of the type of investment property you buy, you will be faced with many, many issues as a real estate owner. Calls from tenants with plumbing leaks, tenants not paying rent, insurance policies, loan expirations, vendors and contractors, tax returns…the list is seemingly endless.

This can be daunting as you think of making this your side-hustle.

Don’t worry.

There are ways for you to handle this and keep your sanity.

The key is to assemble the right team.

And for those who want to go all-in and create a company, this will be an essential guide of who you need as your employees and advisors.

Let’s dig in.

An Industry of Specialists

The real estate industry is full of people that specialize in various niches within the industry. I break down the industry in my discussion on CRE 101.

The groups in green have a financial interest in a property. Said another way, they write a check to invest.

The groups in blue provide services to the groups in green for a fee. Sometimes the fee is one time. Sometimes it is on a monthly basis. Sometimes the owner creates a company and hires people in the blue group to be their employees. Example: property management and accounting.

Each group is made up of people that have chosen to specialize in their given niche based on their skills and interests.

Be the Leader. Don’t Do Everything Yourself.

As the owner of a property, it is up to you to decide what you want to do yourself and what you want to pay a specialist to do. Do you want to:

Get calls from tenants or pay a property manager to handle this?
Do the accounting/bookkeeping or hire an accountant?
Lease the vacant space or hire a broker?
Fix the leaky faucet or hire a handyman?
Oversee the construction or hire a general contractor?

Everyone is different. You need to decide what works for you.

For the property I own with a partner, I pay a property manager to interface with the tenants, manage the vendors, and do the property accounting.

But when it came to replacing the roof a few years ago, I decided to work directly with the roof company as it would only be done every 10 years and it is so critical to the performance of the building.

So who does what and how do they get paid?

Let’s break it down.

Here are the key roles you need to understand, roughly in the order you'll need them:

Mentor

Role: A mentor is someone who (a) has already achieved what you want to achieve and (b) is interested in helping you. They are your vision of yourself in 5-10 years. Your mentor was helped by others in their journey. They want to pay it forward. They will be your guide, especially in challenging situations.

Compensation: None. You shouldn’t need to pay a mentor. This will only work if you demonstrate you are someone worth the mentor spending time on.

How to Find One: Ask around. Contact someone on LinkedIn. Meet someone at an industry event. Be specific about what you want to learn and respect their time. Come prepared with questions and updates on your progress.

Business Partner

Role: They are your investing partner. You do the deal together. You keep each other accountable and share the ups and downs.

Compensation: None. You each invest in the property as partners.

How to Find One: Only do a deal with someone you know and trust. It is like a marriage. See Option 4 in 5 Ways to Invest in Real Estate (From $60 to All-In).

Acquisition Broker / Realtor / Real Estate Agent

Role: They find the property for you. The good ones help you navigate the acquisition process, from the purchase contract to due diligence to escrow and title to the loan and to closing. They have been there, done that. They are licensed by the state they reside in. Note that most of the time they are selling the property on behalf of the owner. Make sure you ask who they are representing. They will either be representing the seller or both of you. Either is fine. Just know that if they are only representing the seller, they may be giving you an (overly) optimistic vision of the market conditions. Make sure you ask the opinion of other brokers not part of this transaction.

Compensation: Commission. They earn 1-6% of the purchase price, depending on the size of the deal and asset class. Example: $3M x 6% = $180,000. The commission is paid at closing and typically paid by the seller. You pay nothing as the buyer unless this is pre-agreed upon by you and the broker.

How to Find One: Check loopnet.com and other websites to see properties for sale. They will list the broker. Contact the broker and tell them what you are looking for. There are national brokerage companies that specialize in industrial, retail, office, and larger apartment buildings (CBRE, JLL, Newmark, Marcus & Millichap, Cushman & Wakefield, Voit, and Lee & Associates). Brokers that specialize in 1-4 unit residential tend to be more locally focused. If the latter, you want to find one that specializes in investment properties, not traditional home sales.

Leasing Broker

Role: Same as an acquisition broker, except they specialize in leasing. This is typically only applicable to industrial, retail, and office. Property management companies tend to do the leasing for apartments and 1-4 unit residential.

Compensation: Commission.

How to Find One: Through the acquisition broker.

Property Manager and Property Accountant

Role: Manages the day-to-day of a property, from interfacing with tenants to managing vendors and maintenance needs to overseeing smaller construction jobs. This role is critical to running a property as well as being the most time consuming on an ongoing basis. They also provide accounting to track the monthly financial performance of a property.

Compensation: A percentage of monthly revenue with a minimum or it could be a flat fee. Example 3-5% of monthly revenue with a $1,000 per month minimum. There could also be additional charges for overseeing construction and renewing tenants.

How to Find One: Through the acquisition broker.

Lender / Loan Broker

Role: The lender provides the debt to help you buy the property. A loan broker helps you find the right lender for you by marketing the property to many different lenders.

Compensation: The lender may charge you not only a fee for the loan at closing (example 1% of the loan amount), but will also pass through the amounts they pay to their attorneys and due diligence consultants. The loan broker is paid just like an acquisition broker (example 1% of the loan amount).

How to Find One: Through the acquisition broker.

Insurance Broker / Agent

Role: Connects you with the right insurance carrier for you to get insurance to protect you against costs related to property damage (property insurance) and being sued (liability insurance).

Compensation: Commission that is imbedded into the cost you pay the insurance carrier.

How to Find One: Through the acquisition broker.

Handyman or Contractor

Role: Handles repairs and construction, ranging from fixing a leaking faucet to painting a vacant unit to replacing a roof.

Compensation: Fixed or percentage fee.

How to Find One: Through the property manager.

Escrow & Title

Role: An escrow agent is the “referee” between the buyer and the seller. They make sure each party follows what is required under the purchase and sale agreement as well as manage the exchange of money. Title makes sure that what everyone thinks is being bought and sold is actually being bought and sold. They also provide title insurance to protect against future issues.

Compensation: One time fees.

How to Find One: Through the acquisition broker.

Attorney

Role: Advises you on legal issues. On larger deals (ex. $5M+), attorneys are used to negotiate purchase and sale agreements, loan agreements, and partnerships agreements involving GPs and LPs. They are also used on larger leases. Some owners won’t do a deal without advice from an attorney. Others rely on standard form documents without using an attorney (Example: AIA Contracts).

Compensation: Paid based on an hourly rate.

How to Find One: Through the acquisition broker or property manager.

Tax Accountant

Role: Prepares your tax return and advises on tax strategy. Remember, the property manager only does monthly property accounting that tells you about the monthly performance of your property (income statement, balance sheet, and cash flow). This is different from a tax return you file with the IRS.

Compensation: Paid based on an hourly rate.

How to Find One: Through the acquisition broker or property manager.

Summary

That was a lot to cover. Let’s try to make it more digestible by providing two examples of how you could approach this.

Option 1: Keep it Simple - Outsource Everything

Find a broker that works for a company that also does property management, accounting, and construction management. Even brokers that work for companies without these services know of other companies that can provide them.

A good broker will help you find a property to invest in and bring together the team to both help you buy it and run it once you own the property.

Once you own it, be clear on what you want to approve and what you are delegating to the property management team. Example: the property manager has discretion to proceed with all maintenance issues < $250 without owner’s approval. Increase or decrease your delegation threshold over time. Dive into specific issues if needed. And be willing to change teams if the existing property manager is not working for you.

Option 2: Active Control

Do any or all of the above functions yourself. You will still likely want to use a broker, but everything else you can do yourself.

You will save money but you will pay for it with your time and energy. You will experience first hand what it is like to get an emergency call from a tenant in the middle of the night or while you are on vacation.

It is not for everyone, but it does have the advantage of teaching you what it is like to really run a property.

You Can Change Your Approach Over Time

Remember that none of this needs to be permanent. You could start with the active approach and then switch to the outsource approach.

This is what I did with my industrial property.

Active: I did the property management and accounting myself for a year and then decided this was not for me.
Hybrid: I then hired a group to do the property management only while I continued with the property accounting.
Outsource: Finally, I decided they did not manage the property in the way I wanted it managed, so I hired a new property manager and increased the scope so that they did the property accounting as well. They have been excellent. I happily pay them their monthly fee.

There is no universal right answer.

Be a student of yourself and observe what works for you.

Professor Bateman

Matthew Bateman 2/4/26 Matthew Bateman 2/4/26

Asset Classes Explained: Industrial, Office, Retail, Multifamily, and 1-4 Unit Residential

Which real estate type matches your investment goals, time, and capital?

It’s funny. The term “commercial” is my least favorite way to describe a particular individual property, yet it is the most accurate to describe the industry as a whole.

In my experience, “commercial” real estate is any property that is operated as an investment; where the business plan is to make money.

The home you live in is not commercial real estate.

The house you rent out for income is commercial real estate.

There are many types of commercial real estate known as “asset classes”.

Understanding how they differ is critical to becoming a successful real estate investor. In my last newsletter (5 Ways to Invest in Real Estate), I discussed the “how”. Now we are describing the “what” you can invest in.

I’ve invested in six of these over the past 20+ years and talked with investors who have focused on the others.

By the end of this newsletter, you’ll know which asset class aligns best with your goals, risk tolerance, and available time.

Let’s dig in.

The Major Asset Classes

Industrial
Office
Retail
Multifamily aka Apartments
1-4 Unit Residential: single-family home rentals, duplexes, triplexes, fourplexes.
Other: Medical Office, Shopping Malls, Biotech, Data Centers, Hotels, Self-Storage, Industrial Outdoor Storage (IOS)

Each of these has different characteristics in terms of:

Physical Characteristics: What they look like physically and how they function.
Tenants: Which tenants they attract and what those tenants are looking for.
Operational Complexity: The demands on owner to operate them.
Capital Needs: The ongoing capital they require to operate.
Lease Structure: Whether the tenant pays anything in addition to rent.
Investment Profile: Cash flow and investment characteristics.
Summary: key takeaways.

We are going to cover a lot of information here. See below for a list of the main asset classes with a “cheat sheet” of their characteristics added.

Industrial: Simple to operate, low capital needs, good cash flow.
Office: Complicated to operate, high capital needs, challenging cash flow.
Retail: Reasonable to operate, modest capital needs, good cash flow.
Multifamily: Intensive to operate, varied capital needs, good cash flow.
1-4 Unit Residential: Easier than apartments to operate, varied capital needs, good but lumpy cash flow due to the limited number of tenants.

The goal is to find the right fit for you as an investor.

Quick Note: I had to err on the side of oversimplifying to summarize all of this information. Those of you who have spent years focused on one asset class may find I missed tons of the nuances of that asset.

I would probably agree with you.

Think of this as the starter to see where you want to dig in.

Industrial

Photo by Point3D Commercial Imaging Ltd. on Unsplash

Physical Characteristics

Industrial buildings are generally single story warehouse buildings that have 5-50% of the interior of each individual suite built out as office. Buildings and suite sizes can range from 5,000 square feet (SF) to 500,000+ SF. Sometimes one tenant occupies the entire building. Sometimes it is broken up into smaller suites. The ceiling heights can range from 12’ to 40’. They normally have large warehouse doors for backing large trucks into to load and unload products.

Tenants

Tenants that lease industrial buildings are typically storing products, manufacturing, conducting e-commerce, or running a small business that requires storage of parts (ex. plumbing, HVAC).

Operational Complexity

Industrial buildings are relatively easy to operate, particularly the larger buildings. The larger the tenant (by SF), the more self-sufficient they tend to be. Most leases require the tenants to handle everything inside their suite (ex. light bulbs and HVAC).

Capital Needs

Industrial buildings don’t require much capital to operate. The tenant improvements (costs to fix up the suite for the next tenant) tend to be relatively low due to the low percentage of office. The most expensive thing to replace on an industrial building is a roof.

Lease Structure

Most industrial leases are 3-10 years in length and triple-net (NNN). NNN means that in addition to the tenant paying base rent, it also pays its share (defined by % of total SF) of the expenses to operate the building such as maintenance contracts, insurance, and property tax. We will get into NNN more in another newsletter.

Investment Profile

The combination of the duration of the leases, the NNN lease structure, and the low capital needs make industrial a good asset for cash flow and an attractive one for investors.

Summary

Simple to operate, low capital needs, good cash flow. I am a big fan of industrial.

Office

Physical Characteristics

Office buildings are generally multi-story buildings with the interior built out for knowledge workers. You have probably been in one. They tend to be broken up into smaller suites ranging from 1,500 SF to 5,000 SF, although some suites can be much bigger.

Tenants

Tenants that lease office buildings are made up of knowledge workers who sit at desks on computers, meet in conference rooms, and congregate around a water cooler to chat. Think of the show “Suits”, the drama that takes place in the office of a law firm.

Operational Complexity

Office is demanding to operate. Not only do tenants expect the owner to change lightbulbs and fix the HVAC in their suite, but there are also major building systems to be maintained, repaired and replaced: elevators, glass exteriors, centralized HVAC systems, and other systems.

Capital Needs

Office buildings are capital pigs: they constantly need money. To lease up an office building for the first time, the owner needs to invest $100+ per square foot (psf) in tenant improvements (TIs) to do 5-10 year leases. At the end of these leases, the next tenant likely wants a different build out, requiring $25-50 psf in new TIs.

Then there are the building systems, which last for about 20 years if well maintained. Replacing an elevator or HVAC system can cost millions in an office high-rise.

Can you tell I am not really a fan of office? I was the asset manager on a suburban office portfolio for years and was constantly amazed by how much we had to spend to get a tenant in our buildings (even on renewals). Proceed with caution.

Lease Structure

This varies from market to market. Some are NNN like industrial buildings. Some are what’s known as a “base year” structure where the tenant only pays their share of increases in operating expenses. Again, don’t worry about this for now.

Investment Profile

I like to think of office as a trading asset. Once the tenants are in place and the rent roll is stable, it can be sold as a good value. But the high ongoing capital needs make it a challenging asset for cash flow.

Summary

Complicated to operate, high capital needs, challenging cash flow. I am unlikely to ever invest in office again.

Retail

Physical Characteristics

Ever been to a grocery store, restaurant, or a coffee shop? Then you have experienced retail. It could be a grocery anchored shopping center like the one in the picture above, or it could be an indoor mall. Suite sizes range from 1,000 SF to 50,000+ SF. It is where you go to buy goods and services.

Tenants

Tenants that lease retail buildings sell goods and services. Examples include: grocery and drug stores, fitness centers, restaurants, clothing stores and general retailers.

Operational Complexity

Retail can be demanding to operate, but for different reasons than office. It is similar to industrial in that most leases require the tenants to handle everything inside their suite (ex. light bulbs and HVAC).

The more challenging part comes with many of the tenants being smaller with limited credit. Owners are constantly managing through tenants struggling to pay rent. There is also an art to creating the right tenant mix that is synergistic and helps increase each tenant’s sales. The right anchor can make or break the whole retail center.

Capital Needs

If we think of a grocery anchored shopping center, capital needs are fairly reasonable. More than industrial, but less than office. Tenants generally need a rectangular box to outfit with their furniture, fixture, and equipment (FF&E). Capital requirements would be much more for a mall that has elevators, escalators, and even HVAC.

Lease Structure

Most are NNN, similar to industrial.

Investment Profile

Retail can be a good cash flowing asset. The performance is highly contingent on the anchor tenant(s). They are the main draw to bring in shoppers. If the anchor vacates, the smaller tenants will struggle.

Summary

Reasonable to operate, modest capital needs, good cash flow.

Multifamily aka Apartments

Physical Characteristics

As you read this newsletter, you may be sitting in your apartment. They are where so many of us live. These are typically built out with a kitchen, bathroom, living room, and one or more bedrooms. They have shared walls and often include common area amenities such as pools, gyms, and dog parks. They are in suburban locations like the picture above, or can be built as high-rises in urban areas.

Tenants

You and me.

Operational Complexity

Multifamily is probably the most complicated asset to operate. Tenants live in them 24/7, not just during business hours. Leases are 6-12 months long, so tenants are constantly moving in and out. Kitchen fires and other events happen all the time.

Be kind to your apartment property manager. It is a very tough job.

Capital Needs

They can be minimal or extensive, depending on how the owner chooses to operate. The floor plans and interior build outs don’t change from tenant to tenant as they do in office. Owners may choose to paint and carpet or refresh a kitchen or bath, but they rarely reconfigure a floor plan.

However, the volume and coming and going of tenants beats up the common areas, which can require constant maintenance.

Lease Structure

To oversimplify, multifamily leases are “gross” in structure. Tenants pay the rent and none of the operating expenses. But as those of you who have lived in apartments know, there are often additional charges such as internet, trash, and utilities.

Investment Profile

The multi-tenant nature of multifamily can be magic for steady cash flow. Most owners of 100+ unit multifamily have a target occupancy (ex. 95%) and adjust the rent each day to hit that target.

Summary

Intensive to operate, varied capital needs, good cash flow. I am a big fan of apartments as an LP investor. I think it is an excellent option for cash flow.

1-4 Unit Residential: Single-family Home Rentals, Duplexes, Triplexes, Fourplexes

Physical Characteristics

Duplexes, Triplexes, and Fourplexes are 2, 3, and 4 unit buildings similar to apartments without the common areas amenities. Single-family home rentals are houses that are rented out to a tenant by the homeowner.

Tenants

You and me.

Operational Complexity

Same as apartments, without the common area amenities.

Capital Needs

Same as apartments, without the common area amenities.

Lease Structure

Same as apartments.

Investment Profile

Same as apartments, without the ability to set a target occupancy because of the limited number of tenants.

Summary

Easier than apartments to operate, varied capital needs, good but lumpy cash flow due to the limited number of tenants.

This could be your on-ramp to real estate investing. Here’s why I break it out as its own asset class.

It is much more accessible to individual investors with limited funds. One can buy a single-family home to rent for less than $100,000 in some markets.
If a building is four units or less, lenders view it as a personal loan. They will evaluate your personal credit as opposed to calculating the cash flow on the property. This can be helpful if you are just starting out.

If you want to start investing in properties on your own in an active way (as opposed to as an LP), this will likely be the most realistic path for you.

Other: Medical Office, Shopping Malls, Biotech, Data Centers, Hotels, Self-Storage, Industrial Outdoor Storage (IOS)

As the newsletter is already fairly long, I will give a brief description of these “specialty” assets.

Medical Office: similar to office, but for medical professionals (ex. dentist). TIs are even higher.
Shopping Malls: complicated to operate, high capital needs, challenging cash flow.
Biotech: similar to office, but for the biotech industry. TIs are veryhigh due to the lab build outs.
Data Centers: think of a warehouse full of computer servers. High power and cooling needs. Very expensive.
Hotels: imagine an apartment where the tenants only stay for 1-3 nights at a time and the owner provides cleaning and room service. This is a hotel. It is more like running an operating business than a real estate investment. I have two LP investments in hotels, but I recognize that operating one as a GP would require a tremendous amount of time and focus.
Self-Storage: very small, open industrial suites for storage leased 1-12 months at a time.
Industrial Outdoor Storage (IOS): land leased to tenants to store products.

Summary

Wow! That was a lot to cover.

Is your head spinning?

Don’t worry. There will be no tests.

All you need to do is pick the one or two that you want to explore:

Industrial: Simple to operate, low capital needs, good cash flow.
Office: Complicated to operate, high capital needs, challenging cash flow.
Retail: Reasonable to operate, modest capital needs, good cash flow.
Multifamily: Intensive to operate, varied capital needs, good cash flow.
1-4 Unit Residential: Easier than apartments to operate, varied capital needs, good but lumpy cash flow due to the limited number of tenants.

Intimidated by the operational intensity of any of these? No problem.

Invest in a REIT or as an LP.

If you are just getting started, I recommend you pick a niche that works for you. It would be a combination of:

Asset class.
Geography.
Investment method (REIT, LP, self, partnership, or GP as discussed last week).

Successful real investing requires focus.

Distraction is the enemy of progress.

Use the guide to narrow your focus.

Pick one asset class. Learn everything you can about it. Make your first investment and you will learn so much more.

Your needs will evolve over time. I started with a hotel, then focused on industrial, office and retail, and eventually made my way to multifamily.

Now most of my investments are in industrial and multifamily.

Success requires focus. Diversification can come later.

Email me at bateman@creprofessor.org to tell me which asset class resonates with you and why. I read every response.

Good luck!

Professor Bateman

Matthew Bateman 1/28/26 Matthew Bateman 1/28/26

Cap Rates: The Simple Math of Real Estate Investing

Cap Rate - this is probably the first and most fundamental concept to understand as a real estate investor. You may have heard someone say something like, “I bought the property for an 8% cap rate and sold it for a 5% cap rate” and found yourself nodding but on the inside you had no clue what this meant.

Don’t worry! Like most of real estate, it sounds complicated but it’s actually straightforward once you understand the jargon. (Side note, this is true for many things in life.)

Cap rates are the simple math that drive so much of real estate analysis. And fortunately you don’t need to be a “math” person to understand it. You learned all you need in Algebra I. It can literally be done on the back of a napkin.

Now that I have hopefully eased the concerns of all the math haters, let’s dig in.

Cap Rate is a commercial real estate term. It is short for “capitalization rate”. It is often used interchangeably with “Return on Costs”. Both refer to the investor’s annual return (example 5% per year) on their investment. It changes, and hopefully grows, over time.

Cap rates are also the key method through which real estate investments are valued.

Cap Rate = Net Operating Income Divided by Cost

Mathematically, it is the “net operating income” (NOI) divided by “cost”. Note that NOI changes over time; even cost can grow over time as you invest in renovations. NOI is:

NOI = Revenue - Operating Expenses.

It loosely reflects the cash flow from a property without debt. Note that operating expenses do not include interest you pay your lender or capital expenses (renovations). Don’t worry about this for now.

Cost is what you pay to purchase the real estate, also referred to as your purchase price. But…your costs can grow over time as you renovate the property and pay leasing commissions to put new tenants in place (or renew existing tenants).

Lower Cap Rate = Higher Cost

Let’s look at the math and see how price changes with cap rates using a consistent NOI.

10% Cap Rate = $10,000 NOI / $100,000 Price
9% Cap Rate = $10,000 NOI / $111,111 Price
8% Cap Rate = $10,000 NOI / $125,000 Price
7% Cap Rate = $10,000 NOI / $142,857 Price
6% Cap Rate = $10,000 NOI / $166,667 Price
5% Cap Rate = $10,000 NOI / $200,000 Price

Wow! The difference between the price buying at an 8% cap rate and a 5% cap rate is huge: $125,000 vs $200,000. That’s a 60% price increase for the same NOI.

Key takeaways: (1) lower cap rate = higher cost and (2) this is not linear; price goes up a lot with increasingly lower cap rates. This is great if you are selling and bad if you are buying.

If you can sell at a 5% cap rate instead of a 7% cap rate, you are selling at $200,000 instead of $142,857. This is a 40% increase.

NOI and Costs Can Change Over Time

Let’s go through an example to show the importance of how NOI and costs can change over time as you own a property.

In-Place NOI

You are buying a property 100% leased to one tenant with two years left on the lease. The NOI at time of purchase is $10,000. This is referred to as your “In-Place NOI”.

Market NOI

You believe you can increase the rent when the tenant’s lease expires in two years and increase the NOI to $15,000. This is referred to as your “Market NOI”.

Now let’s transition to your costs.

Purchase Price

You are paying the seller $165,000. This is the purchase price.

Total Acquisition Costs

But…you have to pay various additional costs to buy the property such as legal and inspection fees. Your total costs to buy the property are $170,000. This is your “Total Acquisition Costs”.

Total Costs at Stabilization

And…to hit the rent target you want when the lease expires in two years, you are going to have to renovate the property and pay a broker leasing commission. Let’s assume all of this can be done for $30,000.

Your costs are now $165,000 + $5,000 + $30,000 = $200,000.

Purchase price + closing costs + renovation/commission costs. This is referred to as your “Total Cost at Stabilization”.

Your Math Building Blocks

We’ve covered a lot. Let’s summarize and see what this tells us.

$ 10,000 - In-Place NOI based on the existing lease.
$ 15,000 - Market NOI based on what you think it could lease for in two years.
$165,000 - Purchase Price that you pay the seller.
$170,000 - Total Acquisition Costs including your closing costs.
$200,000 - Total Cost at Stabilization including your renovation and commission costs.

Now we can do some cool and simple things to calculate the cap rates to tell us more about the investments.

Cap Rate Calculations

Going-In Cap Rate (Seller’s View): $10,000 / $165,000 = 6.1%
Going-In Cap Rate (Buyer’s Reality): $10,000 / $170,000 = 5.9%
Stabilized Cap Rate (Buyer’s Goal): $15,000 / $200,000 = 7.5%

The $30,000+ Error

The one that gets the most muddled up in discussions is the last one. People often use the calculation of Market NOI divided by Total Acquisition Costs:

$15,000 / $170,000 = 8.8%.

They forget that they will need to spend an additional $30,000 to achieve that increased rent and NOI. Be careful.

Finding Meaning in the Math

So what does all this tell us?

In this example the buyer’s going in cap rate is 5.9% but will grow to 7.5% once the rent is increased in two years. This shows you how the going in cap rate may not tell the whole story of what the property could be worth, particularly at times when market rents have grown significantly.

From the outside, someone may question you buying in at a 5.9% cap. They might not know that you see a path to get to a 7.5% cap rate, which makes the investment much more attractive.

Key Takeaways

You will hear cap rates talked about regularly. Now you know how simple the math is. Don’t be shy about asking someone to clarify what they are referring to with their calculations.

NOI: in place or market?

Cost: purchase price or all in acquisition costs or total costs at stabilization?

Don’t be surprised if they don’t really know or have even made a math error. Be humble and supportive. We are all still learning.

Professor Bateman

Matthew Bateman 1/21/26 Matthew Bateman 1/21/26

5 Tax Advantages That Make Real Estate Investing So Powerful

How to legally reduce your taxes while building wealth (including one strategy that lets you defer taxes indefinitely)

One of the things that makes real estate investing so special is the way it is treated from an income tax perspective. This is true both during your ownership of a property and at the time of a sale.

There are at least five tax advantages of real estate investing:

Depreciation: reduces your taxable income while you own it.
Refinancing: refinancing a property is not a taxable event.
Capital Gains: as long as you own the property for at least one year, the gain from a sale is treated as long-term capital gains.
1031 Exchange: if you sell a property and buy another one of “like-kind” within 180 days, you are able to defer your tax until you sell the second property.
Step-Up in Basis: when you die, your heirs get a new tax basis at the market value of the property.

All of these can be combined to allow you to keep more of your money.

You don’t need to be an accountant or a math major to take advantage of these. You just need to know they exist and work with a qualified tax accountant to put the tax laws to work.

Let’s dig in.

A quick public service announcement before we get into the details.

In these newsletters, I am guiding you through the world of real estate investing. In some areas, I will be able to give you enough detail to be very knowledgeable.

In others, I will give you the high level overview but will not be able to give you nearly enough details to be self-sufficient without an expert.

Tax is one of these areas.

People spend their whole career learning all the details of tax accounting and the changing laws. There is no way to cover this level of detail in a newsletter.

So take this information for what it is: an initial guide to help you identify opportunities and ask the right questions of the experts.

Here we go…

The Basics of (Federal) Income Taxes

In order to understand the tax advantages of real estate investing, we need to cover some basics of federal income tax.

Do you really know how income taxes work in the United States? Maybe you understand the concept, but not the details.

Here are the basics.

The money you earn (income) is treated in four main ways:

Ordinary Income: your salary/bonus.
Passive Income: real estate income, royalties, passive businesses.
Dividends: from stocks.
Capital Gains: from selling stock, real estate, a business, etc.

It can get more complicated than this, but these four are the basics that will affect most people including real estate investors.

Ordinary income is the least tax efficient, which is taxed up to 37% at the highest tax bracket.

For many taxpayers, the long-term capital gains rate is 15%, but it can be 0% for lower incomes.

Big difference.

Note that dividends from stocks are unique. Some are taxed as ordinary income. Some are taxed as capital gains.

Now most of us won’t pay 37% tax on our ordinary income. Federal income tax works on a sliding scale. As of 2025, it starts as low as 10% and scales up to 37%.

Example: if you are single and earn $100,000, your taxes will be:

10% on the first $11,925 = $1,192.50
+ 12% on the amount between $11,926 and $48,475 = $36,550 x 12% = $4,386.00
+ 22% on the amount between $48,476 and $100,000 = $51,525 x 22% = $11,335.50
= Total tax of $16,914 or 16.9% effective tax rate.

Once you have higher income, taxes get much higher. For example, a married couple making $500,000 would pay 22.8%. If they earn $1M, they would pay $29.4%.

You can find the data to do the math on your income here: https://turbotax.intuit.com/tax-tools/calculators/tax-bracket/

But what about passive income from real estate investing?

Passive income generally follows the same tax brackets as ordinary income but has the ability to be reduced by passive losses (example: depreciation). We will get more into this in the next section.

Remember that all of this is only the federal tax, not state tax.

What about state taxes? They are different in each state. Some are zero (Texas, Florida). Some are on a sliding scale (California). You will have to research that on your own.

Now we have the basics of how taxes work, let’s explore the five magical aspects of taxes as they relate to real estate investing.

Depreciation

Key Benefit: reduces taxes on cash flow from real estate investments. You pay less (or no) tax on the cash flow you get while owning the property.

The concept behind this is that you have to pay money to buy the property, but the property will depreciate (i.e. get run down) over time. From a maintenance perspective, it would be better to own a brand new building than one that is 30 years old.

So here is how it works.

You buy a property for $3,900,000. After discussing with your tax accountant, you allocate $1,150,000 of the cost to the land and $2,750,000 to the building. You only depreciate the building, not the land.

If it is an apartment or a 1-4 unit residential investment, you can depreciate it over 27.5 years per the tax rules. Office, industrial, and retail are depreciated over 39 years.

Continuing our example: $2,750,000 allocated to the building divided by 27.5 = $100,000 per year.

This $100,000 is a non-cash expense that you deduct from your income each year.

Let’s say you are earning 7% per year on the $3,900,000 investment = $273,000 per year. You reduce it by the $100,000 of depreciation to $173,000 of taxable income.

$273,000 cash flow - $100,000 depreciation = $173,000 taxable income.

You don’t have to pay tax on $100,000 of the income which would have been taxed at the 24% or even 32% tax bracket. Pretty cool!

It gets even more powerful if you have a loan on the property.

For example, you borrow 50% of the cost of the property. 50% x $3.9M = $1.95M. For simple math, assume your interest rate is also 7% so you have “neutral” leverage.

Don’t worry if you don’t understand the debt part. We will get to it in a later session.

Instead of earning $273,000 per year, you only earn half of this as the other half goes to pay debt service.

50% x $273,000 = $136,500.

Reduce the $136,500 by $100,000 in depreciation leaves you with only $36,500 of taxable income.

$136,500 cash flow - $100,000 depreciation = $36,500 taxable income.

Amazing!

It is almost tax free.

If can get even more powerful if you do a “cost segregation study”, which allows you to depreciate some parts of the buildings like plumbing, flooring, and interior walls faster. We won’t go into the details here. All of this is based on the Modified Accelerated Cost Recovery System in the U.S. tax code.

Can I use depreciation to reduce the taxes related to my salary/bonus (ordinary income)?

No.

You cannot use depreciation (passive losses) from real estate to offset your salary/bonus (ordinary income) unless you meet certain qualifications as a real estate investor. Most people will not meet these qualifications. Consult with your tax accountant to understand if you qualify. Passive losses can only offset passive income.

Key Takeaway: depreciation is a non-cash expense that will reduce your taxable income and taxes from real estate investing each year while you own an investment property.

Most of the income I get from my LP investments discussed in past newsletters is shielded by depreciation, allowing me to keep all of the cash flow I get while paying little to no tax on it. See 5 Ways to Invest in Real Estate (From $60 to All-In).

Refinancing

Key Benefit: proceeds (i.e. cash) you receive from a refinance are not considered a taxable event.

We will keep this one short and sweet.

You increase the value of a property and put more debt on it. Example: you increase the debt from $1,000,000 to $1,500,000.

You payoff the original loan and have a “cash out” refinance of $500,000.

$1,500,000 new loan less $1,000,000 original loan = $500,000 of excess cash you keep.

The IRS does not view this as a taxable event. Wow!

You will still need to pay off more debt eventually, but it is nice to have the cash now to reinvest.

I have had many “cash out” refinances in my investing history.

Key Takeaway: refinances are a tax efficient way to pull cash out of a property that has increased in value.

Capital Gains

Key Benefit: if you own an investment property for at least one year, you pay a lower tax rate on profits from the sale of that property as compared to ordinary income.

This is true for not only real estate investments, but almost all investments. Other examples are:

Sale of a business you created or bought.
Sale of stock.

There are two terms to learn here:

Long-term capital gains relate to investments held for at least one year.
Short-term capital gains relate to investments held for less than one year.

Long-term capital gains have a sliding scale just like ordinary income but it ranges from 0% to 20% depending on income. Higher earners may pay an additional 3.8% (Net Investment Income Tax), making the maximum 23.8%. To geek out on the details, you can go to the IRS page here: https://www.irs.gov/taxtopics/tc409

For the rest of you, just remember that long-term capital gains are what you want when you sell a property as they are almost always lower than short-term capital gains which are taxed the same as ordinary income discussed above, which ranges from 0% to 37%.

One more thing…

The negative side of depreciation comes into play here. Remember the $3.9M property example from the depreciation section. Let’s assume we held the property for three years and enjoyed the benefit of $100,000 per year of depreciation for a total of $300,000.

Our tax basis at time of sale is $300,000 less than when we originally bought the property.

$3,900,000 minus $300,000 = $3,600,000.

If we sell the property for $4,900,000 we will have $1,300,000 of gain.

$4,900,000 minus $3,600,000 = $1,300,000.

This is $300,000 more of gain than if depreciation did not exist.

But, we are paying a lower tax rate on this $300,000 as compared to the savings we got by not paying ordinary income on that same $300,000. It is more complicated than this, but it typically works to a taxpayer’s advantage.

Key Takeaway: if you are going to sell your investment property, try to hold it for at least one year to make your capital gains long-term, which are taxed at a lower rate than if you held it for less than one year.

Is there even a way to avoid long-term capital gains? Not exactly, but they can be deferred.

1031 Exchange

Key Benefit: if you sell your investment property and buy another one of “like-kind” within 180 days, you defer the taxes from the sale until you sell the second property.

This is pretty cool. As far as I know, this is unique to real estate investing.

Let’s continue with our example.

You bought a property for $3,900,000 and sold it after three years for $4,900,000. You find a new property to buy for $4,900,000 and “1031 exchange” into that new property.

This is not a taxable event because it is not considered a sale for tax purposes.

No sale.

No long-term capital gains.

No tax.

You can do this over and over again from property to property.

Just be careful to follow the rules and meet the qualifications:

It must be of “like-kind”. In simple terms, it must be another investment property.
You must use a “qualified intermediary”. Think of this as a 3rd party you pay to make sure you follow the tax rules.
The new (replacement) property or properties must be of the same or greater value as compared to the one you are selling.
You must identify the new property within 45 days of selling your property. You can identify up to three properties.
You must buy the new property within 180 days of the sale of the old property.

This can be a complicated and expensive process as you will be paying the qualified intermediary, but the tax deferral benefits can be significant.

Additionally, if you don’t do a 1031 exchange when you sell the second property, then your capital gains will be even higher than if you had just bought the second property with “fresh” cash because your tax basis will be equal to the tax basis from the first property.

Said another way, the old tax basis from the property you sold carries forward to the new property you bought.

Key Takeaway: if you buy a new property within 180 days, you can defer the capital gains tax from a property you are selling.

But what if you never want to pay long-term capital gains? There is an option, but it has its downsides.

Step-Up in Basis

Key Benefit: when the owner of a property dies, the heirs (or surviving spouse) get a step-up (increase) in tax basis to the market value of the property at time of death.

I told you that you weren’t going to like it.

You or a loved one are dead.

Here’s how it works:

The property owner dies.
The property is valued at market as of the date of the owner’s death.
The tax basis of the heirs (or surviving spouse) is the market value.

This is true for not just real estate, but anything owned by the person who dies including stocks, a home, a business, etc.

Note that this is different from estate (inheritance) tax. Estate tax is a 40% tax that the estate (not the heirs) pays on inheritance over an amount set by the IRS. As of 2025, it is just under $14M per person ($28M for married couples). This reduces the amount the heirs ultimately receive.

Example: if you and a sibling inherit $20M of assets from an unmarried parent, the math would be:

$20M less $14M IRS allowance = $6M x 40% = $2.4M in estate tax.

$20M less $2.4M in estate tax = $17.6M in after tax inheritance.

Remember that 1031 exchange we did? The tax basis would be increased to the market value at time of death. This is the way to ultimately avoid the capital gains tax from the sale of a real estate investment.

Just remember it comes with a meaningful cost: you or a loved one need to die.

Key Takeaway: when someone dies, all assets they pass on to their heirs or surviving spouse (including real estate investments) gets a “step-up” in tax basis to the market value at time of death.

Summary

We have covered a lot.

Let’s recap the summary we started with:

Depreciation: reduces your taxable income while you own it.
Refinancing: refinancing a property is not a taxable event.
Capital Gains: as long as you own the property for at least one year, the gain from a sale is treated as long-term capital gains.
1031 Exchange: if you sell a property and buy another one of “like-kind” within 180 days, you are able to defer your tax until you sell the second property.
Step-Up in Basis: when you die, your heirs get a new tax basis at the market value of the property.

You don’t need to be an expert in any of this. You just need to remember that they exist and work with a tax accountant who understands real estate investments.

Side note: as a real estate investor, you want to assemble the right team. Turbo Tax or the tax accountant you are currently using as a salaried employee and stock investor may not be the right fit for you as a real estate investor. Ask around and take the time to find the right accountant.

Most important: remember that real estate investing has many tax advantages that will benefit you both during your ownership of a property (depreciation reduces taxable income) and when you sell a property.

Are there more tax advantages I am missing? Email me at bateman@creprofessor.org to let me know. As a life-long learner, I am always looking to grow.

Professor Bateman

Special thanks to my anonymous friend and real estate tax specialist who helped me fact check this and add clarity where needed. You know who you are. I appreciate you!

Matthew Bateman 1/14/26 Matthew Bateman 1/14/26

5 Ways to Invest in Real Estate (From $60 to All-In)

Which investor are you: Hands Off Harry, Rockstar Reggie, or All-In Alex? Here's how to choose your path.

By now you may be getting excited about making your first real estate investment.

Good news!

If you are reading between Monday and Friday 9:30 a.m. to 4:00 p.m. Eastern time, then you can invest right now.

How?

The most passive and liquid way to invest in real estate is by buying shares of a real estate investment trust (REIT). By buying shares of a REIT you will own a small piece of a company that owns and operates real estate.

REITs are just one of the many ways to invest in real estate.

Let’s dig in to the many options.

Ways to Invest in Real Estate: From Passive to Active

Owning shares of a REIT.
Investing as a limited partner (LP).
Buying a property by yourself.
Buying a property with someone as equal partners.
Buying a property as the general partner and raising money from LPs.

Option 1: Owning Shares of a REIT

REITs are public companies that exclusively focus on real estate. They are required to distribute 90% of their taxable income to shareholders (i.e. you) as dividends.

An example of a REIT headquartered here in San Diego, CA is Realty Income Corporation (NYSE: O). As of this writing, their stock price is trading around $61 per share and they have a 5.28% annual dividend ($3.24 per share) that is paid monthly.

A benefit of REITs is that they are public stock, so you can sell them at any time. If you are investing in an S&P 500 index fund, then you have exposure to around 30 REITs.

Who knew you were already a real estate investor!

Option 2: Investing as a Limited Partner (LP)

Investing as a LP is another passive way to invest in real estate. The general partner (GP) does 100% of the work and makes all decisions*. In exchange for doing all the work, the GP earns fees and often collects an oversized share of the profit if the deal does well (this is known as “promote”).

So what is the tradeoff of being a LP? Control and liquidity.

You don’t have any control over decisions.
You can’t access the money until the property is sold.
The fees and promote paid to the GP reduce your returns.

But on the positive side:

It is totally passive. A pipe bursts at a property at 3am? The GP has the deal with it.

I have made 20+ of my investments as an LP. In my experience it is a great way to invest in real estate while keeping focused on your day job.

So how do you find these opportunities?

In my case, I met people through working in the industry. When I heard of people or companies buying the types of properties I was interested in, I asked if I could invest. Some said no. Some said yes. Over time I built up a portfolio of LP investments.

There are also crowdfunding groups out there that connect GPs and LPs. A couple examples are Realty Mogul and Crowd Street.

One of the challenges that you will need to work through is that most of these groups require you to be an “accredited investor” as defined by the SEC. Generally, you need to have a net worth over $1 million (excluding your primary residence) OR have earned $200,000 (or $300,000 jointly) in each of the two most recent years. Not everyone can meet these criteria.

If this is your situation, don’t be discouraged.

Options 1, 3, and 4 don’t have these restrictions.

Many successful real estate investors started by focusing on increasing their earnings through their day job or with a single property investment (option 3) and built their way up to becoming an accredited investor over time.

Option 3: Buying a Property by Yourself

There are no SEC requirements for buying a property by yourself. It is effectively like becoming a parent: not everyone is qualified, but anyone can do it.

This is more work than investing as an LP, but you can figure out ways to make it relatively passive so that you can focus on your day job.

The Remote Investor Approach

In this scenario, you find a company that is both a broker and property manager. They show you lots of properties to buy. You select one and they help you with the due diligence, closing, loan, inspections, etc. Once you close on the property (i.e. you own it), they handle all the day-to-day and reporting. All you do is tell them what decisions you want to make.

You could take this approach in the local market you live in or even out of state.

I know someone who bought a number of rental homes in another state this way and didn’t see the properties for the first two years of ownership.

This is not for everyone.

I don’t think I could handle not seeing the properties before I bought them, but for others this is fine. If you go this route make sure you find a group you can trust.

There are many examples of people who bought homes in the Midwest US for $100,000 ($30,000 of equity/cash) interviewed on the Bigger Pockets podcast.

Keep in mind that this is only a “passive” version based on the amount of your time it takes. For some this would be an “active” version because of the stress it could cause.

The Hands-On Local Approach

In this scenario, you buy a property in the same town you live in. You can see it, touch it, get to it within an hour if needed.

You minimize the support you get from 3rd parties (brokers, property mangers, accountants, etc) because you don’t want to pay any fees so you can maximize your cash flow and profit. You don’t trust anyone to pay attention to the real estate like you will.

So far so good.

And then something goes wrong at the property. Eventually something will ALWAYS go wrong.

Here’s an example: You own a duplex. A pipe bursts and floods the property. The tenant calls you at 3am or when you about to deliver a presentation at work. Even if you have a group of great vendors, you still have to figure out how to deal with it.

I experienced dealing with a roof leak at a property I own while on vacation with my family over the winter break. It sucked. As soon as I returned from vacation, I hired a property manager to get me out of the “front line” of managing the property. I happily pay them each month for this peace of mind.

So which is the best option?

There is no right answer. It is all tradeoffs. You need to understand what is important to you.

There is nothing wrong with deciding that investing in REITs and as an LP (options 1 & 2) is best for you right now. You can always change options over time.

Option 4: Buying a Property with Someone as Equal Partners.

Let’s continue up the scale of becoming a more active investor.

In this case, you and a friend decide to buy a property 50/50. Ideally you have complimentary skill sets and pre-agree to how you will divide up the work.

You only have to come up with 50% of the equity/cash and you have a partner to brainstorm with.

Partnerships can be excellent.

They can also be very challenging.

They are like a marriage. You are together for the life of the investment. Remember: real estate cannot be converted to cash instantly. It takes time to market and sell a property. See lessons 14 & 15 from my previous newsletter.

My advice: only partner with someone you really trust. This should be someone you would trust with your bank account. And always, ALWAYS have a written partnership agreement that clearly documents decision making, including the right to sell the property.

When you have an equal partner, you both need to agree on what to do. Decisions that will come up:

The roof is leaking. Do you patch it or replace it?
A tenant pays late each month, but always pays by the end of the month. Do you renew them at the end of their lease or vacate the property and try to find a better tenant?
The property has increased in value by 50% since you bought it. Do you sell it? Refinance? Do nothing and enjoy the higher cash flow?

There are many, many issues that will come up. When you have a partner it is not just your decision. You and your partner need to agree.

Things may start out well, but you and your partner may have very different circumstances a few years into owning the investment. Examples:

Your partner gets married and wants to sell the property so she has cash to buy a house. You are still single and like the flexibility that the cash flow from the property provides.
You want to invest the cash flow into the property to make it the best in the neighborhood. Your partner wants to squeeze every penny from the property, making you feel like a slumlord.

Bottom line: decision making will be more complicated by having a partner than if you own the property by yourself.

BUT the right partnership can give you an ally and sounding board as you begin your real estate investing journey.

Option 5: Buying a Property as the General Partner and Raising Money from LPs.

This is the opposite of option 2: investing as a limited partner (LP) where someone else does all the work. In this case you are the general partner (GP). You do all the work.

You find the deal and operate it. You find LPs to invest in the deal. You collect fees and earn an oversized share of the profit if the deal does well (the promote).

Fees and promote? Sounds pretty good.

So what’s the catch?

It is a TON of work.

Here’s some examples of what you will need to take on if you are the GP:

You do all the work.
You typically enter into a purchase agreement to buy a property before you have raised all the equity/cash required. Although you still have the right to back out before your due diligence period expires (typically 30 day), you are still putting your reputation on the line. You don’t want to earn a reputation of someone who always backs out of deals.
You will need to “dial for dollars” to find the LPs. This will occur simultaneously with performing the due diligence AND finding a loan. You will feel stretched in many directions.
You will need to keep the investors up to date on the deal. Even when you do this in a structured way, it can consume your time in unintended ways. Example: you are out for a walk and coffee with your spouse on a Saturday morning. You run into an investor who wants an update on why the deal is not performing as planned. So much for your peaceful morning...

There are many more things you will do as a GP. It can take up a ton of time and is tough to do if you have a traditional W2 job.

Putting together deals as a GP is not for the faint of heart. You need to be all in and stick with it for the long haul.

So Which is the Right Option for You?

It all depends on your goals and needs. Here are some examples I created to help you think about it.

The Passive Approach (Options 1 & 2)

“Perfectly Passive Penny” - Penny invests in real estate exclusively by buying shares in REITs. She holds these shares for the long term.
“Hands Off Harry” - he invests exclusively as a LP with people he trusts. He stays focused on earning money in his day job, while regularly investing in both real estate and the stock market. His tax returns are made more complicated by his LP investments, but he feels this is an acceptable trade-off. See lesson 16 from my previous newsletter.

The Side Hustle (Options 2, 3, & 4)

“Freakout Frank” - just like Harry, he invests as a LP. Unlike Harry, he constantly calls the GP for updates and ask confrontational questions. He invests as a LP, but acts like a GP. Note: if you go the GP route, avoid taking money from a Frank.
“Active Alice” - she buys a duplex and lives in one half. She does all the home improvements at nights and on the weekend. Eventually she will sell her duplex and buy a four-plex.
“Patient Peter” - he uses money he has saved from the last two years of bonuses in his day job to buy a rental property out of state. It doesn’t take up much of his time because he hires a team to manage it. As the property increases in value, he refinances it and uses the refinance proceeds to buy another property. Over time, he assembles a portfolio of properties that provide him passive income equal to his salary.

All In

“Rockstar Reggie” - Reggie works for a real estate company. He is humble, driven, and constantly looks for ways to add value to the company and the properties. His work has been recognized, and he is now able to invest alongside the owners as a GP and participate in a small portion of the promote.
“All in Alex” - Alex creates her own real estate company and raises money from LP investors. She has saved up money to live frugally for two years while she gets her real estate company off the ground.

So Who are You?

You don’t need to pick just one.

I started as a Harry, soon became a Reggie, and then took money I made as a Reggie to become more of a Harry. Passive to active to passive.

Be a student of yourself. Don’t try to get rich quick. Successful real estate investing is best done as a long game. See lesson 3 from my previous newsletter.

Remember, patience is a superpower.

Combine that with self reflection, clarity of thinking, focus, and hard work…then you have a magical combination.

Good luck on your journey to becoming a real estate investor!

Professor Bateman

Matthew Bateman 1/7/26 Matthew Bateman 1/7/26

23 Lessons Learned from 23 Years of Investing in Real Estate

23 years ago I made my first investment into real estate. It was in a hotel that my friend was buying. It was both exciting and scary. Although I understood concepts like cap rate and IRR, I had no real sense of my goals other than “to make money”.

Since then, I have personally made 59 additional investments into real estate. They have varied in size and scope:

Amount per deal: $5K to $200K+.
General partner (GP) vs limited partner (LP): both. [Note: A GP puts the deal together and runs the day to day. An LP is more of a passive partner.]
Individual deal vs a fund: both.
Asset Type: industrial, apartments, office, retail, and hotels.
Target Hold Period: 1-3 years all the way to “hold forever”.
Loan to Value: 0% to 80%+.
Risk Profile: value add all the way to core (ie high to low risk).
Goal: long term income, shorter term equity multiples, and many deals in between.

Some deals have gone very well. For others I have lost some of my investment.

Here are the key lessons I have learned so far. Use or modify the ones you want. Discard the rest. In the weeks and months to come, I will dive deeper into many of these topics in individual newsletters. My goal is to share information I wish I knew when I got started as a real estate investor.

THE FUNDAMENTALS

#1 - Investing in real estate is an excellent (and tax efficient) way to (a) provide passive income aka mailbox money and/or (b) grow your net worth. Seeing money come into your bank account on a regular basis from investments you have made feels incredible. Once you have a multitude of individual investments, “chunks” of money come in fairly regularly from refinances and sales.

#2 - Being a real estate investor has given me a sense of engagement and agency that I have been unable to find in stock investing. Even as an LP, I have been able to craft a portfolio that meets my goals.

#3 - Real estate investing is not a quick path to wealth. I didn't make my first investment until I was 30. It takes time. Patience is a super power.

#4 - The power of compounding is magical. This applies to all types of investing and almost everything else in life, including learning. Stay consistent. Trust the process. The money will come. Just don’t put yourself in a situation where you may lose all your money and knock yourself “out of the game”.

THE NUMBERS

#5 - The math you learned in Algebra I is effectively all you need. Understand the concept of return on cost (aka cap rate): NOI / Price. I will be doing a newsletter on this subject very soon.

#6 - There are more tax advantages than I originally thought (depreciation, long-term capital gains, refinance proceeds, 1031 exchanges, step up in basis).

#7 - It is easy to distinguish the good deals from the bad. The “home runs” from the just “OK” deals. But you can only do this after the deal is done. As much as you can try to only pick the winners, I have found this to be nearly impossible. Of the deals I have done that have come full cycle (ie been sold already), roughly 25% have been home runs, 40% have been good, and 35% I have lost around 20% of my equity. Going in to these deals at time of acquisition, I thought they would all be good or great deals. There are just too many things outside your control. Here’s the important part: This batting average is normal and acceptable - you don’t need to hit 100% to build wealth and achieve your goals.

ASSET TYPES & DEAL STRUCTURE

#8 - Asset types have different characteristics. Multifamily tends to have the most consistent cash flow. Office is a “capital pig”…tenant and building improvements can be huge making it very challenging to achieve cash flow. I will write a more extensive newsletter on my take on each of the asset classes.

#9 - Debt can be a wonderful tool and your worst enemy. There is a reason they call it “leverage”. It can turn a good deal into a great deal and a bad deal into a train wreck.

#10 - There is a place for both GP and LP investing. I have done both. LP investing will take little to none of your time. The cost you pay is in fees and promote. GP investing will take a ton of your time (running the property, working with investors), but the upside can be significant.

MINDSET & STRATEGY

#11 - Be clear on your goals. Many people want to invest in real estate, but only some of these people know what they want: recurring cash flow vs quick flip to double (or more) your equity vs something in between. Understand the goals of the GP and make sure they align with your goals. If you want long term recurring cash flow but the GP wants to sell the property in two years, that may not be the right fit for you - even if it is a “great” deal.

#12 - Your goals may change over time. For the first 15 years, I was focused on turning $1 into $2 as fast as possible. I didn’t have much equity, so I needed to grow that equity. Once I did, then I focused more on investing for passive, tax efficient income in “hold forever” assets to reduce my dependence on my salary.

#13 - Be emotionally (and financially) OK losing money on a deal. Investments are unpredictable. Real estate goes through cycles. The unexpected happens. Being a real estate investor requires mental fortitude (true for most types of investments). Fear is real, especially if it is your first deal and feels like a lot of money to you. Use this fear as a way to develop better self awareness and an understanding of the types of investments that are the right fit for you - not only your financial goals but also for your ability to sleep well at night. Don’t ignore the importance of peace of mind.

#14 - You have to get comfortable with a lack of liquidity. If you own public stock, you can convert it to cash in 24 hours. Not true for real estate. The lack of liquidity can be a real downside. Need the money to pay for your kids college now? Too bad. You have to wait. But…there is a positive side to the lack of liquidity - you can’t panic and sell at the market bottom. Your only choice is typically to ride it out.

#15 - Never do a deal with someone you don’t trust, no matter how good the deal looks. If you don’t know them, ask around and find someone you trust who can vouch for them. See lesson #14 regarding liquidity - there is no quick exit.

PRACTICAL REALITIES

#16 - You will likely need to extend your tax returns. Unless you are buying deals yourself without a partner, you will be issued a “K-1” reflecting your percentage of ownership of the deal. These take a lot of time to prepare and often show up at or after the April 15th tax deadline.

#17 - Budget more money for paying your tax accountant. Long gone are the days of my tax return consisting only of a W-2 (salary) and a 1099 statement (interest, stocks). I have 25 active investments that each issue a K-1. It is logistically complicated for both me and my tax accountant. Want to keep your tax return simple? Stick to public stocks.

SHOULD I QUIT MY DAY JOB?

#18 - It takes a LOT of money to replace W-2 income. Let’s say you make a salary plus bonus of $100,000 per year before tax. If you want to replace this with a real estate investment that yields 5% cash on cash, you would need $2,000,000 ($2M x 5% = $100K). Even a 10% cash on cash deal would require a $1,000,000 investment. The path that has worked for me is to find a place where I can meaningfully contribute AND earn a salary AND get my healthcare paid for AND invest on the GP side AND invest outside of the company as an LP. It would have been much harder to have made the investments I made without a salary/bonus. My family and I would have had to make more financial sacrifices along the way.

#19 - Working as part of a team at a company can be a ton of fun and a fantastic place to learn. You get much more exposure than you would on your own. Your learning curve is measured more by deals per time than almost anything else. You want this ratio to be high. As I read somewhere, think of a salary as a trust fund that pays you to learn.

#20 - Understand your own skills, interests, and weaknesses. Put yourself in a situation that leverages your skills and interests. Build your own team around your weaknesses and areas of little interest.

#21 - No one will (nor should) pay as much attention to your money as you will. Talk to lawyers, consultants, tax advisor, and others but know that you should be the one who makes the final decision for your money.

THE ULTIMATE GOAL

#22 - Size matters more than percentages. A 10% return on $10,000 is $1,000 per year. A 5% return on $500,000 is $25,000. It is easy to get caught up in percentages. I have found it is more important to pay attention to the total dollars.

#23 - Owning an asset without a partner and debt-free is the ultimate form of freedom. You call the shots. Combine this with having enough passive income to cover your expenses and you have achieved financial independence. This doesn’t mean you have to retire to play golf. It just means that you call the shots in how you spend your only non-renewable resource: your time. Life is short. Being able to do what you want to do when you want to do it is the ultimate freedom.

Professor Bateman

Stop Chasing Every Deal: Why Successful Investors Pick a Niche

How to choose your asset class, geography, and strategy—and why focus beats FOMO

You Don’t Have to Do Everything Yourself: Building Your Real Estate Team

How to assemble the right specialists so you can focus on what matters

Asset Classes Explained: Industrial, Office, Retail, Multifamily, and 1-4 Unit Residential

Which real estate type matches your investment goals, time, and capital?

Cap Rates: The Simple Math of Real Estate Investing

5 Tax Advantages That Make Real Estate Investing So Powerful

How to legally reduce your taxes while building wealth (including one strategy that lets you defer taxes indefinitely)

5 Ways to Invest in Real Estate (From $60 to All-In)

Which investor are you: Hands Off Harry, Rockstar Reggie, or All-In Alex? Here's how to choose your path.

23 Lessons Learned from 23 Years of Investing in Real Estate

Ready to think about becoming a real estate investor? Read my newsletter.