As an asset class, an investment in commercial real estate offers several benefits: income, capital gains, tax advantages, and portfolio diversification. As a private equity firm who specializes in the purchase and management of commercial real estate, we believe that there is a strong argument for the inclusion of this asset class as part of a broadly diversified portfolio of risk assets.
But, purchasing a commercial real estate property can be complicated and difficult. It can take years of experience and dozens of transaction repetitions to get it down to a science. Fortunately, we have both. In the article that follows, we have simplified the commercial real estate property purchase process into 10 steps. Once finished, readers will have a good feel for the effort and detail that goes into making a commercial real estate property purchase.
With an indirect approach, commercial real estate investors allocate capital to an investment manager who pools it with capital from other investors and uses it to purchase institutional grade commercial assets like multifamily apartment buildings, industrial property, or office buildings. The investment manager can range from a mutual fund to a private equity firm or a real estate investment trust or (REIT). The upside to this approach is that it provides the benefit of commercial real estate property ownership without the hassle of managing it. In addition, it can provide higher levels of portfolio diversification and, in some cases, liquidity. However, the downside is that investors have little control over how their capital is deployed.
If a direct investment approach is taken, it is up to the individual investor to create their own team. The exact composition of the team may vary by investor, but it usually consists of real estate brokers, real estate attorneys, property managers, and realtors. It is the job of these real estate professionals to assist the investor with the property identification, underwriting, and management processes.
Whether purchasing a commercial real estate property directly or working with an investment manager to do it indirectly, there are a number of questions that should be asked throughout the purchase process.
Broadly, there are four types of commercial real estate property: Office, Retail, Industrial, and Multifamily. Each type of property has its own underwriting criteria, operational quirks, performance metrics, and financing requirements. To determine whether or not a property is potentially a good investment, it is necessary to understand the type and the quirks that go with it.
From a risk standpoint, investors should carefully consider how much capital they are willing and able to invest. While commercial real estate is a traditionally stable investment, it is not without risk. Loss of investment capital is always a possibility and investors should carefully consider how much they want to commit to a deal.
This is the main question that every investor wants to know the answer to. Commercial real estate investment returns are measured using a number of metrics, which include: Net Operating Income, Internal Rate of Return, Equity Multiple, leasing activity, Debt Service Coverage Ratio, and Capitalization Rate (Cap Rate). The results of these calculations should meet an investors minimum requirements or it may not make sense to proceed with the deal.
The above steps are necessary to purchase a commercial real estate property outright. However, commercial properties are expensive and a purchase may not be feasible for everyone. As an alternative, there are a number of ways to invest in commercial real estate that require less capital than a purchase. Two such options are to invest in a REIT or with a Private Equity Firm.
A REIT is a specialized type of commercial real estate investment firm that offers tax benefits to investors as long as they pay out 90% of their income as dividends. Individual investors like publicly traded REITs because they provide exposure to commercial real estate assets and shares can be bought and sold on major stock exchanges. This provides a degree of liquidity that is not typically available in a commercial real estate investment.
A Private Equity Firm is also a specialized type of investment company that purchases and manages commercial real estate assets. However, they are structurally different from REITs in the sense that they are not required to pay out a high percentage of their income as dividends. In addition, they are only available to Accredited Investors who meet certain income and/or net worth requirements. We are a private equity firm and we focus on buying and managing grocery store anchored commercial shopping centers.
Investing in Michigan commercial real estate is no minor undertaking. Few prospective purchasers sign agreements to buy commercial, retail, or industrial property on a whim. Nor do they do so without conducting substantial due diligence to evaluate the transaction's risks and potential rewards and determine whether it is likely to result in steady, lucrative returns.
\"Location, location, location\" is a fundamental platitude about real estate for good reason. For commercial property, an investment's success or failure often comes down to whether the property is in an area that can attract desirable renters and consistently deliver high occupancy rates.
When you purchase commercial real estate, you also acquire the day-to-day and long-term responsibilities of managing the property. Especially for first-time commercial property investors, it is important not to underestimate the time commitment involved in commercial property management.
There are no guarantees or givens when investing in commercial real estate. No matter how much due diligence you do, no matter how many times you crunch the numbers, your acquisition could be a huge and lucrative success or a costly and burdensome albatross. Make sure you know how much debt you can afford to assume and how much you are prepared to lose if things go south. Consider establishing a reserve to cover unexpected expenses or repairs.
The real estate lawyers at Williams, Williams, Rattner & Plunkett understand the multitude of issues commercial property investors face in Michigan. We have the experience and insights to minimize our clients' risks and maximize the return on their investments when purchasing commercial real estate of all kinds.
Commercial real estate investing can be a lucrative venture for those with the right experience or for those who hire expert advisers. If you are new to investing in commercial real estate properties, there are a number of factors that you should consider before investing, including the risks and benefits of the investment, the type of property you want to acquire, and the best way to protect your personal assets. Each type of commercial property brings with it unique challenges and it is best to surround yourself with experienced investors and professionals to help guide you through the process.
Many successful commercial real estate investors find their most profitable, cash-flowing deals out of state. Unfortunately, out of state deals can also be the biggest headaches and the biggest financial losses. This blog is meant to help you differentiate between a good deal and a bad deal. These tips will also teach you to stay on the successful side of purchasing commercial real estate out of state.
Get a coach that can sit down and share the inner workings of the industry. You need to realize and acknowledge that this is a team sport. It is very risky to try to invest in commercial real estate on your own. You need a coach or mentor to help you step by step and also protect you from common mistakes.
I liked how you described the word deal flow and how getting a property in a low-cost area like the inner states could be beneficial to them instead of spending big money for places like NY. I will have to pass this along to my brother who is searching to move his business out of NY and go somewhere a bit cheaper to buy a commercial building.
If you found a better real estate deal then just invest in it irrespective of the distance. The location is an important aspect of the real estate business and the location of the property plays a detrimental role in any kinds of real estate business. A person should do some research regarding the market situation of that particular location prior to making any commercial property. Besides, I do agree that a person should not invest beyond his knowledge.
You are correct about buying commercial real estate often being the biggest financial investment that people have ever made. My sister has been worried that she is making too much of an investment in buying a new office space for her company. I think she should be sure that there is nothing wrong with the property before she actually goes through with buying it, and maybe even double checking.
One of my friends is interested in getting into the real estate market. It was super helpful when you pointed out that he should make sure he goes and looks at properties he wants to purchase, as it will help him see if the property is in good condition. Thanks for the great tips on buying commercial property.
I appreciate your suggestion to buy a commercial property after conducting a proper inspection. Location plays an important role to determine the profit associated with such kinds of investment. Other factors along with the location should also be considered prior to the investment in the real estate. Research is the key to get a better deal. So, one should do a lot of research prior to investing in a commercial real estate business. Guidance from experienced professionals could be very useful.
You will find the standards for real-estate-related lending and associated activities by national banks in Real Estate Lending and Appraisals (12 CFR 34). For additional commercial real estate resources, see Appraisals.
Commercial Real Estate Lending (Comptroller's Handbook, January 2017)Focuses on the analysis of project financing and the legal approaches a borrower may take to hold legal title to the real estate 59ce067264