Commercial Investments 101
By Mark Hulsey, Managing Broker
A couple of months ago I wrote an article titled, What is the Best Real Estate Investment? That’s one big fat loaded-question, if I’ve ever heard one. How in the world can there be a “best” investment when the real estate universe is enormous with so many different investment possibilities in our global market?
Real estate investments and owning your own business are two of the best methods for creating wealth today. While there are plenty of other options, I’m talking about tried & true wealth-building like we’ve witnessed in the US for well over 100 years. Fortunes have been made owning single family homes, duplexes, and apartment buildings, as many people are familiar with. Gigantic wealth has been built in commercial real estate with investments in office, retail, industrial, and land. Like all investments, real estate ebbs & flows with its return-on-investment. However, two things we can count on with investment real estate is appreciation and risk.
I can’t tell you how many people I’ve met during my career that owned a few houses or duplexes for a couple of years and couldn’t wait to get rid of them – the headaches, the tenants! It’s incredible to watch investors go from eagerly enthusiastic, to discouraged and burned-out. Many enter our world of real estate with big dreams and are 100% ill-prepared. No education or experience relating to landlord & tenant laws, building and facility systems, property management, or genuine real estate financial analysis know-how. By now, most people understand the idea of get-rich-quick with real estate is a joke.
Our brokerage group, RE/MAX Results Commercial Group, has focused exclusively on commercial & investment real estate for over 20 years. My personal investment background is in multifamily. I owned & managed 50 rental units across 15-20 properties for many years prior to working in brokerage. I am still a small investor, but I shifted my exclusive focus to commercial brokerage instead of residential multifamily ownership. Two different business models within the world of real estate each with their respective pros & cons.
When an investor ventures into commercial real estate, it’s critical to understand a handful of important principles. Here are a few key points and I’ll dive in deeper in the months ahead as we compare product categories side by side.
Commercial is Huge
With net-lease investments, NNN assets, there are many categories including manufacturing, quick service retail, or distribution. Office is broken into sub-categories like med office, stand-alone vs mulit-tenant, Class A, B, or C properties, office/service, or office/showroom. Similarly, not all retail is created equal. Especially in today’s market, everyone knows there are big differences in restaurant retail vs strip-mall retail vs boutique retail. Common knowledge tells us that location is everything when it comes to retail, but it’s been a highly disrupted category for many years due to online shopping. Industrial buildings have their own sub-categories like manufacturing, storage, or trucking. Commercial multifamily starts at five units with huge differences in apartment buildings depending upon location, building age & quality, or tenant amenities. Investing in land is extraordinarily specialized whether it’s for agricultural use, timber & lumber, mineral rights, recreational, development, or land-banking.
Commercial is Complicated
It’s no secret our world of commercial real estate is terribly complicated. Even for those of us who’ve been in this game for decades, there’s still plenty to learn every day. Changing government laws and ordinances, zoning & planning, tenant rights, environmental, taxation, financing, syndication to litigation, reuse & redevelopment…the list keeps on going. Commercial investors surround themselves with experts since there’s simply too much to know with regulations & compliance steadily increasing each year. The differences alone between the product categories like office vs retail vs industrial, can make your head spin. There’s easily more than one lifetime of learning when it comes to commercial real estate investments.
Commercial is Specialized
Most commercial investors specialize within a single product category. I’ve always found this very interesting throughout my career working both sides of the fence. I was a multifamily guy with some mixed-use properties along the way, but never thought much about venturing into office or retail. That’s common in commercial investments. The adage, “stick with what you know” is invaluable. Once an investor learns the ropes of a particular product like retail for instance, they begin to scale their business. It’s logical and practical. Rarely do we find an industrial investor owning apartment buildings or an office investor looking to diversify into land acquisition. Portfolios are typically built within a single product type.
Commercial is Expensive
This is an understatement to say the least! Everything about commercial investment real estate is expensive as far as I’m concerned. This game is not for the cheapskate, under-capitalized, or faint-of-heart. All commercial investors should be prepared to spend some serious money or they don’t belong here. From the point of acquisition including expensive due diligence, to working through tenancy issues like build-out & TI (Tenant Improvement) allowances, holding costs during vacancies, bankrupt business tenants, costly commissions, legal fees and so much more. You won’t find any books written on, How to Get Rich with No-Money Down Commercial Investments. This is why REITs, partnerships, and syndications exist. Pooling capital together to get in the game and stay in the game is often required even for many high-net worth individuals.
Commercial Requires Experience
Sure, money can get you in the door, but experience is going to get you the return. Lenders are not real bullish on giving loans to inexperienced commercial investors. Most investors in commercial real estate earned their way to their ownership positions. Some inherited their way as well, but likely learned a lot over the years from their family. Many commercial investors come from commercial brokerage, management, or finance. Some have been involved in other high-level investments and are ready to diversify their holdings with the right real estate team behind them. You don’t see the college graduate leaving with student debt and becoming a commercial investment pro. Or, the duplex guy or home-flipper suddenly killing it with their industrial portfolio. Maybe, it’s the general contractor that’s well capitalized, or home builder with the right connections ready for another venture, or the business owner that has run multiple locations and facilities that understands this game. One way or another, commercial investment professionals have paid their dues. No surprise there.
In my next articles, I’ll compare different investment strategies including product categories or using 1031 exchanges to get into commercial investments. I’ll tell you how to go from tenants, toilets & trash into a hands-free check-cashing owner. Now that sounds good to me! Until next time…
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