I know many people who were successful in other industries and parked much of their wealth into real estate assets and commercial property to build tremendous net worth. Usually, though, this is the exception, not the norm. Most people who come into the world of real estate investing do not have the right expectations of what it takes to be successful.
Most novice investors think that owning rental properties is just passive income, and not an active business. They think they can buy an apartment building and just collect mailbox money. They then realize how hands-on you actually have to be, even if you have delegated the leasing, accounting, and asset management to competent professionals, and hired a management company (On a side note if you don’t think these “competent” professionals need constant oversight your expectations are wrong.) Also, keep in mind that all of this delegating will end up reducing your cash flow and your net operating income (NOI).
Know the Difference Between Managing Different Commercial Properties
As a real estate investor, it is very important that you do your due diligence and have the right expectations from the beginning. Make sure you understand the type of commercial property that you will be investing in, and the amount of work that you will need to put in as the property owner.
The world of commercial real estate is diverse, and you have the option to chose from many property types and asset classes including; office buildings, retail property, shopping centers, mixed-use and multifamily properties. Consider the differences in lease terms for tenants, maintenance costs, and the amount of time you may spend managing commercial tenants vs. residential. If you do your due diligence and educate yourself on commercial real estate management and different type of properties, you are more likely to succeed.
Stabilized Vs. Value Add Real Estate Assets as Real Estate Investments
If you are buying a core, stabilized asset as an investment property, you have a better shot. Such properties may already have low vacancy rates and reliable cash flow; this would be as close as you can get to passive income in the world of commercial real estate. But the full-time nature of the business is amplified when you are doing “value add” deals as we do. Executing lease agreements. Managing construction. Installing new management systems and processes. And being the property manager. It is exhausting. Of course, with these types of properties, you should be able to secure a lower purchase price, and your rate of return will be increased.
Knowing what I know, if I ever left the commercial real estate business, and went into another one, I would never dream of taking on a value add asset part-time. In my mind, it is a recipe for “losing your shirt.” This type of investment strategy requires in-depth knowledge and experience.
Hiring a Professional to Manage your Commercial Real Estate Investment Strategy
Most high net worth individuals and institutions with capital to deploy would be better served by investing in partnerships and funds, run by competent asset managers with reliable track records. There are plenty of competent private equity groups, not just ours, that specialize in finding deeply undervalued real estate assets, repositioning them, and adding tremendous value to their partners.
Our partners do not mind paying us our fees, because they know net-net, they would not be able to achieve the same returns and cash flow if they went out on their own and attempted to juggle all the balls associated with finding the right investment property with the right cap rate, and then coordinating property management, leasing, and running of that property. They rely on us for our CRE knowledge and experience, and trust the passive income they generate through our partnership.
No matter how you participate in the commercial real estate business, I think investing in real estate is a fantastic investment opportunity, and the best long-term wealth building strategy there is, and I wish you much success.
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