- Commercial real estate investment is anything but a passive endeavor
- It takes a significant amount of time, effort, resources, and expertise to find, research, analyze, finance, close, and manage a commercial real estate asset
- It is possible for some individual investors to do it on their own, but that is the exception, not the norm.
- For most individual investors interested in a commercial real estate investment, it makes sense to outsource property identification, underwriting, financing, and management efforts to a professional firm
- Doing so provides them with professional expertise, access to institutional quality assets, portfolio diversification, and time to concentrate on the things that matter most to them
Finding, purchasing, and managing a commercial real estate asset is not a passive endeavor. It requires a significant amount of time, effort, and expertise. While many real estate investors like to take a do-it-yourself approach, this may not always be the best option. In some cases, it can make sense to outsource the major activities to a professional investment manager.
To illustrate why, we will first provide a high-level overview of the commercial real estate transaction lifecycle.
CRE Transaction Lifecycle Explained
Each commercial real estate transaction has its own quirks, but they all follow a similar 5-step cycle.
First, an investor has to find the property. Typically, this involves sorting through dozens or even hundreds of property listings in different markets. The search can be facilitated by a broker, through search aggregation websites, or by talking directly to property owners. Whatever the method, the goal of this step is to identify a select group of properties that look promising for investment.
Next, the properties must be screened. This means creating financial pro forma for each of them to project potential cash flows and to calculate potential investment returns. If the results meet a set of pre-established criteria, it’s justified to commence a deeper dive.
For the properties that survive the initial screen, a more detailed review is performed. This includes reviewing property documentation, performing a site visit, assessing the competition, and refining the financial model as needed. If all checks out, an offer is made. Often, an offer can be made on two or three properties with the expectation that only one of them will be accepted.
When an offer is accepted, the transaction moves into the closing phase. Closing is generally a hectic time that is characterized by reviewing sales contracts, finalizing financing, completing due diligence, performing property inspections, and signing all of the necessary paperwork.
Finally, once the transaction is closed, the asset management phase begins. Where finding and acquiring a property can take around 60 days or so, the asset management phase lasts for the entire duration of the ownership period—and this phase can be the most time consuming. It includes property management activities like collecting rent, making repairs, overseeing renovations, negotiating lease renewals, leasing space to new tenants, and managing tenant issues.
The point of reviewing the transaction lifecycle is to illustrate the idea that finding and managing a property requires a significant amount of time, effort, and expertise. The work must be done, which raises the question of who should do it.
Direct vs. Indirect Purchase
In a direct purchase, one or more investors may handle all of the above activities on their own. There are certainly many individuals capable of doing so, but they are the exception, not the norm. The vast majority of potential CRE investors are individuals with other jobs, other areas of expertise, and busy vibrant lives. They may have the money to invest, but not the time or expertise to do it effectively.
In an indirect purchase, an individual takes the same amount of money that they would have invested directly, and they place it instead with a professional real estate investment manager—like us—who performs all of the above activities on the investor’s behalf. In effect, the individual outsources the above activities to the manager, which can make a lot of sense in certain situations.
Why Outsourcing Makes Sense
For individual investors looking to allocate a portion of their investment portfolio to CRE assets, there are a number of reasons that outsourcing investment can make sense:
- Expertise: A professional real estate investment management company has decades of experience and dozens of transaction repetitions over which they have developed a high level of commercial real estate expertise. This type of institutional knowledge can be incredibly valuable.
- Efficiency: For a professional manager, real estate investing is their core business. Because of their size and scale, they can often obtain better pricing for key costs and run a property more efficiently than an individual investor. For example, we have an in-house property management team and can save a lot of money by performing these functions for our own properties.
- Access: By investing with a professional management firm, an individual isn’t just getting a property, they are getting access to all of the manager’s brokers, service providers, consultants, and underwriters. These are relationships that take years to form and having access to them is very valuable.
- Asset Quality: A typical commercial property investor is somewhat limited by availability of capital. By working with a group of real estate professionals, individuals can pool their capital with other investors to gain fractional ownership of an institutional quality asset that they could not afford on their own.
- Diversification: A real estate investment in general can provide a layer of diversification within the traditional stock/bond portfolio. But an investment with a professional manager can provide another level of diversification through exposure to different property types, different markets within the United States, and different properties.
- Time: Finally, the reason why outsourcing can make the most sense is simply a function of time. Working with a professional manager can save a significant amount of time and allow an individual to focus on the things that matter most to them.
Every investor has his or her own set of unique needs and preferences. But for those who agree that outsourcing makes sense, the next step is to find a manager to work with.
Interested In Learning More?
First National Realty Partners is one of the real estate industry’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities in which we invest.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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