Commercial Real Estate Partnerships: The Best Way To Invest in CRE
Commercial Real Estate Partnerships: The Best Way To Invest in CRE
Updated on July 20, 2020
As real estate investors, we all find ourselves on a different journey with a different level of activity that we desire for different reasons. Some investors want to be hands-on as the property manager making sure they are able to watch over their investment, others prefer to be hands-off and collect “mailbox money” through their various investments. Whichever place you are at in your journey, we recommend investing in private equity commercial real estate partnerships (LLCs, LPs, Etc.) is the best way for investors to participate in commercial real estate deals. Here is why:
Access to More Opportunities – By pooling funds together with other investors, investors can get involved in commercial property deals that they could not acquire on their own due to capital constraints. Even the wealthiest individuals and institutions in the world cannot buy every asset they want. By investing in partnerships and pooling funds, investors can access real estate investments they couldn’t do on their own.
Ability to Invest in More Deals – Since you do not need to commit 100% of the equity to a given transaction, you can spread capital out by taking advantage of multiple opportunities. This diversification reduces risk and allows better performing deals to carry ones that don’t perform as well.
Less Risk – Aside from a pure diversification standpoint, if an asset requires a capital call for a new tenant fit-out or a large capital expenditure item, the partnership takes it on. If an individual owned it outright they would have to stomach the entire bill.
Leverage Off Of Experienced Sponsors – A competent and savvy sponsor will have more resources, experience, and relationships than most one-off investors. Because of economies of scale, a sponsor will be able to utilize a team to help with leasing, legal, accounting, and development. A one-off investor does not have the economies of scale to profitably support an entire team of professionals for one or two assets. This is probably the single greatest reason to invest in CRE partnerships. as an added bonus, real estate investing passively with an experienced team gives you a behind the scenes look at how to successfully execute a commercial real estate investment should you choose to take on a larger investment property outside of a sponsor group like a private equity real estate firm or a real estate investment trust (REIT).
Passivity – In a limited partnership or non-managing member LLC situation, investors are totally passive. Their total involvement in the deal is committing capital and earning a return. While sponsors earn fees for running a deal, paying these fees is usually an easy pill to swallow when you think about what goes into operating commercial real estate assets. This limited partner position also provides the investor with a completely passive income from the cash flow at the rental property.
The keys to a successful commercial real estate partnership are as follows:
Good Deal – This goes without saying. If your partnership is overpaying or buying the wrong asset, it will be hard to be successful, regardless of who is running the transaction. All investment opportunities, be it a multifamily apartment building, an office building, or any other commercial real estate properties, due diligence must be thorough and the purchase price must make sense. The asset and merits of the deal trump everything else.
Straightforward Business Plan – Just like any other business, each real estate asset needs a business plan. More importantly than a good plan is the sponsor’s ability to execute on said plan.
Experienced Sponsor – You want to invest with companies that have a proven track record of success. Successful sponsors have all of the relationships and key personnel on staff or retainer to ensure an asset is managed properly and reaches its full potential. It takes a village to perform these intricate deals well. From investment strategy for acquisition and eventually disposition, commercial real estate investing needs to be handled with precision to be successful.
Experienced Property Management – If you have an experienced sponsor, you should be in great hands as they are not going to choose a bad PM, but it’s worthwhile to call out that the property management is a key item on the list for successful commercial buildings. They manage the day to day responsibilities and are the eyes and ears for the property owners. Keeping your vacancy rates low, all of your lease agreements, lease terms and maintenance costs; this is all handled by your PM. They are the expert on the specific asset type and real estate market you have invested in. Your Net Operating Income (NOI) and the overall rate of return at your commercial investment property is intrinsically tied to the success of your property management.
Alignment of Interests –This is very important for individual investors. You want to make sure that the sponsor derives the majority of their compensation when the investors win first. This is simply an exercise in human nature. When everyone’s goals are aligned, things always tend to work out better.
If you have additional questions about the best way to add commercial real estate to your investment portfolio, please reach out to us. First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets – including middle-market service-oriented retail shopping centers – well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you’d like to learn more about our middle market retail investment and lease opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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