As a commercial real estate agent, individuals often ask me for an opinion regarding a particular property they might be considering as an investment. The first question they ask is invariably, “Is this a good deal?” My standard reply is that any deal is a good deal at the right price.
While there is some truth to that statement, there is much more to pairing the right real estate opportunity with the right buyer. The definition of “a good deal” can vary as widely as the number of stores in the Mall of America, and therefore needs careful consideration.
In keeping with the Mall theme, buying real estate can be compared to finding the right pair of shoes. To begin, think about why you are in the market for a pair of shoes. Are you looking for a high-end pair of designer blue suede shoes that will tell the rest of the world you have arrived? Perhaps you are content with a pair of work boots that will last for decades to come with durable results?
The designer pair might be compared to the trophy office towers or top-end retail centers that continue to set pricing records in today’s hot market. These properties are typically found in 24-hour cities, major population centers with growing populations and high barriers to entry for new supply. They often come with hefty price tags, the result of which is typically low cash returns traded for high appreciation potential.
The work boots are more comparable to a solid industrial property or suburban office building that produces a steady income stream. These properties are typically found in second or third tier cities, where population growth is steady, but not explosive. There tend to be fewer barriers for new supply, meaning the landlord should expect to compete with both new and existing product for tenants. The trade-off is that prices are typically more moderate, meaning larger cash returns for investors.
As a commercial real estate investor, there are many questions to ask yourself in deciding which type of investment is right for your individual return expectations and risk profile. Here are a few good ones to consider:
- What do I expect my investment to do for me? Am I looking for steady cash returns or am I willing to forego cash returns for large appreciation?
- What do I expect to do for my property investment? Will I be a more “hands on” manager or do I want very little management responsibility?
- Do I intend to operate the property under the status quo or will I attempt to add value in some way? What kind of capital might be required to add value?
- What is my risk profile? Am I comfortable with a highly leveraged asset? Would I sleep better knowing I had lower debt?
- What are my financial goals and limitations? What percentage of my total assets do I want invested in real estate? How does this affect my other investments?
- Should I consider taking on partners? How many partners is enough? What value does each partner bring to the table? How is that value being rewarded?
- Where do I want to invest my real estate dollars? What countries or cities do I want to invest in? Do I want something close to home so I can drive by from time to time or tell my neighbors about?
- What property types am I comfortable with? What are the costs and benefits associated with each property type?
These are the questions for which there are no right answers. As in shopping for the right kicks, tradeoffs exist between all choices, and it is important to find the right balance that suits your needs. After taking these questions into careful consideration, it is time to meet with your Block and Company advisor to map out a successful strategy for getting you the investment real estate deal that best meets your objectives. Our objective is to match your criteria with opportunities in the marketplace so that at the end of the day you are satisfied with your investment.
The world needs blue suede shoes, work boots, and many variations in between. The commercial real estate markets are no different. Let Block and Company help you find the right fit.