Commercial Real Estate
Commercial real estate is one of the primary vehicles used to gain and accumulate wealth. Commercial real estate is also used as a storehouse of wealth by the affluent. Successfully investing in commercial real estate requires a broad range of skills, diligent, patience and good judgment. While many have succeeded in gaining wealth or commercial real estate, many more have been unsuccessful. This article outlines some of the fundamental keys to success in commercial real estate investment.
- Timing real estate markets is a key skill. The popular expression is that the key to success in commercial real estate is: location, location, location. Buying commercial real estate when a market is still soft is difficult. Selling commercial real estate when a market appears great, is also difficult. However, correctly timing the purchase and sale of commercial real estate is more important than location in most cases. Negotiation skills are helpful in obtaining a better than average price. However, an investor will do better in slightly overpaying at the right time (as a market has just started to recover) than obtaining a deeply discounted price just before a commercial real estate market declines precipitously.
- Due diligence is crucial when purchasing investment real estate or even when purchasing a home. Becoming emotionally attached to a parcel of commercial real state is understandable. However, thorough due diligence regarding the physical property, rent roll, income and expense reports and the commercial real estate market are critical.
- Wealthy commercial real estate investors minimize federal income taxes using a specialized technique called cost segregation. Cost segregation increases depreciation from commercial real estate by correctly allocating components a shorter economic life. This specialized service is often performed by appraisers. In many cases, commercial real estate investors can increase depreciation by 50 to 100% using cost segregation. It is also possible to "catch up" commercial real estate depreciation that was underreported in previous years.
- Property taxes are a substantial expense for commercial real estate investors in many locations. In Texas, property taxes are often about 3% of the market value of the property. Other parts of the country have tax rates as low as ½ to 1%. Real estate tax valuations are revised periodically depending on the law and local practice. Successful commercial real estate investors either appeal the property taxes themselves or hire an expert with skills and knowledge to effectively reduce their property tax assessment.
- Most wealthy commercial real estate investors specialize in one type of property. They don't buy an apartment complex one year, a retail center the next year, and an office building the following year and an office warehouse property the subsequent year. It may appear that all types of commercial real estate investment are similar. However, each is actually a separate type of business requiring specialized knowledge, experience and contacts. Many successful commercial real estate investors started their career and leasing or investment sales brokerage. Disallow them to gain important insights into nuances within the market and market trends while simultaneously earning a living.
- Commercial real estate management is both the bane and the core skill of successful real estate investment. There's nothing sexy about commercial real estate management. It involves a myriad of details regarding leases, tenants, repairs, and budgets. It is the operational element of real estate. However, success in this area is critical for success in commercial real estate. Monitoring and controlling operating expenses sounds like a job for a bean counter. However, many of the nation's largest and most successful commercial real estate investors are notorious for aggressively pinching pennies regarding operating expenses. In many cases, it is possible to obtain meaningful reductions in operating expenses by reviewing the levels of staffing which are necessary and obtaining multiple bids for the largest line item expenses.
- Visiting your real estate is basic, but often overlooked. Many real estate investors love the pursuit of new acquisitions but don't care for the tedium of overseeing past conquests. Your property managers can report how the property is doing by phone. However, their perception is often colored by the relative level of their success. A personal, on-site visit adds context and granular detail which cannot be obtained through reports or phone visits.
Much wealth has been gained through commercial real estate investment. Despite the promises of "get rich quick schemes" by late night purveyors of tapes and videos, real estate success is usually earned through years of hard work, prudent decisions and attention to operations. In commercial real estate, like in most other businesses, paying attention to the details materially impacts the bottom line.
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