What Makes a Good Commercial Real Estate Investment?-Part 1
You have $500,000 cash, experience in residential rental real estate and a desire to purchase your first commercial investment property. Or, you are tired of the minuscule returns from the bank and investment institutions and don't have the temperament for the stock market. You hear other investors who makes a smart move only to make multi-millions of dollars on a commercial real estate investment and you want a part of the action. You are ready to venture into the realm of commercial real estate investing.
We always hear of the investor who makes a killing in commercial real estate, but we seldom hear about, or we forget about, those who lose millions. There are basically two types of investors: speculative and those looking for a current and safe return on their investment. The speculative investors are those who usually take more of a chance on an investment and oftentimes those who are creative and have patience and resources to watch the market.
Take for example Downtown Napa, I know an investor who purchased a commercial property about 13 years ago for approximately $1,500,000. He held the property for the past 13 years, not done much to the property other than keeping the status quo. He was not even really concerned with filling vacancies or replacing tenants who left. This investor was holding his property for future growth because he had a hunch that Downtown Napa would someday blossom into the economic engine we see it approaching today. He is now willing to sell for about five times what he paid...and it is worth that amount. Not a bad return on investment I would say.
On the flip-side, an investor purchased a property in a different city for $1,500,000 in 2001, has had trouble securing quality tenants, had to reduce the rent being offered and is finding the value of the property currently at $750,000 or half what he paid. Plus, there is substantial work that needs to be done and the property is dated and needs to be upgraded to attract new tenants. Did I mention his outstanding loan is about $900,000? He made a bad choice because the location of his building is no longer desirable and is an area that is economically dead and needs to be revitalized.
Speculative investing can be rewarding, exciting and fun, but unless you do your homework and have an inside scoop as to what the area will be like in five to 10 years (see my last column on demographics) then you may be taking too much of a risk for your temperament and financial position.
There are many facets to consider when securing a viable commercial real estate investment. With a good commercial broker on his or her team a resourceful and knowledgeable investor can be successful. My next column will review some of the metrics used to analyze commercial real estate investments. We will even look at a real life example of a commercial property investment.
Have any success stories or nightmares in commercial real estate investing?
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