Five Things You Must Know Before Investing in Commercial Real Estate
by Team CREXi | Oct 11, 2018
Expert Tips to Make Your First CRE Project a Winner
The goal of your first commercial real estate investment should be simple: Make sure there’s a second one.
From site selection to underwriting to partnerships and construction management, successful real estate investors must cultivate a quiver of wide-ranging skills. And while there’s no substitute for experience in the trenches, sound advice and good planning can minimize costly slip-ups. Commercial real estate investing can be intimidating, but the best way to learn is to roll up your sleeves and dive in.
So rather than learn from your own mistakes as you go, why not supercharge the process and benefit from mine instead? Here are five things every first-time commercial real estate investor should know:.
1) Be Strategic First, Opportunistic Second
Commercial real estate investing offers a little taste of a long list of disciplines. Risk and reward can vary wildly, as can time horizon and capital requirements. Picking a project that’s a good fit for you can be as important as stumbling upon that great deal.
Real estate investments have the best chance to succeed when matched with an investor’s goals, interests, skills and values. Before embarking on a first project (or a second, or a third), identify your own financial and personal goals, which aspects of the project lifecycle most interest you and what core values will drive your decision-making. Only after these guideposts are staked should you start chasing deals, as they will provide the framework against which you will evaluate opportunities. Skip this up-front diligence and the chance you’ll choose the wrong project increases dramatically.
Property attributes like location, property size, product type and investment strategy are the outcome of a strategic process, not the other way around. This homework will dramatically narrow the world of potential properties to evaluate, saving you countless wasted hours underwriting deals that shouldn’t have been in your pipeline to begin with.
With the context set, start digging for the best possible opportunity within your focused world of potential deals.
2) Get Help Early and Often
Like any new endeavor, success hinges on a healthy balance of decision-making under uncertain conditions and the humility to ask for help when you’re stuck. Even the most seasoned real estate developers will tell you that one thing they love about the business is that they’re constantly learning, that each new project inevitably delivers a surprise (or three).
An invaluable exercise before embarking on your first project is to assemble a group of informal advisors and experts willing to pitch in and help along the way. Some may merely offer a tip or two in their field of expertise, while others may agree to be more intimately involved in your project.
Engage this group early and keep them involved throughout the project. Your contractor-friend can offer a more useful review of bids if he’s seen the project evolve from concept to blueprints, even more so if a couple of his initial ideas made it into the final plans. An architect’s suggestion to visit her favorite project-friendly planner can save hours, if not weeks, of delays.
3) You Don’t Need Money to Make Money in CRE … But it Helps
Perhaps more than any other business, commercial real estate investors are fluent in the use of OPM (Other Peoples’ Money). But nothing elicits sleepless nights like an empty bank account and bills coming due. The bigger your war chest on day one, the better.
An often-overlooked aspect of needing money to make money is how your personal balance sheet impacts borrowing. A lender typically wants a warm body to stand behind its loan – specifically the type of body attached to a big bank account. Lenders certainly appreciate your willingness to sign a recourse loan, but won’t place a lot of value in your good word. Investors rarely sign loan documents or guarantees, so many CRE developers form partnerships with deep pocketed colleagues to beef of up their financials.
The lesson here isn’t that you have to be rich to get rich. Rather, if your capital reserves are limited, invest within those limitations and pick a project you can afford to finish.
4) Define Decision-Making Ahead of Time
Partnerships and joint ventures have the unique power to make otherwise impossible real estate projects feasible. But so too are they a breeding ground for disagreement, dispute and litigation.
If you’re planning to formally join up with other individuals or groups, determine not only the economic terms but a decision-making framework before the first dollar is spent. And put it in writing. Formal agreements foster rather than erode trust. Plus, the simple act of drawing up an agreement will inevitably lead you to consider and discuss possible points of contention before the stress of a real-time crisis hits.
This recommendation goes for working with family, perhaps even more than non-family. Investors have made fortunes picking up the rubble of inheritance disputes, siblings who own property but no longer speak and family partnerships gone sour. Blood may be thicker than water, but it can be alarmingly toxic to real estate investing.
5) Commercial Real Estate Investing is Harder Than You Think, But More Rewarding Than You Can Imagine
Humility can be your greatest asset, especially early on. Respect the fact that the wealth-creating power of real estate investing comes with a corresponding level of risk and challenges. Development is, after all, a specialized profession. People spend careers honing their skills, learning from their mistakes and benefitting from the lessons of others.
The personality of a construction manager may not be suited to the constant rejection and networking involved in sourcing deals. Capital raising requires talents that aren’t necessarily useful to conducting thorough due diligence. Even the most skilled construction manager may be lost around a color palette. Keeping accurate books and records requires different aptitude than persuading the planning department to approve your variance request.
Yet these and countless other skills are essential for any successful project. And if going it alone, you’ll be required to perform admirably across this dizzying array of disciplines. Hence the proclivity of developers to enter into joint ventures, where real estate players tap into the strengths, skills and expertise of their colleagues.
The hardest thing about real estate projects, and the one most new investors underestimate, is the sheer array of skills and talents involved in a project lifecycle. For this reason, my second tip suggesting you seek help and expertise early on may be the best advice any new commercial real estate investor can get.
If you’ve read this far without deciding to give up on your dreams of becoming the next great property developer, I’ll leave you with one parting piece of more upbeat advice: pick fun projects. We each have our own version of fun, so be honest with how you define yours.
Your properties will become like children – with equal power to fulfill and enrage. Excitement and passion for the project will lead you through the (inevitable) dark times, just like it will be the source of your satisfaction at achieving your goals.