Strategies for Small to Medium Size CRE Investments and Portfolio Growth
One of the niches that Sperry Van Ness® advisors typically focus on is being very active in the investment property sale market for assets within the $1,000,000 – $10,000,000 range. Of course, we have talented advisors who regularly complete larger, institutional, >$100MM size deals in the larger cities and core markets, but the “bread and butter” of many of our advisors is working in the trenches, in primary (non-core), secondary, and tertiary markets across the United States.
If you are a real estate investor, or you are considering getting started in real estate investing, I would like to offer you the following concepts, tips, and suggestions for creating a successful plan that mirrors what many of the larger public and private real estate investment groups do. It’s not rocket science, you can do it too!
Define your Investment Parameters
One of the mistakes I often see both new and seasoned investors make is to not properly define their investment parameters before getting started. This is important because it sets the course for the strategy and allows you to execute the plan more efficiently; and ultimately be more successful, because you have a baseline to which you can compare your investment portfolio.
You could write pages on many of these concepts, but for this post, I will provide a brief outline.
- Niche: Do you like apartments, office space, self-storage, retail space, etc.? The reason this is critical, is because you can get lost quickly, without a plan. Consider this: If you like retail, do you like single tenant, multi-tenant, big box anchored centers, smaller shadow centers (i.e. think small strip center in front of Wal-Marts, etc.), If you like single tenant investments, because of the typically limited landlord responsibilities, then in which industry sectors would you want to focus? Food/beverage retailers? Tire retailers? Drug stores, or all of the above? As you can see, each individual niche has many potential decisions that need to be considered and evaluated.
Tip: My recommendation is that you consider investing in product types that have a basic appeal to you. For instance, if you just despise the idea of warehouse or industrial properties, for whatever reason, that might not be the best personal choice for you as an investment property (however industrial property investments can be very lucrative in certain markets).
- Financial Criteria: An important part of this first step is to define realistic expectations and goals for the investment criteria of your defined niche. This step helps you expedite deal reviews by being able to quickly determine if a potential deal fits within your criteria or not. It makes the decision less emotional, and allows you to cover more of a larger geographic area by focusing on deals that fit within your criteria. Keep in mind, your individual criteria will differ from that of someone else, based on your goals, your cash on hand, your financing sources, location, product type and timing.
Educate Yourself
Once you have defined investment parameters, the next step is to educate yourself. You need to study your respective market, in the particular product type niche or niches you have chosen. Research sale comparables and what properties are on the market for sale. This is where teaming with a trusted real estate advisor, like those at a Sperry Van Ness office, can greatly enhance the success of implementing your strategy. Picking a great commercial real estate advisor who specializes in the niche product type is critical to being able to quickly get up to speed and accomplish your goals (see our other post “3 Tips to Finding a Good Commercial Real Estate Broker”).
Develop an Action Plan and Execute it
Part of being successful after you have defined your niche and educated yourself, is to formulate a plan of action to acquire properties. Perhaps part of your plan is to rehabilitate C-class multifamily properties and attempt to raise the rents after renovations. Whatever it is, you need to write it down and review it often and tweak as needed. It’s easy to get distracted, especially as the real estate market continues to heat up and the velocity of deal flow continues to improve. Having a solid action plan and a commercial real estate advisor to assist you with the plan will minimize your wasted time and increase your chances for success.
Exit Strategy
Every commercial real estate deal needs to have an exit strategy. It’s important to think about this exit strategy early on; in fact, before the purchase is even made. Granted there will be times when the exit strategy will change, due to rising or falling market conditions, or supply and demand, and you will have to adjust your exit strategy. The main point here is that an exit strategy needs to contemplated in the beginning, not the end of a commercial real estate transaction. If you buy an office building at an 8% cap rate that is 70% occupied and your plan is to spruce it up, apply aggressive leasing tactics with a CRE advisor, and increase the revenues, only to find out later that the market for those types of investments are trading at 8.75% cap rates, due to the smaller tertiary market the property is in and the smaller, shorter term leases, then your exit strategy is flawed because the market will not pay you for the work you have done. Of course, this is a simplified example. The point is, have a defined strategy to exit the investment at the proper time, and always be willing and able to review your exit strategy and make adjustments. In the words of a favorite Kenny Rogers song, sometimes “you got to know when to hold ‘em and know when to fold ‘em, know when to walk away, know when to run!” Hope is NOT an exit strategy.
Summary
This is a very brief overview of some of the basic tactics and format that individual and small to medium size group commercial real estate investors can apply to model their CRE investment strategy after the larger, institutional players in the industry. Employing the use of a qualified CRE advisor as a resource in your toolkit will serve you well. The Sperry Van Ness organization has over 1,000 advisors in scores of markets across the United States, specializing in all niches of commercial real estate. Contact one of our advisors today to answer any questions or to get started investing today.
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About Carlton Dean – Carlton has nearly 20 years of experience in the commercial real estate industry, with a special focus in the retail and multifamily sectors. Carlton is based in Tallahassee, Florida, but serves clients throughout the entire Southeastern US. Click here to view his full profile and listings, or if you would like to contact him, you can call him at 850-877-6000 ext. 101, or email him at cdean@svn.com