5 Must Ask Questions before Investing in Commercial Real Estate
Before we look at the five questions to ask before investing in commercial real estate – let’s take a step back so you understand where I’m coming from. If you are considering buying Calgary commercial real estate, it’s likely you are looking for a few things:
- Predictable cash flow and,
- Wealth Preservation (the value of the property will remain over time)
If you are not familiar with investing in Calgary commercial real estate, it’s important to know there is no shortage of buyers who have money and want to buy. The challenge is in finding properties at a reasonable price, well located, with stable and predictable cash flow.
In my experience, as both an investor in Calgary commercial real estate and investment salesperson- with so much money on the sidelines, looking for commercial properties, it’s difficult for smaller private investors (relatively speaking) to purchase properties under $15M with decent returns.
The difficulty arises when there are 10 buyers and 1 seller.
Supply and Demand.
Some buyers stretch to make a purchase- the winner, usually has what is called a low ‘cost of capital‘.
Cost of Capital – is the return an investor needs on their equity. For example, if a Pension fund, or Life Company can raise equity at 2% and can buy commercial properties in Calgary at a >5% return, they have positive leverage.
For you, a private investor, it’s unlikely you would purchase real estate and only expect 5% cash on cash return.
Most business owners, doctors, lawyers and dentists I work with, are looking for stable 6-10% cash on cash returns (plus, whatever mortgage payments are made each year, which increases their equity).
To do this- it’s unlikely you are going to find good, commercial real estate listed from larger brokerages. Knowing there are a line up of buyers who want good commercial properties, brokers run auction style sales processes to bid up the price. And, often this eliminates the private investors from getting any type of advantage.
So, what is the solution? Let’s look at the five questions (as they set up the answer well).
First: The 5 questions a Private Investor should ask before buying Calgary Commercial Real Estate are:
- Why should a bargain/deal exist on a property? If a property is priced ‘low’ or at a bargain, the first question is ‘why’. If there are many buyers who will purchase good commercial real estate- why then does a bargain exist? In some cases, it’s not a bargain, and/or, it’s not a good piece of real estate.
- When returns are ‘generous’ when compared to the risk – ask yourself: ‘am I overlooking or missing something’? Don’t assume you have found the holy grail. Look for skeletons. Sellers of properties are not stupid. They use Greed and Fear of missing out as leverage to entice buyers to stretch.
- Why is the Seller Selling, especially if they are selling at price that is going to give me tremendous upside? What problem am I solving for the seller? What am I missing?
- Why are you showing me the deal first? Or, am I the first person to see this property?
- Look at 50 properties before you buy 1. It’s the Law of Large Numbers – you need to see a of properties in most cases before you find the right one. So, either you do this, or, you have someone do it for you.
These questions came from my research on how some of the greatest stock investors look at companies and invest. Some of these questions were inspired from and credit to Howard Marks).
When you understand these questions- it’s easier to identify when you actually have a competitive edge.
In commercial real estate, to get that edge, here are a few ways to improve your odds of finding a property that will give you stable cash flow, at solid in place returns:
- Off market properties. Unlisted and you are first to know about (either you are doing the cold calling or, you have a relationship with a commercial agent, who will find you a property directly from owner). Much of my business is done this way.
- Properties in submarkets– they are off the grid for most larger players
- Properties priced between $2M- $10M. Too small for big players and too big for mom and pop investors
- Properties that are ‘out of fad’. Today, that would be office (however, I still would not personally recommend most office properties given the uncertainty of where this market will be in 2-10 years). Industrial properties are another, non-sexy investment that most private investors are unaware of, but can give great returns.
These are a few ideas you can use to identify gaps in the market, and give yourself a competitive Edge.
The key, in my experience is having a solid Acquisition plan in place. When you know what you want, where you want it and how much you are prepared to pay- that clarity, gives you power. When you’re speaking with a broker or property owners, they can sense you are serious and will often come to you first.
If you’d like helping crafting your Acquisition Plan– set up a time with me to do this. I have a 10 point process that will get you crystal clear on your objectives. It takes about an hour, and once you have it, you will be in the 1% of Private Investors who has a clear Acquisition Plan, to build Lifelong Wealth for you and your family through commercial real estate.
Set up a Time to create your 10 Point Commercial Real Estate Acquisition Plan– request a copy here: ClubSyndication.com/scorecard
Request the 3 Forms for Investing in Commercial Real Estate
- 8 Non-Negotiables to Investing in Commercial Real Estate
- The Debt to Cash Calculator
- The Commercial Real Estate Small Business Plan