Commercial Real Estate Investing Principles
Commercial Real Estate Investing Principles – Before we get into the 6 Stages of investing in Commercial Real Estate (where I left off last week), I thought I should share with you, how I think about investing.
About 3 months ago I was on a call with my coach. He asked if I’d read the book, Principles, by Ray Dalio. I said I hadn’t, but was familiar with Ray and his investing success (he owns a hedge fund, Bridgewater Associates).
As you know, I’m not a fan of investing in stocks or the market- but that doesn’t mean I don’t study it. In fact, many of the successful investors I learn from are stock investors. Guys like Warren Buffett, Charlie Munger, Kyle Bass, Ray Dalio, Howard Marks – are all investors I have a great deal of respect for.
I study their ‘investing principles‘ they follow.
So today, I want to share with you the Rules or Principles I follow when investing and guidance I give clients.
A few notes before we get into them.
The list of Shane’s 10 Commercial Real Estate Investing Principles below are a compilation of research that has taken 10+ years. Not all of these concepts are original or mine. When possible, I will give credit to the person I have learned from.
It’s not always possible, as I’m constantly updating and tweaking my investing philosophy.
Last, these are my Investing Philosophies. I’m not asking you to agree with them or beleive any of them. In fact, you may challenge all of them. That’s fine.
My hope is that it generates some critical thinking on how and what you invest in. The questions you ask before investing. The approach you take.
Step 1. Shane’ Values
- I value Control. Definition: power, authority, command, dominant or mastery.
This is why I believe in investing in Commercial Real Estate. Because I control so much of the outcome vs. handing my money over to someone else. If you study the great stock investors, like Warren Buffet and Charlie Munger – you find when they invest, they are not buying 1,000 shares of company and hoping it increases in value. They are buying a meaningful % of the business and with a seat on the board of directors they influence (or control) how the business operates.
- True Wealth. Wealth that can not be destroyed. Which, means, that I have numerous flows of income coming to me such that if 1 or a few get cut off, that it doesn’t affect my life. I am not there yet, but it is my ambition.
- Freedom. Free to choose where I spend my time. Who I spend time with (clients, family, friends). To me, it’s about choice. What’s interesting, is how much time I chose to spend working with investors and in my own ventures.
- I value Control. Definition: power, authority, command, dominant or mastery.
- Integrity. Simple. You say you’re going to do something, do it.
- Responsibility. You take ownership of your life. You don’t blame others for why things didn’t go your way. This is something I have to work at every day. It’s not easy to take 100% responsibility when things go sideways- but it is critical. This lesson I learned during a 20x training with Navy Seals in San Diego in 2015. They demand personal accountability, because it affects the group if 1 person is not holding up their end of the bargain.
- Discipline. To have the discipline to do what’s required. Not taking shortcuts. Following through, even though its not easy and may not be fun. Investing in Commercial Real Estate, there are going to be uncomfortable conversations. There will be people who are dishonest. It’s easy to be tempted to take short cuts or do things that others may not catch on. To maintain my reputation, I force myself to be disciplined throughout my working and non-working hours. Something my father and father-in-law have reinforced throughout my life.
- Courage. To do the things you know need to be done, even if you fear them.
- Sense of Urgency. Investing in high stakes commercial real estate is requires action. And, you to make things happen, you have to push. Thanks Bill!
- Leadership Mentality. this is harder to explain. It’s a mindset that what I’m doing is bigger than me. That whatever skills I’m developing, it’s important to share them with others. It is why, I’m forcing myself to create more content. To share what I’ve created, without fear of what others will say or think.
So, these are my underlying Values. Without understanding my values, you would not have the context for my Commercial Real Estate Investing Principles or Philosophies.
MINDSET: Create Predictable and Consistent Income investing in commercial real estate. To create enough income that it pays for all your living expenses, without touching the principle – you now own your time.
Shane’s 10 Commercial Real Estate Investing Principles
- Strong long-term outlook (credit Buffett and Munger)
- MF, service based retail and Industrial are all sectors with a long horizon
- Do I understand the Predictability of the business long term? If no- we do not invest (ie, single tenant industrial buildings with short term leases).
- Purchase on Cash flow today – Target 6% cash on cash (Credit Grant Cardone)
- Do not buy into the better management story, or price appreciation
- We do not financially engineer spreadsheets. It’s very easy to ‘tweak’ the numbers, cap rates and assumptions. Look at the property on an As Is basis and make your determination.
- Invest in what you understand.
If you do not understand retail tenants, don’t invest in them on your own. Invest where you are competent and understand your clients.
- How do I get killed in this deal? What are the disastrous outcomes?
- How much damage could a competitor do to me if they didn’t care about returns? (think Office downtown Calgary – Net 0 deals)
- Invest in properties that have real and measurable upside potential (improve vacancy, reposition a property, redevelop, add density).
- Solve a problem
- Can I buy this property with a good margin of safety – run sensitivity models to show how far rents can fall, vacancies to go up, unexpected expenses (Cap X), or interest rates can rise (debt service)
- Invest where there are Jobs and Growing GDP (Don Campbell- REIN)
- We do not fall in love with the city we live in. That said, if you’re in a big enough city, and it has strong fundamentals, there are opportunities.
- Conservative Debt (father in law, Andy)
Leverage can be amazing at increasing returns, but, on the downside, it can wipe you out. So, we generally like 30% equity in our deals, with solid room for covering our debt service
- Supply and Demand Fundamentals (Munger/Cardone)
Be careful investing in a markets where barrier to entry is low (large supply of land, cheap labor, etc). If you can buy well below replacement value, that is a good starting point.
- Brand loyalty
- Barriers to entry
- Capital investment required (today and ongoing)
- Obsolescence (if too old, is it still relevant)
- Changing buying habits (online)
- Competitors ability to cut prices (lower cost base)
- Location and Timing are Crucial (Experience)
Don’t be married to investing in 1 place and/or must invest today. Goes back to patience and constant learning
- Invest where you have a Market or Analytical Advantage. (Brokers I worked with in Houston and Texas)
Meaning you know people in the cities or areas you are investing in and they have insights others do not, or, you have analytical data that gives you an adv over the competition.
- What happens if I’m wrong on this investment?
- Have you personally guaranteed the loan?
- Do you have investors money in this deal?
- Are you “All In” or, are you properly hedged?
- Competent and HONEST Management (experience, the hard way)
- How deep is the labor pool?
- Are you dependent on talented people to run the property? If so, you could be beholden to them (ie, small towns, remote areas, complex properties)
These are my guiding beliefs and philosophies for investing in commercial real estate – and why I like Multifamily Properties.
If you have thoughts on comments – let me know. I’m far from perfect.