Buy commercial real estate

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ahmadcpa
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Buy commercial real estate

Post by ahmadcpa » Thu Nov 06, 2014 10:33 pm

Hello all,

I was wondering if any of you has an idea as to how good investment in commercial real estate is. I found a website called loopnet that advertises a rate of return of about 7% on various properties in phoenix area. Any insight would be appreciated!

mpowered
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Re: Buy commercial real estate

Post by mpowered » Thu Nov 06, 2014 10:43 pm

What kind of tenants. 7% seems pretty low to me unless these are NNN type national credit tenants.

You have to look carefully at the underwriting the broker has done. Remember that you will be paying a management fee and have a vacancy allowance. Also some leakage when it comes to expenses.

Background on me, my family owns a significant amount of retail investment properties, and I am a real estate lawyer.

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Uncle Pennybags
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Re: Buy commercial real estate

Post by Uncle Pennybags » Thu Nov 06, 2014 11:17 pm

If you have speculative money go for it. If not I would suggest REITs. Buying locks up your money on one property.

playtothebeat
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Re: Buy commercial real estate

Post by playtothebeat » Fri Nov 07, 2014 1:15 am

If you just discovered loopnet, you are not ready to be a commercial real estate investor...

Now that that is out of the way.. CRE returns vary greatly. Far too many variables. I work in commercial real estate for what it's worth (I'm on the lending side).

Dave55
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Re: Buy commercial real estate

Post by Dave55 » Fri Nov 07, 2014 9:52 am

When investing in CRE, you can not take at face value what the broker portrays about the property or his underwriting, and the same goes for the seller. You have to do your own due diligence and work up your own pro forma. (I have worked in Commercial RE professionally in acquisitions).
If you never invested in CRE before directly, I suggest you find a principal investor who has invested and even has a portfolio of properties, become their friend and learn everything you can from him or her. That principal investor may take on passive investors like yourself and that can be a way for you to invest.
BTW, there are no guarantees in returns of any commercial deal. There will be a pro forma that projects returns, but there are events that can turn the pro forma on its head. As one of my primary principals would say when asked what could go wrong with a given deal, his response was "Everything".
I have invested in Multifamily, office and retail properties for 20 years as a passive investor, some of those deals were home runs, some doubles and some deals went south too. It all depends on many factors and the future is always unknown.
Dave

Valuethinker
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Re: Buy commercial real estate

Post by Valuethinker » Fri Nov 07, 2014 6:19 pm

ahmadcpa wrote:Hello all,

I was wondering if any of you has an idea as to how good investment in commercial real estate is. I found a website called loopnet that advertises a rate of return of about 7% on various properties in phoenix area. Any insight would be appreciated!
Buy a REIT fund.

Someone, John someone, has an excellent (John Reed?) website devoted to personal RE investing.

The reality is, you are very likely to get your clock cleaned. The field abounds with scamsters and things that they didn't tell you about on the way in.

Read everything you can get your hands on, and maybe try to work in the field of CRE (in sales or managing properties for a bit) to get a feel for the traps. Also make friends with a very good structural engineer/ real estate surveyor who can spot serious structural or other issues.

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cowboyinasia
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Re: Buy commercial real estate

Post by cowboyinasia » Fri Nov 07, 2014 7:38 pm

I found a website called loopnet that advertises a rate of return of about 7% on various properties in phoenix area.
7% doesn't sound like a good return on real estate. Since real estate uses leverage and it takes more work than stock and bonds, 7% doesn't sound attractive. I think you can get the same on a stock fund, historically.

Unless you can apply depreciation to your and effectively avoid taxable income? That can work with single family units at least.

The comment about finding someone as a RE-BFF is a good one.

Good for you thinking outside the box!

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abuss368
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Re: Buy commercial real estate

Post by abuss368 » Fri Nov 07, 2014 9:32 pm

Dave55 wrote:When investing in CRE, you can not take at face value what the broker portrays about the property or his underwriting, and the same goes for the seller. You have to do your own due diligence and work up your own pro forma. (I have worked in Commercial RE professionally in acquisitions).
If you never invested in CRE before directly, I suggest you find a principal investor who has invested and even has a portfolio of properties, become their friend and learn everything you can from him or her. That principal investor may take on passive investors like yourself and that can be a way for you to invest.
BTW, there are no guarantees in returns of any commercial deal. There will be a pro forma that projects returns, but there are events that can turn the pro forma on its head. As one of my primary principals would say when asked what could go wrong with a given deal, his response was "Everything".
I have invested in Multifamily, office and retail properties for 20 years as a passive investor, some of those deals were home runs, some doubles and some deals went south too. It all depends on many factors and the future is always unknown.
Dave
Hi Dave55,

I have enjoyed your posts on real estate investment and hope you continue to share more of your experiences. If I recall, you now prefer US and International REITs.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

Topic Author
ahmadcpa
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Re: Buy commercial real estate

Post by ahmadcpa » Fri Nov 07, 2014 10:31 pm

I really appreciate what this forum offers. I have the shortcut pinned to my browser's favorites bar and I learned something everyday. I have about $400K in cash in a CD earning 2.5%. I wanted to use the cash, buy property with it that brings in cash flow which is the primary objective. I am looking for cash flow in case something happens at my job.

I could go into REITs which apparently is bringing in only 3 to 4% per year, yet investment in real estate appears to be bringing in more. My in-law has one investment in commercial property and he says it requires minimal work unlike residential. I understand there are risks involved so I'll do my due diligence in reading and researching but I am looking for insight as to where to start. Many of the listings I see are advertising 7% or even more.

Experienced boglers, what should I pay attention to?

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abuss368
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Re: Buy commercial real estate

Post by abuss368 » Fri Nov 07, 2014 10:56 pm

US and International REITs or Direct Single Family Real Estate.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

mpowered
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Re: Buy commercial real estate

Post by mpowered » Fri Nov 07, 2014 11:22 pm

ahmadcpa wrote:I really appreciate what this forum offers. I have the shortcut pinned to my browser's favorites bar and I learned something everyday. I have about $400K in cash in a CD earning 2.5%. I wanted to use the cash, buy property with it that brings in cash flow which is the primary objective. I am looking for cash flow in case something happens at my job.

I could go into REITs which apparently is bringing in only 3 to 4% per year, yet investment in real estate appears to be bringing in more. My in-law has one investment in commercial property and he says it requires minimal work unlike residential. I understand there are risks involved so I'll do my due diligence in reading and researching but I am looking for insight as to where to start. Many of the listings I see are advertising 7% or even more.

Experienced boglers, what should I pay attention to?
You could look at NNN single tenant or ground lease. You are basically just buying a stream of income. You can typically get around 6% return for a national credit tenant like a bank and your only responsibility is to a collect a check. At the end of your 15-20 year lease, if they don't renew, at least you still have the land/building.

Dave55
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Re: Buy commercial real estate

Post by Dave55 » Sat Nov 08, 2014 1:41 pm

abuss368 wrote:
Dave55 wrote:When investing in CRE, you can not take at face value what the broker portrays about the property or his underwriting, and the same goes for the seller. You have to do your own due diligence and work up your own pro forma. (I have worked in Commercial RE professionally in acquisitions).
If you never invested in CRE before directly, I suggest you find a principal investor who has invested and even has a portfolio of properties, become their friend and learn everything you can from him or her. That principal investor may take on passive investors like yourself and that can be a way for you to invest.
BTW, there are no guarantees in returns of any commercial deal. There will be a pro forma that projects returns, but there are events that can turn the pro forma on its head. As one of my primary principals would say when asked what could go wrong with a given deal, his response was "Everything".
I have invested in Multifamily, office and retail properties for 20 years as a passive investor, some of those deals were home runs, some doubles and some deals went south too. It all depends on many factors and the future is always unknown.
Dave
Hi Dave55,

I have enjoyed your posts on real estate investment and hope you continue to share more of your experiences. If I recall, you now prefer US and International REITs.

Best.
Correct, I rather be invested in liquid traded Reits like VNQ and or VNQI as opposed to private deals now. I do still have investments in private real state deals that I have had for many years.
Dave

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3CT_Paddler
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Re: Buy commercial real estate

Post by 3CT_Paddler » Sat Nov 08, 2014 2:08 pm

ahmadcpa wrote:My in-law has one investment in commercial property and he says it requires minimal work unlike residential. I understand there are risks involved so I'll do my due diligence in reading and researching but I am looking for insight as to where to start. Many of the listings I see are advertising 7% or even more.

Experienced boglers, what should I pay attention to?
I would be wary of investing in commercial real estate with so little experience. It's not like picking a couple stocks or mutual funds. There is a very real risk you lose your shirt on it, unless you put in a lot of leg work and get very informed. It may (or may not) be a bad time to invest with the recent recovery in real estate.

Topic Author
ahmadcpa
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Re: Buy commercial real estate

Post by ahmadcpa » Sat Nov 08, 2014 3:06 pm

People who say there is risk, can share you experiences? What specifically are the risks?

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Uncle Pennybags
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Re: Buy commercial real estate

Post by Uncle Pennybags » Sat Nov 08, 2014 3:20 pm

ahmadcpa wrote:People who say there is risk, can share you experiences? What specifically are the risks?
Mount Olive hopes to fill 'largest unoccupied office building' in NJ, environmentalists scoff at how

Boglegrappler
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Re: Buy commercial real estate

Post by Boglegrappler » Sat Nov 08, 2014 3:53 pm

I think there is a secular trend for lower real estate valuations, driven by the steady shift to e-commerce and delivery and away from bricks and mortar retailer purchases. You just can't expect the same rents from retailers that you might have projected two decades ago. There are other components besides retail tenants, but it is having a big impact, IMO.

Dave55
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Re: Buy commercial real estate

Post by Dave55 » Sat Nov 08, 2014 6:44 pm

ahmadcpa wrote:People who say there is risk, can share you experiences? What specifically are the risks?
CRE Risks:

Location, competitive properties, competitive tenants, economically unsound tenants, inability to lease up vacant space, lease expirations, environmental hazards, deferred maintenance & repairs, overpaying for the property, not understanding the local market dynamics: is the area growing? what are the economic drivers? population growing or shrinking? demographics of local market - to name a few.

Dave

Valuethinker
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Re: Buy commercial real estate

Post by Valuethinker » Sun Nov 09, 2014 4:36 am

Boglegrappler wrote:I think there is a secular trend for lower real estate valuations, driven by the steady shift to e-commerce and delivery and away from bricks and mortar retailer purchases. You just can't expect the same rents from retailers that you might have projected two decades ago. There are other components besides retail tenants, but it is having a big impact, IMO.
In my company we no longer have 'our desks'. We have a pool of desks that we base ourselves at when we come in to the office (not every day). Probably the office space per employee has fallen by c. 40%.

A lot of companies are moving towards that sort of arrangement. That fundamentally reduces the economy wide demand for office space. Conversely it increases the demand for home office space.

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White Coat Investor
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Re: Buy commercial real estate

Post by White Coat Investor » Sun Nov 09, 2014 5:03 am

I wouldn't do it for 7%. The point for me of dealing with that kind of hassle, risk, and leverage is to provide stock like (or stock+) returns with lower correlation with the rest of my portfolio. 7% doesn't seem very good to me for real estate. You should be able to get something like that buying Cap rate 4 or 5 houses outright, and those sit on the MLS for months.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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