how much to invest in commercial real estate

[spmysp1]

hello all and thanks in advance for your replies. this board has been a tremendous resource that i have used over the past 10 years.

Background info: me 46, wife 42, 2 physician household earning 1-1.5M/year. tax-advantage accounts 1.5M, taxable 2.5M, house paid off and worth 850k, 529s with 175k per child. no debt

Question: i would like to invest in commercial real estate for diversity, cash-flow and tax benefits. i have identified a 40,000 sq ft type B office building with 13 tenants that is fully leased. price is around 5.5M, 8% cap rate, great location with lots of traffic and net operating income (NOI) of 475k/year. i would keep the current property management company in place and my plan would be to buy and hold for the long term. I have been a devoted bogleheads investor for 10 years so this will be a big step for us. do you think this is too big of an investment in real estate? are we crazy or is this sensible?

[bighatnohorse]

Inside information from a legal person working at a high rise downtown Seattle building (full of other law firms) is that their office has experienced a 30-percent increase in efficiency due the Covid-work-from-home status currently in place.
Commercial real state and perhaps all real estate may be changing to something unexpected.

[Dave55]

hello all and thanks in advance for your replies. this board has been a tremendous resource that i have used over the past 10 years.

Background info: me 46, wife 42, 2 physician household earning 1-1.5M/year. tax-advantage accounts 1.5M, taxable 2.5M, house paid off and worth 850k, 529s with 175k per child. no debt

Question: i would like to invest in commercial real estate for diversity, cash-flow and tax benefits. i have identified a 40,000 sq ft type B office building with 13 tenants that is fully leased. price is around 5.5M, 8% cap rate, great location with lots of traffic and net operating income (NOI) of 475k/year. i would keep the current property management company in place and my plan would be to buy and hold for the long term. I have been a devoted bogleheads investor for 10 years so this will be a big step for us. do you think this is too big of an investment in real estate? are we crazy or is this sensible?

Having a background in vetting commercial RE properties for boutique private equity RE firms, the first question we asked when looking at any property was: "What could go wrong"? The answer was aways: "Everything". What edge do you have that professional commercial owners/investors don't have? Why did the pro's not scoop up this property? Cap rate, NOI, rent escalations, taxes and all the numbers are part of the story. There are a whole host of other questions that need to be asked and answered. If you have no expertise or experience, I would steer clear. I worked with guys that had decades of experience investing and managing commercial properties and all these guys made mistakes at one time or another, even after 20 years in the business.

Dave

[000]

In addition to the above, compare your results to just buying REITs, including the time and hassle spent.

[tibbitts]

I wouldn't invest in a single property like that; maybe you can find some sort of investing groups or private REITs that own different types of commercial properties in widely dispersed geographic locations. I'm assuming you very specifically don't want the stock market aspect of public REITs.

[bloom2708]

I'd need $25 or $30 million before considering something like that.

Be able to lose most of it. Mid-Covid isn't the time for that type of diversity.

I would keep doing what you are doing. Head down. Pump the arms.

[helloeveryone]

I'd need $25 or $30 million before considering something like that.

Be able to lose most of it. Mid-Covid isn't the time for that type of diversity.

I would keep doing what you are doing. Head down. Pump the arms.

I would echo keep doing what you are doing. You are doing GREAT! If you keep doing what you are doing you WILL win the “game”. None of are in your shoes but if winning the game means paying long term capital gains taxes on your millions of dollars accumulated in a headache fee fashion (ie - not investing in a $5 million building I think that’s well worth the taxes on the earnings.)

As one poster above said you are dipping your toes in territory that people devote their entire careers to. That’s pretty high risk

[Humility101]

Just invest in publicly traded data center reits.

[Mrxyz]

I am no expert in investing in commercial real estate but wonder if I can suggest you looking at the "need" and "ability" to take the risk.......even if you do not invest this money in real estate, you and your family are well set........Just a suggestion.
Thanks

[BillWalters]

This is a bad idea. The pros are passing for a reason. Multi tenant office is a brutal asset class. While in place yield may look good turnover is very expensive and this is a management-intensive sector of CRE.

If you want diversification and tax benefits invest in a multi family syndication. Before you do, spend some time at bigger pockets so you can evaluate deals. Even better, keep plowing your earnings into a 3 fund portfolio, which will do better over time with less risk. If you need RE exposure, buy REITs.

[Wricha]

I would not say no based on what information you have provided, as mentioned above you need to provide additional information about building, tenants, terms of the lease. With that said would you consider partners, people you trust to redistribute the risk?

[flaccidsteele]

At the very least get the T12 and do a lease audit

The price appears high relative to NOI imo. It won’t be a hands off investment unless you can get it for lower

Ignore the ppl talking about REITs

Dividend income taxed at ordinary rates

No depreciation

No claim on underlying buildings unless entire REIT is purchased

No cash out refi/LOC/blanket

No 1031 exchange

[annu]

We did invest in a property, not as expensive as yours, but went with a partner, so we have lesser risk. It sounds good, but too good. Check on how long the lease are signed, also check if their is any legal issues or pending litigation.

While leases can be broken, check a little bit into kind of businesses, if they can be impacted by covid, maybe that is one reason to steer away.

Although there are risks, I really do not think REIT is a replacement for this, at all, they are different classes of investment, maybe related field and thats about it.

[KyleAAA]

I think anywhere from 10-20% of your portfolio is reasonable, so in the $400-800k range in CRE equity. I certainly wouldn't put my entire allocation in single property. Why not start a little smaller? Maybe small multifamily properties to start? An 8 unit apartment buulding or something like that?

[spmysp1]

thanks everything for your thoughtful replies. lots to think about.

to those that suggested REITs, they have comprised 8% of my portfolio over the past 10 years but they lack some of the most appealing aspect of direct ownership or CRE, namely depreciation and cash flow. i am going to continue to explore this asset class but agree that making a smaller initial investment (10-20% of net worth) as some suggested is more prudent.

[SpaceX]

I agree with some of the other posts. Why not invest smaller amounts in multi-family units as a passive investor rather than deal with all of the headaches as an operator or sponsor? There is certainly less risk with smaller amounts, but you can still capture all of the benefits including the tax advantages. I've invested in 3 multi-family syndications (5 year cycles) this past year and I am hoping for IRR of 15-17%, annualized returns of 18-20%, with ROI 1.9-2x at the time of the sale. The RE portfolio makes up about 7% of my current investable assets, but I'd like to get to a target of 15-20%
Happy investing!