Buying commercial real estate as investment

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someuser001
Posts: 24
Joined: Fri Nov 25, 2016 2:26 pm

Buying commercial real estate as investment

Post by someuser001 » Fri Aug 25, 2017 5:01 pm

Do folks recommend buying commercial real estate as an investment?

dbr
Posts: 23770
Joined: Sun Mar 04, 2007 9:50 am

Re: Buying commercial real estate as investment

Post by dbr » Fri Aug 25, 2017 5:09 pm

As a generalization people neither recommend nor not recommend commercial real estate as an investment. It also depends on what you have in mind. You can invest in commercial real estate indirectly by buying REIT stocks. That is conventional and already included in any total market stock fund or may be added as a concentration by adding a REIT fund. Lots of people do that. You can own your own commercial real estate by, for example, buying an apartment building or a retail building. You can buy commercial real estate by joining a partnership. In my opinion owning and operating commercial real estate yourself is a business that includes investment but is not an investment. That is up to you. You can be very successful if you know what you are doing and work at it. I don't know enough about partnerships and corporations to advise you except to say that if you have to ask here it is probably a bad idea for you. There are lots of ways to get badly ripped off and hurt financially in exotic real estate deals you don't understand.

make_a_better_world
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Joined: Mon Mar 18, 2013 11:55 pm

Re: Buying commercial real estate as investment

Post by make_a_better_world » Fri Aug 25, 2017 6:28 pm

I have not seen a lot of support for it on this board, but I personally invest in commercial real estate and it has been rewarding. In fact, commercial real estate is my ultimate retirement plan- to accumulate a number of properties that generate rent indefinitely that goes up as inflation does. It requires a lot of time, research, work and patience. It is important to be familiar with market prices in order to recognize a good deal. If you have enough cash you can move quickly when you find a distressed property and you may be able to purchase a completed building well below replacement costs. If you intend to build it is important to understand the process from A to Z and anticipate factors such as differences in regulatory codes depending on location, or requirements for water drainage depending on flood plane, or making relationships with sub-contractors directly. These types of factors can result in major cost differences and thus your return. I agree with the previous poster - it really is more of a business as it requires a tremendous amount of time and energy.

dbr
Posts: 23770
Joined: Sun Mar 04, 2007 9:50 am

Re: Buying commercial real estate as investment

Post by dbr » Fri Aug 25, 2017 6:37 pm

make_a_better_world wrote:
Fri Aug 25, 2017 6:28 pm
I have not seen a lot of support for it on this board, but I personally invest in commercial real estate and it has been rewarding. In fact, commercial real estate is my ultimate retirement plan- to accumulate a number of properties that generate rent indefinitely that goes up as inflation does. It requires a lot of time, research, work and patience. It is important to be familiar with market prices in order to recognize a good deal. If you have enough cash you can move quickly when you find a distressed property and you may be able to purchase a completed building well below replacement costs. If you intend to build it is important to understand the process from A to Z and anticipate factors such as differences in regulatory codes depending on location, or requirements for water drainage depending on flood plane, or making relationships with sub-contractors directly. These types of factors can result in major cost differences and thus your return. I agree with the previous poster - it really is more of a business as it requires a tremendous amount of time and energy.
It is probably more accurate to say the board is not very interested in commercial real estate than that it is not supported. Part of that is that the forum at base is about investing in stock and bond mutual funds as inspired by Jack Bogle, which places direct holding of commercial real estate a little off topic. I would say it is also a reaction, certainly mine, that people ask this question without being prepared for the learning curve and effort that is involved, the sort of classic "if you have to ask . . ."

That said, there are certainly posters here that own commercial real estate investments, some that regret the fact but many that are apparently successful. In fact in a list of pretty wealthy people one would probably find commercial real estate well represented among the routes to getting there. It is probably a bias of this forum that the discussion is not much about how to get wealthy but rather about how to manage what wealth you have. I would not be able to be of much help advising someone how to start and proceed in this field, but the thread is open for advice.

Theoretical
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Re: Buying commercial real estate as investment

Post by Theoretical » Fri Aug 25, 2017 7:20 pm

I think a major impediment is that no one disputes that real estate is an asset class for investment. It's very divergent from both stocks and bonds. The problem is that it's very hard to invest in none-to-minimally leveraged real estate that is diversified across the country. REIT funds give you diversified real estate exposure, but it's mixed with heavy equity exposure and is extremely volatile due to the internal leverage.

Buying an interest in a local apartment building or small strip shopping center gets you a genuine piece of property with the downside of being subject to some of the same forces that affect your local economic presence.

Given that a key boglehead tenet is diversification, at this group's (and 99% of people) it's not practical.

There are a couple of diversified interval mutual funds that intrigue me - one is from Griffin and the other Bluerock TIPRX. Unlike REITs, they're actual physical property ownership illiquid funds. The downside is a standard A load and 2% fees plus the institutional fund fees. On the other hand, 3-4% is a ton for a stock or bond fund, but is pretty cheap compared to a rental property management company's usual 10%.

DIY/self-managed real estate of any kind is a (second) job in itself.

Iliketoridemybike
Posts: 335
Joined: Wed Jun 28, 2017 11:03 am

Re: Buying commercial real estate as investment

Post by Iliketoridemybike » Fri Aug 25, 2017 7:28 pm

Probably the wrong forum to ask since risk adversity is the rule here, but I own a commercial property. One of the best investments I've ever made.

Valuethinker
Posts: 33176
Joined: Fri May 11, 2007 11:07 am

Re: Buying commercial real estate as investment

Post by Valuethinker » Sat Aug 26, 2017 8:34 am

Theoretical wrote:
Fri Aug 25, 2017 7:20 pm
I think a major impediment is that no one disputes that real estate is an asset class for investment. It's very divergent from both stocks and bonds. The problem is that it's very hard to invest in none-to-minimally leveraged real estate that is diversified across the country. REIT funds give you diversified real estate exposure, but it's mixed with heavy equity exposure and is extremely volatile due to the internal leverage.

Buying an interest in a local apartment building or small strip shopping center gets you a genuine piece of property with the downside of being subject to some of the same forces that affect your local economic presence.

Given that a key boglehead tenet is diversification, at this group's (and 99% of people) it's not practical.

There are a couple of diversified interval mutual funds that intrigue me - one is from Griffin and the other Bluerock TIPRX. Unlike REITs, they're actual physical property ownership illiquid funds. The downside is a standard A load and 2% fees plus the institutional fund fees. On the other hand, 3-4% is a ton for a stock or bond fund, but is pretty cheap compared to a rental property management company's usual 10%.

DIY/self-managed real estate of any kind is a (second) job in itself.
Do they not also pay fees to property managers? I.e. they get net rental income not gross?

Is there a dual taxation problem as well? Or do they have reit status?

WhyNotUs
Posts: 1120
Joined: Sun Apr 14, 2013 11:38 am

Re: Buying commercial real estate as investment

Post by WhyNotUs » Sat Aug 26, 2017 8:45 am

As noted, this is a board focused on low cost index investing. Some have interest in commercial real estate but it is not the focus. RE is about the numbers, location, and creating a reliable pro forma.
I own the next hot stock- VTSAX

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