Part one of this three-part article will explore buying a commercial real estate property for investment purposes. It is heavily weighted with parameters to limit risk to the buyer. It proposes a model on how to buy rather than what to buy. It is applicable to almost any asset type, whether it is an office building, an industrial project, an apartment complex, a retail center or even a self-storage project. It further explains the rationale for each parameter. However, the article does not assume this is the only way to buy commercial real estate investment property.
The Basic Premise
Our buyer, Joe Investor, wants to buy property that produces higher yields than those from traditional investment alternatives. Joe analyzes the net-operating income and the cash flow after the debt service, then compares them to how much cash he will be putting into the project. He is shooting for over an eight percent return per year. He is also interested in significant appreciation over a three- to five-year period. Joe is not looking to flip properties. Not only does he want to limit his exposure to market fluctuations, but also to limit his financial income dependencies on any single tenant.
This sounds simple but it is not. There are three (and maybe more) distinct challenges Joe will face. First, depending on the particular market being searched, Joe’s ability to find the property to invest in may be a significant obstacle. For example, a market like the Austin, Texas MSA has received so much positive publicity that it is very difficult to find the property that satisfies all of Joe’s investment criteria. Based on the nature of what Joe is looking for, many properties listed for sale have been shopped to brokers for months or years. Second, once a property is identified, getting true and accurate data and financials may prove harder than expected. Third, prices today are over-inflated. In most areas of the country, it is a seller’s market. CAP rates are compressed, so finding a deal that has enough room for long-term appreciation is very hard.
In Part two, we will explore Property Parameters and Rationale, and in Part three, we will examine how to go about finding the right property.
Texas Investment Property Group
is a Commercial Real Estate Brokerage and Investment Company. Since 1991, the principals have created limited partnerships for over 65 successful investments, never once losing money for the investors and never once having a capital call. They invest their own money in every deal. All of the principals are Certified Commercial Investment Members (CCIM) and are hands-on property managers. Two of the principals have earned the Certified International Property Specialist designation (CIPS). For more information, please visit us at www.TexasIPG.com. The author would like to acknowledge the contributions of Wes Walters, CCIM, and V. Bruce Evans, CCIM.