In part one of this series, Managing Risk for Commercial Real Investing Part 1, we talked about inherent risks, and why projects fail. In the second part, Managing Risk for Commercial Real Investing Part 2 the focus was on the financial analysis of the deals. In our final part of these series we discuss mitigating the risk.
The question that arises is how do you mitigate risk? Our success has been forged by creating a model of what we know has worked over time. It is a repeatable model. Since economic times vary, the model may be stressed in terms of relevancy to current market situations, but it still works. Creating a model starts with the goals and objectives of the investor(s). Some goals are strictly financially based, that is, either a cash-on-cash return, an IRR, or something as simple as net cash flow or asset appreciation. Other property could be acquired for long-term appreciation. Whatever the real estate investing goals are, it is imperative to stay true to the model, stay focused and not deviate.Analyzing a commercial real estate investment is a time-consuming and very detailed process. Click To Tweet
For best results, the real estate investing model should be limited to either a specific geography (a city or state or region) or a specific asset class (multi-family, retail, industrial, office, etc.). While some investors prefer single-tenant net leased properties, other prefer multi-tenant properties. Some investors have an appetite for value-added properties (renovation, repositioning, reuse, increased rent, increased occupancy), while others feel that newly constructed properties suit them better. Having a defined horizon for holding the property is important, but remember it is the market that will dictate when the time is right to sell. Some would call this an exit strategy. Lastly, the model needs a starting and exiting CAP rate that enables the investor to attain the financial goals. By buying at a low CAP rate, the investment leaves you little or no room when it comes time to sell.
Analyzing a commercial real estate investing is a time-consuming and very detailed process. One only has to consider what is at risk (time, money, reputation) to know that while difficult, it is necessary and doable. The key is not cutting corners or making decisions based on emotion or incomplete or inaccurate information. It is best to enlist help for this process. Having a good real estate attorney, accountant, real estate broker (preferably a CCIM) and a team of related professionals (architects, engineers, inspectors, geotechnical specialists, etc.) helps de-risk the project.
Image Courtesy of “Risks Sphere Definition Shows Insecurity And Financial Risks” by Stuart Miles FreeDigitalPhotos.net