Eight Habits of Highly Effective Commercial Real Estate Investors

Investing in commercial real estate can be a very lucrative business—but also a risky one that requires patience, fortitude, and industry knowledge to ultimately be successful. How do you separate yourself from the crowd? Here are eight ways highly effective investors stay on top of the game.

  1. Create a Solid Business Plan – It’s important to visualize both your short and long-term goals, which helps maintain focus and get back on track if you ever hit a stumbling block.
  2. Know Your Market Inside and Out – Acquire an in-depth understanding of each of your markets by keeping on top of current trends, transactions, and key economic figures that allow you to make informed decisions about purchases, dispositions, and other opportunities, both now and for the future.
  3. Read the News Every Day– Subscribe to publications that cater to both your market and industry, including daily newspapers, business journals, and trade publications. Set aside time each day—whether at breakfast, on your commute, or on a break—to catch up on the latest news. Blogs, Twitter, Facebook, and LinkedIn are four other sources to find and share stories related to your market.
  4. Never Stop Learning – Keep abreast of all industry regulations, laws, trends, terminology, and technology, which will allow you to adapt easily to market changes and conditions. Understand the ins and outs of your properties, your tenants, effective ways to save money, and how to keep your assets competitive.
  5. Understand Risk – There’s a reason there’s that old adage, “If it sounds too good to be true, it probably is.” Educate yourself on the risks that come with real estate investments—not only in terms of deals, but legal, financial, and market risk. Avoid investing in assets you don’t understand.
  6. Carve a Niche – While it may be enticing to be a jack of all trades, many successful real estate investors build their business on a specific niche; for instance, it might be only investing in certain asset classes, industries, or geographies. This allows investors to really develop a deep knowledge of the niche and everything that comes along with it.
  7. Build a Solid Team – From accountants, lenders, and lawyers to business partners, operational experts, and mentors, successful investors build a hard-working, knowledgeable team around them in order to share expertise and gain insight.
  8. Network – You never know from where your next deal or opportunity may come—perhaps from a colleague, client, business partner, friend, mentor, or fellow alumnus. There are many ways to drum up new business: Attend networking events, join boards, or become a member of industry or alumni organization, to name a few.

A New Indicator of the Health of Real Estate Investing

US government data indicates that commercial real estate lending is healthier than it has been for many years.

With Q2 ’15 data analysis now available, the Federal Reserve notes that commercial real estate loan delinquency rates have been in steady decline, implying a healthier economy and real estate market.  The percent of CRE loans from banks with delinquent payments dropped to 1.2%, the lowest rate since 2006. In between these years, the delinquency rate climbed as high as 8.77%, during the major recession. There’s a great chart here, with a screen capture below.

iFunding sees this as another sign that commercial real estate investing may be in a ‘goldilocks’ environment now, where market demand and property prices are growing slowly but steadily and investment performance overall should bias positively.  Although there are no guarantees about the future, many industry pundits agree the U.S. domestic economy is relatively robust (see the video here), the existence of an investment bubble is very unlikely, and the possibility of a recession is low for the next several years.
What does the Fed’s loan data mean for your real estate investing? You may want to consider that:
  • Investment opportunities with a 1- to 3-year target for return of capital are attractive yet prudent, as they are predicted to avoid major macro-economic surprises.  Longer duration investments also can be favorable, but understand that your capital may be locked in for an unexpected amount of time until the market is right for a property sale.
  • Both first-lien debt and well-underwritten mezzanine (“second tier”) debt, with its higher average return rate of several percentage points, can be reasonable investments for an income-generating portfolio at this time. First-position debt is secured by a first-in-line lien against the property, meaning that even if there are payment delays or defaults, a company like iFunding is in position to take control the property and protect investors’ principal.
  • The average loan default rate will vary by the type of commercial property held, the structure of the loans, as well as local and demographic economic trends, and each property carries its own risks. Therefore, spread your investments across multiple holdings to diversify away much of the default risk.

 

Foreign Investment Heats Up U.S. Commercial Real Estate Market

When the U.S. residential real estate market hit the skids in the latter part of 2007, it started a chain reaction that would eventually bring the international economy to its knees. Since that time, government officials, economists, and financial experts have been coming up with creative ideas to prop the real estate market back up. These solutions, such as the first-time homebuyer tax credit, have met with mixed success. But in the past year, the U.S. real estate market has been on the rebound, largely because of a sharp increase in foreign investment in U.S. commercial properties.

Commercial Real Estate Investment

The term ‘Commercial Real Estate’ refers to properties that are not residential. Any real estate can be considered as a commercial real estate, provided any one of the following criteria is met:

  • It generates revenue
  • It is rented out
  • It is for investments
  • It falls into any other category other than private residence

Understanding the fundamental nature of commercial real estate is vital since there are different rules that apply to residential versus commercial real estate.

Challenges of Investing in Real Estate

The commercial real estate market is making a comeback! Recent data suggests that now seems to be the ideal time to add real estate to your investment portfolio. Some benefits of investing in commercial real estate are:

  1. Stable cash flows: Commercial properties are typically occupied by tenants that have long-term leases, making cash flow fairly predictable.
  2. Low risk diversification: Private commercial real estate investments can be a wise portfolio diversifier since their returns have low correlations with other asset classes such as stocks and bonds.
  3. Inflation Hedge: Given its positive correlation with changes in the consumer prices, real estate investment can provide a partial hedge against inflation. As consumer prices rise, so do real estate cash flows and, typically, associated property values.