10 Commercial Real Estate Investing Principles – Before we get into the 6 Stages of investing in Commercial Real Estate, I thought I should share with you, how I think about investing.
About 3 months ago I was on a call with my coach. He asked if I’d read the book, Principles, by Ray Dalio.
I said I hadn’t, but was familiar with Ray and his investing success (he's the CEO and created the hedge fund, Bridgewater Associates).
As you may know, I’m not a big fan of investing in stocks or the market (lack of control)- but it doesn’t mean I don’t study the guys who are dominating in it. Many of the successful investors I learn from are stock investors.
Warren Buffett, Charlie Munger, Kyle Bass, Ray Dalio, Howard Marks – are all investors I have a great deal of respect for and whom I study their ‘investing principles‘.
Today, I want to share with you the Rules or Principles I follow when raising capital and investing in real estate.
The list of Shane’s 10 Commercial Real Estate Investing Principles below are a compilation of research that has taken 10+ years. Not all of these concepts are original or mine. When possible, I will give credit to the person I have learned from.
It’s not always possible, as I’m constantly updating and tweaking my investing philosophy.
My hope is that it generates some critical thinking on how and what you invest in. The questions you ask before investing. The approach you take.
1. Strong long-term outlook (credit Buffett and Munger)
- MF, service based retail and Industrial are all sectors with a long horizon
- Do I understand the Predictability of the business long term? If no- we do not invest (ie, single tenant industrial buildings with short term leases).
2. Purchase on Cash flow today – Target 6% cash on cash (Credit Grant Cardone)
- Do not buy into the better management story, or price appreciation
- We do not financially engineer spreadsheets. It’s very easy to ‘tweak’ the numbers, cap rates and assumptions.
- Look at the property on an As Is basis and make your determination.
3. Invest in what you understand.
If you do not understand retail tenants, don’t invest in them on your own. Invest where you are competent and understand your clients.
How do I get killed in this deal? What are the disastrous outcomes?
How much damage could a competitor do to me if they didn’t care about returns? (think Office downtown Calgary – Net 0 deals)
4. Invest in properties that have real and measurable upside potential (improve vacancy, reposition a property, redevelop, add density).
Solve a problem
: Can I buy this property with a good margin of safety – run sensitivity models to show how far rents can fall, vacancies to go up, unexpected expenses (Cap X), or interest rates can rise (debt service)
5. Invest where there are Jobs and Growing GDP (Don Campbell- REIN)
We do not fall in love with the city we live in. That said, if you’re in a big enough city, and it has strong fundamentals, there are opportunities.
6. Conservative Debt (father in law, Andy)
Leverage can be amazing at increasing returns, but, on the downside, it can wipe you out. So, we generally like 30% equity in our deals, with solid room for covering our debt service
7. Supply and Demand Fundamentals (Munger/Cardone)
- be careful investing in a markets where barrier to entry is low (large supply of land, cheap labor, etc).
If you can buy well below replacement value, that is a good starting point.
- Brand loyalty
- Barriers to entry
- Capital investment required (today and ongoing)
- Obsolescence (if too old, is it still relevant)
- Changing buying habits (online)
- Competitors ability to cut prices (lower cost base)
8. Location and Timing are Crucial (Experience/ Learning the hard way)
Don’t be married to investing in 1 place and/or must invest today.
Goes back to patience and constant learning
9. Invest where you have a Market or Analytical Advantage. (Brokers I worked with in Houston and Texas)
Meaning you know people in the cities or areas you are investing in and they have insights others do not, or, you have analytical data that gives you an adv over the competition.
- What happens if I’m wrong on this investment?
- Have you personally guaranteed the loan?
- Do you have investors money in this deal?
- Are you “All In” or, are you properly hedged?
10. Competent and HONEST Management (experience, the hard way)
- How deep is the labor pool?
- Are you dependent on talented people to run the property? If so, you could be beholden to them (ie, small towns, remote areas, complex properties)
- These are my guiding beliefs and philosophies for investing in commercial real estate – and why I like Multifamily Properties.
If you have thoughts on comments – let me know.
I'm always learning and growing
