Flu – We’ve bought/sold/developed over $1B of commercial real estate in the western US over the past 10 years.
In summary, commercial is all about cash flow, cash flow, cash flow.
This makes the asset class completely different from the residential world where most investors are simply “hoping” for appreciation and profits. Homes rarely turn a positive cash flow.
To be brief, there are 3 deadly problems in commercial: 1) vacancy; 2) rising expenses; 3) reliance on profits/sale
Vacancy: when you lose a tenant, you NEVER get that rent back and your montly check drops immediately. Be scared of lots of small, local mom/pop type of tenants as they disappear regularly.
We own bldgs leased to Fortune 500/100 clients exclusively with investment grade credit (s&p BBB or better). NO VACANCY RISK
Expenses: do not be exposed to paying expenses yourself as they will rise over time yet if your rent income drops (vacancy) then you get hit, hard. We prefer NNN leases where the tenant pays 100% of the expenses thus reducing our risk/exposure to inflation, etc. Couple that with high credit Fortune 500 tenants and our expense exposure is minimal.
Profits: most people think the sale is where profits are made, no. Over 50% of your profits should come from dividends and distributions. Remember, the odds of needing to sell at the peak of the market is rare, thus don’t use a projected sale price to guage your purchase price. Buy based on cash flow/credit then as the market improves consider selling into a rising market. Don’t expect a huge killing from the sale, but rather enjoy the huge cash flows you can earn/grow.
Over all its the best vehicle (done correctly) for generating cash flow & upside potential that I can imagine.
Someone else already hit on the cap rate/value topic so we’ll leave that alone.
Feel free to PM me if you want add’l insight from an investor’s perspective.
