Investing in Commercial Real Estate
Do you get seminars and/or if you watch them about investing in commercial real estate? Some of these presenters slam all the real estate “experts and gurus” who tell you that those who say “your money is made when you buy” are totally wrong. When they say “understand” they mean “buy my online training program” and that you too could time the market and become rich beyond your wildest dreams by investing in commercial real estate or residential real estate.
Commercial Real Estate profit
Your profit is made when you buy the commercial real estate property. If you invest too much for commercial real estate in Austin, there is nothing you can do. Hopefully it does not come to that your lender takes pity on you or is smart enough to figure out that they will lose less in a short sale than they will foreclosing.
Smart Investors
The smart investor doesn’t invest in commercial real estate when they can’t determine what the value is.
Investing in real estate in Austin, Texas or anywhere for that matter has a different value to each investor.
BEFORE one invests, they have an investing criteria you should know HOW to figure value to an asset BEFORE you buy it.
Timing the markets is crystal ball, truly none of us know what is going to happen, unless you have ESP or incredible luck.
The reason why is because we don’t know when the market has fallen from its peak until after it falls because it’s historical data. We look backward. We see the peak. We see the market falling. Same with bottoms. We don’t know the market has bottomed until it rises. So, if you buy at the very bottom and sell at the very top, it is sheer Luck- Guess Work.
If you are a great timer and can profit on this, you should be investing in real estate more, however beware timing the market is not the way to go.
For the rest of us; we need to know how to reduce risk by using proven financial formulas.
Here is an example:
Joe and Jim invest in real estate in Austin find a 10,000 SF real estate investment with $50,000 NOI. A Joe’s criteria is anything above 4 Cap is good, so he buys it at 5% NOI, which is $1,000,000, loan is 80% LTV, 6%, 20yr AM, and has a tenant at $14sf NNN. Jim buys for 7 Cap, or $714,286 everything else is the same. The market corrects and depreciates by 25%. Joe’s debt is $800,000, Jim’s is $571,000. Rents fall 25% to $10.50.TI is $36,000.
Joe’s
Income/debt/differential
$105,000/$104,772/$228
Jim’s
Income/debt/differential
$105,000/$85,104/$19,896
Joe will not catch Jim in run to the bottom in a lease rate war.
If you use a higher cap rate, you can see the formula shielded Jim from the risk Joe was willing to take. They both bought at the same time. A Value-driven model will provide better protection in the future than timing the market.
Now that we are several years into a correction and, thankfully, in some areas seeing some upward trends, it is easy to predict what happened. Few people I know, and I know some very well-educated, sophisticated, experienced investors, saw this crash coming.
Timing markets is very difficult, if not impossible.. The key is not to give any real estate back. In a sour economy like we just had , you could have spent the last 4 years fighting to stay in possession of acquiring and building.
It’s old, it’s tried, it’s true. Use financial analysis. Know your numbers and buy low, sell high. It’s been working for years.
