Commercial Property Investment: Try It

Investors can diversify their portfolios with a little time and effort

Michael Merino, Vice President, NAI NBS

Individual stocks and bonds, mutual funds, precious metals, certificates of deposit and interest bearing checking accounts. Ask the average “investor” where he or she directs investment money and more than likely the answer will include one or more of the vehicles listed above. But is there another option available to an investor who wants to truly diversify his or her portfolio?

Commercial investment real estate may be that option. For the individual willing to put in a little work and research, commercial properties offer a wide range of alternatives. From industrial properties to small multi-family apartment buildings, strip shopping centers to self-storage warehouses, real estate can pay off.

There is a tremendous range of commercial properties available for the small investor to consider. Each type of property presents its own profile of return potential, management, responsibility and, of course, levels of risk. However, a property that is well managed and properly financed can yield significant returns over the long term.

Investors making their first foray into investment real estate should keep the following in mind before closing on a commercial property:

Establish a Realistic Objective – Just as a smart investor would set objectives with stocks and bonds, so should anyone planning to purchase a commercial property. Make sure these goals are defined and attainable.

Because returns on leased commercial properties are not subject to the roller coaster ups and downs of Wall Street, investors should not expect dramatic short-term returns during their ownership. Instead, determine an exit strategy for disposition of the property at a prescribed time, preferably when the property has appreciated in value and market demand is strong.

Identify what type of factors may trigger the sale (retirement, the purchase of a new home, relocation, etc.), and keep in mind the following: real estate – governed in part by the economic principle of supply and demand – is not always a liquid asset. In other words, don’t expect to be able to turn it into cash at a moment’s notice.

Add Sweat Equity – Add to the bottom line by investing personal time in the upkeep and management of the property. General remodeling tasks, minor interior and exterior maintenance, general accounting and other related chores can often be completed by the investor. This helps reduce overhead cost while letting the investor retain more of a “hands-on” property ownership.

Avoid Highly Leveraged Deals – A highly leveraged financing package is one in which a small amount of cash is used to purchase a larger, more expensive property investment. These types of deals can prove extremely risky, because a market fluctuation can outpace potential income. Leave highly leveraged deals to experienced investors.

Start Out Small – Investing in real estate may be more time intensive than investing in stocks. This is why first-time commercial investors are advised to purchase smaller properties, such as a duplex apartment building or single-tenant retail properties. These properties require less initial capital and generally reduce time management commitment, while providing the experience of ownership and prospective financial rewards.

Stay Close to Home – Markets across the nation vary as greatly as the country itself. Neophyte property investors are advised to make that initial plunge into familiar waters. An investor will certainly be more familiar with the particulars of his or her local market, rather than one across a few time zones.

Get Professional Advice – Commercial real estate, like any other long-term investment, presents great opportunity and inherent risk. A commercial specialist experienced in appraisal, brokerage, management, financing and other related areas can prove invaluable to first-time investors in helping to select an appropriate property.

With a trusted advisor, minimize risk and chart a long-term path to success. Select a real estate professional who is educated in dealing with issues that may surface during the anticipated length of time the property will be held. Also, locate an experienced tax advisor who can help explain the liabilities and strategy involving the Capital Hill Cost Allowance.

Lastly, seek legal advice from an attorney who specializes in real estate or "dirt law."

In the last several years there has been a lot of liquidity, or capital, in the marketplace. Right now, financial institutions have tightened their lending requirements, but opportunities are still available in the commercial real estate sector for investors willing to take some risk. This may include bringing more equity to the table. However, with great upheaval comes new opportunity.

Like any speculative venture, investment real estate may not always perform up to short term expectations. Over the long haul, however, a well managed and properly financed piece of commercial property can unquestionably prove to be a solid investment.