How to Become an Investor in the Best Investment in the World
“All men are created equal”—except in the world of commercial real estate.
One of the concepts that always seems to be difficult to convey to successful accredited investors is that no matter what level of prominence they have achieved throughout their lives, as far as investing in commercial real estate is concerned, they are a bottom-of-the-food-chain “outsider.”
Being an “outsider” generally begins with the lack of basic real estate knowledge.
There isn’t an investment channel or a “commercial real estate for dummies” guide to enlighten one.
1. Understand the Vocabulary
The average person has never been exposed to, nor understands, even a rudimentary real estate vocabulary, let alone the nuances surrounding different asset types (e.g., apartments, hotels, office buildings, retail centers, self-storage, etc.).
One must also know how building values are quoted (e.g., by the square foot, the door, the key, etc.) as well as terms like ADR, IRR, RevPar, cap rate and more. Additionally, concepts like construction renovation costs, replacement reserves and loan terms are important to understand.
Mastering this terminology is the foundation all true real estate investors must build upon.
2. Acquire General Market Knowledge
Once you have a grasp of vocabulary, the next building block is general market knowledge.
“Tell me, Joe, what’s the current lease rates on office properties in the Scottsdale Airpark with floor plates above 5,000 square feet?” “How about under 1,500 square feet?” “And lease concessions?”
Now imagine those kind of questions as it relates to every asset type, in every area, of every city, of every state.
Although many of the major brokerage firms produce quality research, there are some fine (but expensive) online property sources such as CoStar, Yardi or LoopNet. Still, how this general information may pertain to a certain property is completely interpretive.
3. Form Lending Relationships
Next, it is impossible to make any deal pencil if you are “outside” with the lending market. That can’t be stated enough.
You’ve heard the saying “cash is king”? Well, if cash is king, then debt is the emperor.
The difference between a good deal and a great deal is the quality of your debt.
The main difficulty in getting a quality loan is that not only are there different kinds of lenders to go to (e.g., banks, commercial mortgage-backed securities, insurance companies, private lenders, etc.), but also most of these lenders won’t give you a commercial loan unless you’ve gotten a commercial loan before.
Building a network within the lending community is important. Equally important is knowing the power one has as the borrower and how to push back against a particular lender’s punitive and costly terms.
4. Nurture Construction Industry Contacts
One of the most contentious “outside” issues many investors encounter is their relationship with the construction industry.
With unemployment levels at historic lows and a shortage of new workers entering the industry, construction labor costs have increased and the time it takes for a project to be completed has risen dramatically. Contractors have their pick as to what jobs they will show up to and when.
As far as material pricing is concerned, the most significant problem developers of all kinds faced in 2018 was “building materials prices,” according to a recent survey from the National Association of Home Builders.
The majority of developers (87 percent) said the cost of materials was a significant problem for them in 2018, and 69 percent anticipate more trouble from material costs in 2019.
As these issues continue to multiply, real estate investment managers who do not have the ability to source material and keep construction crews employed and compensated justly will find it more and more difficult to underwrite assets whose returns depend on renovation cost controls.
5. Gain Deal Access
So, you’ve done a lot of work, and now you understand real estate terms, your market, the kind of debt package you’ll have, and your construction costs and team. Now you’re faced with the classic conundrum that makes every other “outsider issue” moot: Do you have the access to quality real estate deals?
You’d be hard pressed to think of an industry or a club where access is so readily denied as it is in commercial real estate. Why? Commercial real estate is the Wild West.
There is no organization, exchange or general marketplace where equally talented, like-minded investors can go to trade their wares, in an honest and informed manner.
Every player in the industry is constantly creating their owns connections within the asset control structure and looking for ways to source deals.
Sure, you can argue that the major commercial brokerages and online services list assets to the public domain. But, as
anyone inside the industry will tell you, the best deals are never listed. When a truly spectacular opportunity comes along, the person who sources that deal will bring it to their best clients first and bypass the general market.
The reason for this is simple: The definition of a “best client” is someone they know who has demonstrated multiple times the ability to close quickly, and without complication.
A novice might respond, “Well, by going to the open market am I not exposing the property to more buyers or sellers who will get the best possible price for the asset?”
Theoretically, yes. In practice? Nope.
Insiders know that by bringing a deal to the general market, additional players, unrestrained by the rules or regulations of society, will inject into the process delay, ignorance, arrogance, dishonesty, ill intentions, unrealistic expectations and complication.
Perhaps this sounds like a negative take on the utopian vision of the marketplace, and a jaded opinion propagated by an agent who wants the marketplace kept closed. Ask a true dealmaker sometime about a few of their acquisition/disposition horror stories, and then judge this opinion wrong.
Getting on the inside of the deal pipeline, otherwise known as the “better end of the trough,” requires patience, discipline and most of all, time.
The track record and reputation you establish to the investment community begins the minute you enter the arena and will stick with you always.
The decision the prudent person has to make is this: Do you spend your time developing all this knowledge and developing this vast network, or do you skip to the front of the line and partner with someone who has the sophistication and access you desire?
Hopefully, the answer is self-evident.
Thomas Bade
As one of the “Original 7” at Caliber Wealth Development, Thomas Bade specializes in working with investors in the allocation of real estate to their portfolios. Tom began his career in the real estate industry in 1978 and has a long and varied background in the sale of “institutional-level” commercial real estate. Prior to joining Caliber, Tom was a commercial real estate agent and wealth advisor with several nationally known firms, where he worked in the fields of financial planning and investment sales. He was also a registered principal and investment advisor for National Bank of Arizona, Dain Rauscher and Prudential Securities for 14 years, where he received recognition as Rookie of the Year, Broker of the Year and Manager of the year.
