If you think the answer is a simple yes, then this article is for you. As you will soon find out, American economist Milton Freedman’s adage about there being no such thing as a free lunch rings true.
There is a Way to Generate Income on Your Real Estate Investments, but…
There is nothing passive about it.
It is possible to get to a point where you’ve already put in all of the work setting up a system that will generate profits for you; however, these systems can take years to bear fruit.
Dispel the myth that commercial real estate investments instantly pay for themselves (as well as a house in the Hamptons), and let us dig into the ways you can make CRE work for you!
The CRE Myth vs. the CRE Reality
For people who are not familiar with the minutia of real estate investing, it might seem like a straightforward process at first glance. Experts in the field see commercial real estate as having a low bar for entry. You only need capital to purchase real estate, but you will soon be underwater and overwhelmed if you go all-in uninformed.
Many successful entrepreneurs or professionals acquire capital through hard work and success in their respective fields, and they hear colloquially that CRE is a great way to invest that capital. There could be potential tax advantages down the line, and they may have friends or acquaintances who have had success in CRE investments. They want in on that action.
Plus, diversifying assets is a good thing, right?
True, but to be truly successful in a business enterprise requires more than the initial capital investment. Trust commercial real estate investing experts when they say that the devil is in the details.
Tangible is Attractive
Real estate assets’ tangibility makes it more attractive than an asset you can’t touch, stand on, run through, or shop at. This tangibility of CRE contributes to the myth that all real estate investments are a sure bet for profits.
This is where the details start to erode the steadfast idealism present in newer investors. Here is where “passive” must be divorced from income in your mind.
The Obstacles Facing New Investors
Knowing the local markets is crucial to securing a plot that will return profits. If you pay too much per square foot of space, it won’t matter what tenants you attract or how much foot traffic there is. It won’t matter that your location is prime and that the area is wealthy.
The math does not lie – you will lose money paying a premium for the ideal location.
Instead of seeking the most attractive locations, search for deals that accurately weigh price against value. How do you truly gauge value? Consider the variables.
Consider These Variables:
Knowing the local markets comes down to understanding a few key variables that have a massive impact on a property’s value.
Bylaws that regulate zoning ordinances change all the time based on legislation. The ordinances that regulated the previous owner might change completely as local, state, and federal governments enact legislation and voters decide at the booth.
Local, State, and Federal Government Prerogatives
As local, state, and federal authorities redistrict regions, implement stimulus packages, legislate infrastructure programs, and change business loan rates, your property’s value will be affected.
Maybe a state stimulus package calls for the widening of a highway that will cut into your property. Perhaps the construction of a new bridge three miles down the road will redirect the traffic that brought exposure to your property. Or maybe the opposite is true, and a new bridge means more exposure. These local market factors have a significant impact on choosing the correct location.
Is a particular area getting poorer or wealthier? Is that area diverse culturally? What has census data said about the changes in the region you are eyeing up? Is there a new school going up in the area? A new convention hall or sports arena? A new satellite branch of a university being built or an old college relocating?
Local Markets Make or Break Your Investment
Hopefully, now you see that commercial real estate is a bit more complicated than you might have first thought. Let us say you had two identical properties in terms of price and square footage, but each location had a vastly different local market. Which one do you go with? If you didn’t consider all the variables, then you may be throwing your capital at a sinking ship and not even be aware of it.
What About the Tenants?
Now that you’ve purchased a brand new commercial lot, how do you attract and keep the right tenants? How do you effectively negotiate a lease that is fair and profitable for both parties? How often do you want to revisit the lease to make adjustments and address issues?
Each tenant will need a slightly different deal to accommodate their business. Are there restaurants? Are there medical clinics or marijuana dispensaries? What about breweries?
Strike a Flexible Balance Between Your Financial Goals and Your Retention Goals
You need to be assessing and reassessing this balance to make sure your tenants are satisfied, and your enterprise is profitable. Do you spend more to keep an anchor tenant happy? If their leaving spells a moderate decrease in consumer presence, then how much do you give?
What About Maintenance, Damages, and Repairs?
Another essential aspect to consider is who pays for what and when? Balance is also paramount when considering this. Certain factors are uncontrollable, but other costs can and should be negotiated and hammered out in the lease agreement – before problems arise.
Put Professional CRE Investors to Work For You
Most people who have other business responsibilities do not have the time to accurately and exhaustively study the markets, evaluate price against value, or possess the legal prowess in writing up fair and profitable lease agreements.
If you’d prefer to trust the experts, you can invest your capital into a private equity CRE partnership. By investing in a CRE partnership, you fund an asset pool managed by career real estate experts. You provide the capital and see returns on your investment. Entering a CRE partnership may be the closest to “passive” income an investor can get.