Commercial Real Estate Investment - Passive Income or an Involved Business?
September 6, 2017
Many inexperienced people think that commercial real-estate investment is just a passive investment – you just sit back and collect lots of money.
Nothing could be further from the truth. Do you just sit back and collect money passively if you run a restaurant? No! There is a lot of work. The management, managing your managers, customers, customer service, legal, marketing, repair, cleaning/maintenance, bookkeeping, budgeting, payroll, insurance, taxes, friendly and professional waiters, paying bills, safety concerns, knowledge of food preparation, keeping food fresh, the serving of the food, hiring, planning, training, etc.
Well, commercial real estate investing is the same thing. There are a lot of parts to running commercial real estate investments.
Why are there so many parts to it? This is because commercial real-estate investment is a business, just like a restaurant or clothing store, or a dental office is a business.
There are so many skills to acquire, knowledge, and—the most important thing needed – years of experience.
But, you might have the argument that you could hire a good property manager who would handle everything and all you would do is sit back and collect the money.
Good luck! You do not have a strong probability to succeed.
Why?
Because the manager is unlikely to care about running your commercial real estate business as much as you.
And there are parts of running a commercial real estate business that the owner handles and the manager doesn’t handle. For example — when to sell the property instead of holding on to the property. Your property at one point was hot. Occupancy was 100%. Rents went up every year. Now people are moving away from the area. It’s not a highly desired area to live in anymore. A manager isn’t likely to have this type of knowledge. If the manager did have this kind of knowledge, it’s likely they would be a commercial real estate investor.
And what if your manager becomes lax – starts to not pay attention to some crucial things. For example, the manager is no longer tough with tenants who leave trash outside of their rental unit. What if the manager stops working hard to keep the occupancy high.
One investor we worked with did not inspect his property for a long time. Finally he found out what was going on. The property was seriously uncared for – actually neglected. There was a discarded mattress outside the property. What’s worse is that occupancy had fallen to 55%.
The owner lost a lot of money.
What is arguably worse is that we’ve come across investors who’ve reported that their property managers have stolen money from them.
There is a very important expression in business. “Inspection equals profit.”
You need to inspect all activities involved in the business you run. Now, it doesn’t mean that you have to look at every operation of your business. But, it does mean that you have a statistical program set up where you will know that all operations are done correctly.
For example, with a good statistical program, you would know in a heartbeat that your property manager is stealing money from you. How? By the statistical program which has documented all monies that are collected. A good program will show that some funds aren’t accounted for, and who is responsible for that. “Checkmate.”
The take away here is that you need to be able to manage your manager. This is one of the top skills needed for commercial real estate investment. Actually, any business where you have one or more managers.
But, how can you manage your manager unless you have knowledge of the different parts of commercial real estate investment? And we are not talking so much about book learning knowledge. We are talking about experience. Years of experience. You don’t have a pilot fly you to Orlando who only read books about flying. You fly with a pilot who has years of actual flying experience.
Importantly, you know how to screen rental applicants for credit, and references, etc. Because without this knowledge, you may end up with tenants who destroy your property and don’t pay rent.
You also know how to read a brochure that describes a commercial property that is for sale. You know that these brochures often have lies that make the property look a lot better than it actually is. You have the wisdom to spot the lies immediately. Many of the lies are in the form of a proforma. A proforma describes what the seller anticipates rents will be in the future.
But, it is sneaky and meaningless in so many situations. Why is it meaningless? Because the proforma describes a possibility of rents for the future. But, lenders are only going to pay attention to actual numbers . This means the actual current rents right now, and actual past rents. A proforma makes a property look good, but only to the inexperienced investor. Inexperienced investors lose a lot of time and money because of buying properties based on proforma.
One thing of major importance you can do that can save you many thousands of dollars, and hundreds if not thousands of hours of time, is get mentored in commercial real estate investment. Using the pilot example again – do you want to buy a flying manual and try to figure out how to fly a plane, or would you rather hire a pilot who actually shows you how to fly the plane?
You can join a commercial real-estate investment group to get mentoring. It could also be an investment group that has both residential and commercial real estate investors. It’s an excellent way to get mentoring. There are experienced commercial real estate investors who help people with less or no experience.
Contact us to see if you pre-qualify for our best multifamily, new construction, rehab, or hard money/bridge loan rate and terms. Also, contact us if you would like to discuss your particular multifamily lending needs, or if you have any questions. Call 214-695-7310, or send an email to bruce@businessloanstore.com (link sends e-mail)
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Bruce Painter, Director of Marketing, Business Loan Store