For many years you could purchase commercial real estate at a reasonable price and the investor could secure a quality asset at a CAP rate that was sensible with room for future appreciation.
But today’s CAP rates are extremely low in pricing and require extreme caution before deciding on the right investment.
Picking a national tenant with flat rents, being in a good area, may not be your best choice. In the past the typical investor (whether experienced or not) had room for mistakes if the CAP rates were high and the area was good.
Strategy For Today’s Commercial Real Estate Investments
Today, the opposite has taken place where these two characteristics are not enough to determine whether the transaction will be successful in the future.
There is no room for mistakes or miscalculations. This is so due to the fact that interest rates are rising worldwide and your future is very much in jeopardy if you need to sell the investment for any reason such as health, death or financial need in the near future (the next 5 to 10 years).
It might happen that your property may go down in value when leases get shorter, rates go higher, and no bumps occur in the lease to keep up with inflation. Buying one single asset with one tenant is not for everyone.
If you are older, already diversified into numerous asset groups and plan to keep this single asset until forever without worrying about needed cash to survive, there is not much of a worry.
If you are younger and put all your money into one asset, and need to sell for a reason sooner than later, it may not be a wise to invest into one of the single asset categories with risks mentioned above.
There are other options with a diversification element with less money invested in various asset groups that could appeal to the younger investor.
Value-add assets that have more risk and work, seem to appeal to younger investors while steady eddy tenants like Walgreen’s appeal to the older less risk adverse crowd.
There is no magic formula for all commercial real estate investors, for they vary in age, goals, risk/reward tolerance levels and strategies to either gain cash flow to live on or appreciation for retirement years.
Professional commercial real estate advisors know the overall market nationwide and the effects of all the characteristics affecting the property. Such may be the credit of tenants, demographics, CAP rates for certain tenants, lease structures, price per sq. ft. of building and land, proper locations, possible changes in the area.
All these could affect the future value or determine the correct purchase.
