I answer your questions on commercial real estate investment, operations, markets, strategy and anything else in the commercial real estate world. All questions are welcome, so please submit one on the contact page of this site. The first set of questions I received are here below:
What do you recommend as the first commercial real estate investment for someone new to the field? Why?
I recommend that investors starting in commercial real estate focus on traditional multifamily apartments (note that commercial multifamily is generally defined as buildings with five or more units), which are the most straightforward product to understand. Though there are a variety of sophisticated residential strategies, most investors get the idea: it's a residential building and the tenants are people, not businesses with complicated operations. Multifamily is generally lower risk as an investment class. It is also a large asset class, with more opportunities, despite the competition among investors. I recommend that first time commercial real estate investors focus on gaining experience and knowledge in the investment process, build relationships with operators and investors, gauge how involved to be in an apartment project, and decide whether to hire good operators or managers for the investment; making a quick profit or achieving out-sized returns is less important than learning from the process.
What are qualities of a good commercial real estate developer?
To start with the basics, developers need to be good with numbers and manage many ongoing components of a project concurrently. And of course, they need to work well with people--in concert with many other members in the industry, including lawyers, contractors, and investors. Interestingly, developers come from a variety of different backgrounds or areas of study: traditional finance, law, and architecture to name a few. One thing I’d like to highlight is that developers all have in common the ability or willingness to take sizeable calculated risks on the projects they pursue. The fruit and payoff of their work often take years to achieve, and they are willing to endure the entrepreneurial struggle to see a project to its completion.
Now from an investor’s perspective, to find a good developer or operator to invest with, you must spend time with them. Ask all of the vital questions and see that they are willing to answer your questions without reservation. You are building a relationship with this person, and hopefully a long-term one, that will endure ups and downs. Just as entering any venture with a business partner, you should understand this person's character and vision.
How much of my portfolio is reasonable to invest in real estate assets?
This question should be directed to your personal financial adviser, who can tailor the answer for the complexity of your specific portfolio. But I do have some thoughts to offer. Take for example sophisticated investors like pension funds, endowments, or sovereign wealth funds. Up until the 1980s, these institutional investors did not accept real estate as a core asset class. But over the past 30 years, they began to embrace modern portfolio theory and gradually increased their allocations to real estate. Today, any reputable fund or endowment allocates between 10% to 20% of their portfolio to hard real assets. This allocation seems to hold true among high net worth individuals, with many sources showing that they allocate approximately 10% to real estate. For investors who have more experience with real estate, or are more comfortable evaluating investments, the allocation seems to be much more.