As a business owner, I work at growing wealth by investing in my core business – commercial construction. I also recognize the need to diversify my investments to manage risk. I look at investing as placing bets. I can determine my own financial future and control risk by betting on myself and my team – a good bet. Commercial real estate development has been my primary means of investing outside of my business for nearly 20 years. By carefully investing in select properties, I have been able grow additional wealth outside my primary business. By sharing my commercial real estate investments with partners and investors I also share the risk.
The primary risks involving commercial real estate include location, market fundamentals, cost, delivery, debt or leverage and effective property management. Understanding, quantifying and managing those risks are the keys to building wealth through real estate. A good property location has appropriate traffic levels, good visibility, growth opportunity, availability of utilities and proximity to commuter routes, amenities and shopping. Good market fundamentals include population density and growth, high median incomes, stable taxes and strong political leadership. On the cost side, buying right, forecasting and controlling costs are essential. Underwriting investments with inappropriately high debt levels can increase risk dramatically. Strong and effective property management will insure that high occupancy levels are achieved and long-term property values are maintained.
In order to achieve financial success, a developer must have the ability to qualify, underwrite, deliver and lease a commercial real estate project at or under budget. Qualifying means finding the right projects. The developer must understand the market fundamentals, the entitlement or permitting risks, the income potential, market value and the total costs to complete the project. Good underwriting involves making sure that costs, income, debt and market value are aligned and that the invested capital will achieve the desired returns. There are significant risks in managing and delivering all projects, especially those that require repositioning and/or construction. Construction must be delivered on time and under budget. Achieving projected incomes quickly can be achieved with an experienced marketing, advertising and leasing team.
When investing in commercial real estate one must consider their financial objectives. Are your objectives a long-term cash flow stream or a shorter term, lump sum payout? Long term cash flow generally is more tax efficient as depreciation can lower taxable income. Investors can also take advantage of increases in market value and income over time. A well-located project can yield increases in value and cash flow that exceed inflation. Shorter term hold strategies can yield higher returns on investment but can be less tax efficient. My preference has been to do a mix of short term projects that provide future investment capital and longer term projects that build a cash flow stream that will benefit me and my family in the future.