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Focus on value: The time to invest in commercial real estate is now

Posted by Greg Chew on Dec 17, 2014 4:47:00 PM

Estimated reading time: 4 minutes

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One of the greatest things about working in commercial real estate is the number of unbelievable people I have the opportunity to meet and work with. Recently I was speaking with the top gun at one of Ontario’s largest private Real Estate Trusts. What an amazing story of growth they have experienced over the past 40 years and it all started with one man, one building and likely some creative 1970’s financing. I have heard success stories similar to this one before; however, I have never heard it from a man with such humility. 

All of us may not aspire to handle a multi-million dollar real estate portfolio spread over the country; however, reflecting on the success story of one man starting with one building is powerful for those just getting started in commercial real estate investment, especially after coming through a major recession.

 

Why invest

I can say with confidence that very few were unaffected by the turmoil of the economy sparked by the debacle of the mortgage backed securities in the United States. Although Canada fared well compared to the negative spin off that other countries endured, commercial values in many small to mid-size markets in Canada are just now climbing back to reach 2006-07 values. Generally, those who stayed the course and continued to invest in properties that they understood with a focus on value investment have continued to do well. 

 

"Price is what you pay, value is what you get"

A very wise man named Warren Buffett said “Price is what you pay, value is what you get”. It’s pretty tough to argue with a guy like Buffett as he slides into the number 2 spot ahead of Mexico’s Carlos Slim Helu and just behind Bill Gates on the Forbes list of the richest men in the world with $71.6 Billion in assets. For those who are unaware, Buffet’s beloved Berkshire has been buying up top in market real estate firms throughout the United States for the past 10 years. With Buffett’s track record I will comfortably disclose that I will listen to his advice before I attempt to decipher Janet Yellen’s few words of underlying fear or cautious optimism on behalf of the US Federal Reserve every few months.

 

How to get value out of your investment 

I think what Buffett is trying to tell us is that price alone doesn’t make an investment a good one. So to put that into perspective for those just getting started in real estate Investment, a “Power of Sale” doesn’t necessarily mean a good deal in terms of value and swinging at a home run in your first at bat may not be the best way for you to enter into real estate. You still have to understand the property and it’s value. 

What are the market conditions and does the property have underlying value that others may not see? How much additional capital will it take to bring the property back to an income generating state etc.? At the end of the day you may be better off paying more for another property to realize a better overall return. In today’s market climate, many large buy and hold investors are happy with a 5-7% annual return and get really excited when the opportunity for a 10-12% return can be realized. These are long-term investors that are in the business of building long-term wealth. With most investments, an attitude of getting rich quick on a buy low, sell high flip sounds easy, however, if it were that easy, then the billionaires would play that game too and for the most part they don’t.

 

A quick summary 

  1.  Learn about Commercial Real Estate Investment by talking to those who are successful at it.
  2.  Consider it as part of your overall lifetime investment portfolio.
  3.  Focus on buying smart based on value not just price.
  4.  Don’t wait for the bottom of the market to fall out to get in when you see value. Even Buffett doesn’t try and time the market.

 Connect with Greg Chew

Topics: Commercial real estate investment, Portfolio

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