Deciding how to invest your money is a big deal. This is something that I keep at the forefront of my mind when meeting with any of my clients. I believe that part of my job as a broker is to help my clients make the best financial decisions and I am well aware that for many of my clients real estate is not the only avenue being explored when deciding how and where they want to allocate funds.
I subscribe to a partner-based philosophy as it relates to investing, and I feel that it is often my duty is to help weigh real estate investment options against more traditional alternatives. In several past blog posts we have looked at why commercial real estate (CRE) may be a good addition to your investment portfolio (here & here!) as well as first steps when investing in CRE (here!). But in this post, I want to address the approach I take to helping someone decide whether any particular CRE deal makes the most financial sense for his or her investment.
Below I have outlined some of the more conceptual questions I typically try to think through as I analyze investable options (whether through real estate or traditional avenues). Generally speaking, these basic questions should help investors who, starting out, need to apply extra scrutiny to each and every deal. I would advise also going through these questions with your CPA and financial planner as they likely have a wealth of advice regarding what type of investment makes the most sense for you depending on your overall financial snapshot.
Questions to think about
- Am I setting out to be an active or passive investor?
- Do I want to add value to the investment by participating in it?
- How much control do I have over the investment?
- What are my short-term and long-term goals?
Then think about how these goals impact what type of investment you should be looking for.
- What are my risks?
This is an obvious one, but the key is to be honest with yourself.
- Am I equipped to deal with every possible outcome or situation that may result from investment?
- If this investment were to go bad, could it wipe me out?
- Am I considering the tax implications, tax rates, and tax shelter options available to me?
Consult your CPA on these questions about taxes. They will likely be able to help you decide how best to protect your investment in this manner.
- What is my opportunity cost?
Am I concerned that I will miss out on another opportunity? If so, am I committing too much here?
- Am I maximizing my ability to leverage and maximize my returns?
Also consider how you are utilizing other people’s money and other people’s time when leveraging your investment.
- Am I sufficiently diversified in my investment portfolio?
- Is demand sustainable in the area?
As it relates to investment property such as medical office, retail, apartments, etc.- How easy will vacancy be to overcome down the road?
- Is the location a strength or weakness? Is the area trending upwards or downwards?
- What are the costs should things go awry? And am I sufficiently allocating reserves to address those?
Lease-up time should a property go vacant, leasing fees, upfit/remodel costs, etc.?
- What is my exit strategy?
This one is usually at the top of most people’s lists, but I kept it last as it should be easier to answer at the tail-end of an analysis rather than at the front end.
While this is not a comprehensive list, I have found it to be an effective reference for my clients.
Do you have your own list you want to share? Let us know!