The allure of passive investing in commercial real estate investing is undeniable. The promise of steady returns without the hassle of day-to-day management is a dream for many. But what happens when that dream property doesn’t quite pan out? At CREI Partners, we believe the most valuable lessons often come from the “almost” investments – the deals that didn’t quite meet our criteria.
Here, we want to share our investment process and how even seemingly unsuccessful pursuits contribute to our overall success in helping you passively invest in commercial real estate.
Step 1: Market Assessment – Laying the Foundation for Success
Before we even consider a specific property, we begin with a rigorous market assessment. We focus on markets that exhibit strong fundamentals over a five-year period, analyzing metrics like:
- Unemployment Rates: Low unemployment indicates a healthy job market and a stable pool of potential tenants.
- Population Growth: Growing populations create demand for housing, driving up rental rates and property values.
- Population Age: Understanding the age demographics helps us identify markets with a high concentration of renters.
- Job Diversity: A diverse economy mitigates risk, as the property’s success isn’t tied to the fortunes of one industry.
- Top Employers: Identifying the presence of major employers with a strong track record ensures a steady stream of potential tenants.
- Supply & Demand of Apartments (including Building Permits): We analyze the balance between existing and new rental housing to avoid saturated markets with high vacancy rates.
By prioritizing markets with these characteristics, we lay a strong foundation for your investment’s long-term success.
Steps 2-5: Refining Our Approach Through Every Stage
The following steps in our process – Property Analysis, Due Diligence, Value Creation, and Exit Strategy – all play a crucial role in identifying potential pitfalls and honing our selection criteria. We’ll explore these steps in the context of “almost” deals to illustrate how even setbacks contribute to our overall expertise about investing in commercial real estate.
Step 2: Unearthing Value – Beyond the Surface Shine
Imagine a seemingly “off-market” deal – a property with below-market rents in a decent location. We see potential for renovation and rent increases, but further investigation reveals structural issues that would require significant upfront costs.
Lesson Learned: We go beyond surface appearances. While value-add opportunities are exciting, meticulous due diligence is crucial. We factor in potential hidden costs to ensure the renovation translates to a sound investment for you.
Step 3: Due Diligence – The Unsung Hero
We’re excited about a well-maintained office building with a solid tenant base. However, the lease agreements reveal short terms with high tenant turnover. This translates to potential vacancy periods and lost income.
Lesson Learned: We delve deep into the financial history and lease agreements. Understanding tenant profiles and lease structures helps predict future cash flow and minimize vacancy risks.
Step 4: Value Creation – More Than Just Renovations
We find a property in a good location with decent rents, but the common areas are outdated and uninviting. We envision renovations to attract higher-quality tenants. However, upon closer inspection, the local zoning code restricts significant exterior changes, limiting our ability to add curb appeal.
Lesson Learned: While renovations can significantly enhance value, we also consider regulatory limitations. We ensure our value-add strategies comply with local regulations to maximize returns within permitted boundaries.
Step 5: Strategic Exits – Knowing When to Fold ‘Em
We identify a property with a strong exit strategy – a potential redevelopment opportunity in a few years. The current financials are solid, but the exit timeline hinges on a specific zoning change that may not be approved.
Lesson Learned: We prioritize clear and achievable exit strategies. While future development possibilities can be attractive, we focus on properties with established value and predictable exits.
The Takeaway: Every Step Counts
Even the “not-quite-right” opportunities contribute significantly to our investment process. By analyzing what didn’t work, we refine our selection criteria, sharpen our due diligence process, and develop a deeper understanding of different markets and property types. Ultimately, these lessons translate to better deal selection and a stronger foundation for your passive real estate investments.
Partnering for Success
At CREI Partners, we believe in transparency and open communication. We share these insights not just to showcase our process, but to empower you to make informed investment decisions. As your partner in passive commercial real estate investing, we are committed to continuous learning and improvement – all to ensure your investments reach their full potential.
Interested in learning more? Stay tuned for our next blog post where we’ll delve deeper into specific passive commercial real estate investment opportunities!
Additional Resources:
Due Diligence Steps to Finding Multi-Family Investments, Part 1
Due Diligence Steps To Finding Multi-Family Investments, Part 2
https://www.meetup.com/texas-multi-family-investor-meet-up/
Mike Manino – Mindset Mastery: Goal Setting and Systems for Real Estate Success
Subscribe to our newsletter so you never miss out on new investment opportunities, podcasts, blogs, news and events.