When you have been in commercial real estate for over 30 years, you tend to have at least a few words of wisdom. Here are some of the observations we have made on how to successfully buy commercial real estate, which includes self-storage facilities, mobile home parks, RV parks, billboards – basically everything out there.
You make all your money by selecting what to buy
Real estate is a strange animal. The greatest value add you offer is the initial selection of the property. If you buy a bad property, even the greatest manager in the world cannot save you. And if you buy a great property, even the worst manager in the world cannot stop you from being successful. So the most important thing you can do as a buyer of real estate is to be a great shopper. You have to be able to identify what is an opportunity from what is not an opportunity. If you can’t tell the difference yet, then hold off buying until you figure it out.
You must also understand timing and wait for it
You’ve heard the old expression “buy low and sell high”. A big part of that description relates to the macro market conditions. You want to buy when everybody else is selling, and vice versa. If the market is frothy with demand and prices are skyrocketing, then wait until it goes back down. Conrad Hilton, the famous American hotel tycoon, learned this lesson during the Roaring 20’s. After losing all of his hotels to foreclosure during the Great Depression, he said “the secret to real estate is to never build a hotel, but to let somebody else build it and then buy it for a penny on the dollar during a recession.” Some of America’s greatest fortunes were made during the Savings & Loan crisis of the late 1980’s, from people who sat by and waited until the booming market collapsed, and then bought those properties for next to nothing from the FDIC.
You must be a master at due diligence
Benjamin Franklin once said “diligence is the mother of good luck”. He would have been a great real estate investor. That quote is as true today as it was in 1776. If you do not perform solid, in-depth due diligence on a property, then how can you expect it to perform as planned? That would be like a pilot not doing a check of the airplane before taking off. Sometimes you might get lucky, but most of the time you stand an excellent chance of crashing and burning.
Buy damaged goods and fix them
Many people fail to see the profit differential between buying something that is already in great shape and buying something that is poorly managed and making it into a property in great shape. Don’t turn your nose up to properties that have cosmetic challenges – things you can fix. You’ll get a huge discount, and cosmetic fixes are relatively easy and fast to make. Don’t confuse this with “structural” problems that are impossible to remedy, such as a poor location. But a coat of paint and a new sign are easy.
You must live by the motto "sell, sell, sell and cut, cut, cut"
To really succeed, you must focus on the key drivers to profitability: revenue and expenses. You must focus all your energies on these two arenas and not get sidetracked or fail to monitor your progress on these two important areas. Everything you do should revolve around pushing sales higher, and operating costs lower.
We’ve owned every type of commercial real estate, But the rules remain the same for every asset niche. If you buy great properties at a discount, perform great due diligence, and then manage them to their full potential, you will always succeed.