Kirk Halpin reiterates the “fundamentals” for investing successfully in commercial real estate. There is nothing new here – just a summary of basic principals that “matter” (or mistakes to avoid), no matter the economic climate. Unfortunately, many and even most, were overlooked during the recent run-up in prices and frenzy buying.  These are worth a couple of minutes to remind yourself how to stay out of trouble with your commercial real estate investments.

1. Just Looking at the Returns

I regularly have clients that bring in several investment opportunities for review and advice, and some automatically prefer the project with the highest ROI (return on investment) without looking at any other factors. As the four ways to make good money in real estate are cash flow, appreciation, equity growth and tax benefits, one can not afford to just look at returns. In addition, investors frequently just focus on ROI. Contrary to popular belief, ROE (return on equity) provides a better measure of the speed of wealth creation and the tax efficiency in doing so.

With regard to cash flow, one can work on decreasing expenses and/or increasing revenue. On the expense side, it is good to look at the maintenance costs, the management fees, and other expenses which cannot be passed through to the tenants and discuss possible ways to reduce these expenses. On the revenue side, it is good to explore whether the lease rate can be increased, what can be done to decrease vacancy rates, whether additional leasable space can be added and whether additional revenue streams can be added from cell phone tower leases or billboard leases on the property.
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