Commercial Real Estate – What’s the Optimum Acquisition Strategy?

In our line of work, doing consulting for different high net worth real estate investors, we come across all types all types of commercial real estate acquisition strategies.

Some commercial real estate investors want to invest in only apartment buildings. Some investors wouldn’t touch apartment building if their life depended upon it because they think, as a whole, apartment buildings are over priced at this point in time.

Some commercial real estate investors want to invest in low-income housing. Others wouldn’t touch low income housing with a ten-foot pole, because they don’t want the headaches of collecting the rent and the abuse the property receives.

Some commercial real estate investors want to invest only in real estate where there’s an existing tenant to create cashflow. Others would prefer not have an existing tenant because they don’t want to pay the premium for the property.

As you can imagine, we could go on and on.

What’s fascinating is the seeming contradiction between the different strategies.

One investor’s ceiling is another investor’s floor.

But after reviewing the detailed business plans of literally hundreds of commercial real estate investors, there IS a common denominator to the strategy for their real estate ambitions.

Here it is in a nutshell:

First, they have a long-term plan. They are NOT opportunistic, looking at every single deal that crosses their path. They know their exact acquisition strategy. Whatever acquisition strategy they have, it fits into their overall wealth building strategy.

Yes, that may be common sense on paper, but in reality most commercial real estate investors, especially new ones, tend to shoe horn in whatever deal they are contemplating into their long-term plans.

They first key is that the strategy must drive the acquisitions, not the other way around.

That’s why you see some people sell off their entire portfolios of hodge podge properties. It’s a pain in the neck to corral them and so they try to get an unsuspecting person to take the winners and with the losers.

The second key strategy is they do their market research. Stated differently, they know the market or area they want to make an acquisition in.

It’s common knowledge for instance, that the major retailers know where the best locations are in the country. They just don’t put a store where think it will do well.

They put it up where they KNOW it will do well.

How do they know? They do their own research. They understand what PRIME retail space is to them based upon their needs down to the traffic patterns, congestion, local merchants and the specific growth areas within a community.

Now, some people think market research is ONLY for big companies; that it doesn’t apply to them.

If market research is one of the things you have a challenge doing, then you should look at it this way:

· Do you want to get the best deal on a piece of real estate?

· Do you want to be able to charge the highest amounts for rent or get the best price when it comes time to sell?

· Do you want to eliminate the risk of making an inappropriate acquisition?

Well, then you should become an expert at doing your research.

The third key strategy we’ve noticed is that commercial real estate investors rarely make an outright offer, unless it is a sweetheart deal. They prefer to submit to the seller a document called a Letter of Intent. It’s an informal offer. It’s an offer, which usually carries no penalty to either party if the deal doesn’t go through.

The purpose of the letter of intent is to allow the seller time to do specific due diligence on the property in regards to zoning, entitlement, infrastructure, etc. Unlike residential real estate, the commercial real estate market is “buyer beware”.

The due diligence process is performed so that the acquisition will allow the buyer to submit a formal offer with full knowledge of what he or she is buying.

The fourth key strategy is that they want to understand the math of a deal. Does the deal make sense? Is it doable?

You can execute the other three strategies flawlessly, but if the math won’t work, you’ll make a huge blunder.

There are dozens of different strategies for commercial real estate. Obviously, one size does not fit all. But hopefully, implementing these four acquisition strategies can make a profound difference in your commercial real estate wealth building success.