The Advisor's Edge: Looking for a Financial Niche
How Commercial Real Estate is a legitimate source of Income
With an 8th grade education on her resume, my mom, born in the midwest during the great depression, taught me how to make a great living in commercial real estate.
She was business savvy and good with numbers. At the age of six, I would travel with her across the border in Mexico to find great buys on kitchen tile, flooring and other necessities needed to run her small apartment buildings in San Diego.
I went to college as a Finance major. I wanted to understand both the debt side and equity requirements needed to purchase commercial real estate. After graduation I spent 10 years working for two large international banks. I now had the tools needed to venture out of a safe banking environment and onto the investment side on my own.
The first lesson I learned is that things take longer and cost more than even my most conservative budget could imagine.
It took me five years before things fell into place. But the rewards were worth the wait.
The key to successful multifamily property investment for me was in a combination of strategic location selection, thorough due diligence, and detailed financial management. Finding the right property in a high-growth, high-demand area with good access to amenities and public transportation was crucial. Furthermore, understanding market trends, securing appropriate financing from lenders, and implementing tight property management oversight were essential for returns.
I write this to help those who are looking for a legitimate way to make a new beginning.
If you think you don’t have the skillset or means, consider this.
Recently, I was asked to teach 14 year old students in a private school in Bangkok the fundamentals of Commercial Real Estate. It’s been an amazing experience. These students have developed a passion to now pursue this as a career.
Just learning the skills necessary at such a young age has led them towards a new potential future in this space. It has opened up the door for them to keep learning, and planning field trips into the city to meet with commercial brokers.
A commercial broker can easily make $500,000 as a commission on just one closing. It would take closing on up to 50 residential sales to generate the same earnings. That’s the beauty of the commercial real estate industry.
What it takes to move forward:
Obtain a real estate license in the city and state you plan to work.
Learn how Cap rate movements are essential to values
Create a rent growth strategy
There are two main financial metrics that determines what the property is worth:
Net Operating Income( NOI)
Cap Rates
Property Value= NOI/Cap Rate. The lower the Cap rate, the higher the value.
A 10 unit apartment building that generates an annual NOI of $60,000, with a market Cap rate of 6% (.06) would have the following value: $60,000/.06 = $1 million.
If the Market Cap rate lowers to 4%, the value increases substantially: $60,000/.04 = $1.5 million.
So a small movement in the Market Cap can create an immediate increase in your 10 unit apartment building from $1 million to $1.5 million. This is why Commercial Real Estate is so coveted by property investors and brokers alike.
Types of Commercial Real Estate
As you can see, Multifamily is just one of many commercial real estate asset classes to invest in. There are endless opportunities in small retail centers, land acquisitions and self storage.
I will write about more detailed opportunities in the Commercial Real Estate Markets in the coming weeks.
Until next time,
David