With Some Shift From Residential "Appreciation-Based" Investments To Commercial "Income-Based" Investments Make Sure You Have The Full Picture

Over the last several years, the Boise SMSA has seen some tremendous growth in the residential real estate sector.  During that same time, the commercial real estate sector experienced measured appreciation from increased demand fundamentally driven by increased population.

Commercial lease rates strengthened driving a commensurate overall increase in building values.  That being said, there are areas which remained flat and may have experienced some decline in value.  The BoiseValley is no different than other parts of the country in that regard.

Early in this last rapid acceleration in the residential market I heard a real estate agent advise his customer to buy land "because it's one thing that never declines in value."  Hmmmn; I thought I'd give him some gray haired advice on that subject, but I was rebuffed as too conservative.  I did get the chance to tell him the former governor of Texas, John Connelly, went bankrupt when Austin went through rapid growth, overheated, and crashed.  I still got a fairly cold look.

My point is, when investing in commercial real estate unless youre a great commodity investor, look at the fundamentals .  Yes, you can time the market, you can project growth, you can do all that and more - if you have extremely good market insight.  Otherwise, stick to the fundamentals - do your due diligence.  What are some of the items you need to understand when investing in income-based properties?  You need to have a good understanding of:

*   Leases - how many, how long, rent increases - and what services were committed to in those leases?  I was discussing an acquisition with an investor the other day and I was if the landlord needed to provide a tenant with certain services.  Without chuckling too loud, I asked for a copy of the relevant lease and then explained what the commitment was.  I wasn't on either side of that deal, but have subsequently aided the investor in managing and understanding the dynamics involved in a multi-tenant office building.

*  Lease Rates. O kay, I have an associate whose mantra is "buy properties based on the lowest lease rates in the market and, if the deal still pencils, you'll be prepared for flat markets."  On the flip side of this coin, hes also the guy trying to convince me the current (over-market) lease rates in a building he is marketing justified a certain value.  My research showed there is excess product inventory with lower lease rates.  Don't buy properties based on above-market lease rates as they may not be reproducable but don't be afraid to acquire properties that pencil with below-market rates even if they appear, at first blush, to have lower CAP rates.

*   Tenants - how strong are they, what's their payment history, and where are they in their growth?  It's okay to talk about such things with your tenants!  You need to.  No, you must have an open business dialog with your tenants.  I dont know if you have a "right" to such information, but you are partners, whether either of you know it.   You need to anticipate tenant growth / space needs, infrastructure needs, technology needs, quality of life needs, etc  Okay, now let's talk about who is who here.  This is where I want to talk about win-win relationships, tenants understanding landlords and landlords understanding tenants - gooey, soft, hard to understand stuff like that.  Yes, you may be the new owner, but whether you know it or not, you probably need them as much as they need you.  As a matter of fact, lets be honest, as a landlord, you need them more than they need you - so treat them accordingly and never over-promise.

*  Market Trends I'm not talking the stuff that shifts frequently, I am talking about where the market is moving over time?  Yea, I know, everything tends to grow in a southwesterly trend, except where rivers and mountains limit growth or the highway turns northwest instead.  The point here is, just have a grip on whats going on, you dont want to purchase an income producing property based on rent increase projections not supported by future low demand.

*  Property Managers in addition to being a commercial realtor, I also manage my clients buildings occasionally.  I think 90% of building owners need to have property managers.  Heres my two cents on this subject.  At some point, tenants think building owners are making the big bucks and just too cheap to make the particular investment de jour.  There is also a tenancy for landlords to get too emotionally involved when a tenant is late with their rent check, after all, landlords have to make their mortgage payment and pay the utilities, pay those crazy leasing agents, and essentially bear all the risk all by themselves.  Nine times out of ten, in my humble opinion, it is best to utilize an intermediary; someone a step away from the day to day burden of the tenant or landlord.

There are plenty of good, reasonable commercial investments in the BoiseValley just make sure you do your due diligence and seek the advice of an experienced commercial realtor.