Commercial Real Estate – Developing an Investment Criteria

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Greetings from Flagstaff, AZ.  With a car full of kids and a plan for a perfect family vacation…. I will be making my way up to the Grand Canyon then off to Sedona, AZ for a week. By the way…the perfect plan flew out the window the first hour of the trip.

During my long drive to the great state of Arizona, I had a lot of time to think.  Specifically, time to think about all that is going on with the real estate market.  Of all that is happening in our economy,  the one thing I know is that the worse things get the more opportunities there will be.  But when will the opportunities show up?  Well….if you have had your ear to the ground ….compared to that last few years…the opportunities have arrived…or have they?  I am  a believer that things have not bottomed out and I think things are going to get much worse.  So…with that in mind, better opportunities are still coming….right?

But ….I am tempted

You see, I am having an emotional dilemma.  What if things have already bottomed out?  Will I miss out on the current opportunities if I do not move now?  If I make a move, what markets should I look at?  All of a sudden, I realize I am asking the same questions I asked myself last year and the year before….and the year before that.

Is there such a thing as “recession proof”?

Now add to my dilemma the theory of a “recession proof” market.  The one thing I am hearing over and over…is that there are real estate markets that are recession proof.  Is there such a thing?  From all my time in business school the one thing I remember is cycles travel.  In other words, all markets will get hit…it is just a matter of time (only the severity of the hit is unknown)….like a ripple effect.  For example, as we watch California’s real estate market fall into the sea….Oklahoma is still going strong.  So strong that the state brags about it.  But if cycles travel…is it just a matter of time?  In theory….yes.

A close friend of mine who is a “self-proclaimed” economist states that the Dallas/Ft. Worth area is recession proof.  I also heard that Oklahoma City is recession proof.  So…as nice opportunities come up in these areas….I am tempted.

What to do?

Develop an Investment Criteria

Late last year, I wrote down an investment philosophy for myself on how I was going to invest for the next few years.  The overall theme of my philosophy was to be a “vulture investor.”  In other words, the plan is to act on opportunities that are “cherry deals.”  The cherry deals had to have the following “aggressive” criteria:

  1. Blue collar assets.  Investments that tailored to lower income populations.  Class C apartments, “Thrifty” retail,  mobile home parks, etc.
  2. No land…unless I have money to park long term
  3. Seller Financing or partial seller financing
  4. Purchase at sixty percent of value or less
  5. Positive demographics
  6. Familiarity with the area
  7. Solid property management in the area

Now…there is more to my criteria….and a lot of room for a “case by case” assessment…but every time I am confused or “tempted,” I review my real estate investment philosophy, make adjustments, then make a move.

Needless to say, I have yet to make a move to aquire an asset in the last several months…but not because of the lack of action but because the opportunies have not met my investment criteria.

So….to keep from making emotional mistakes….developing an investment criteria before acquiring an asset can keep you from being a lemming.

Until next time……rob

Photo Credit: DanieVDM

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  1. Your criteria all seem solid and closely mirror my own, but I was wondering if you could expound on the <= %60 value one? I understand the idea of buying assets below their value, but 60% seems a bit unrealistic to me…isn’t there a danger of missing a lot of great deals at 70%? Perhaps I’m interpreting it wrong, or perhaps there’s a lot of deals at 60% 🙂


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      Less than 60%?….yes….this is where we are headed. We last saw this back in the eighties…

      Of course…this will not be the norm (so…no…there are not a lot of deals today at 60% or less…but there will be)….this is why I call it “vulture tactics” where the seller motivation is extreme and the need to sell is overbearing.

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      Sorry for the delay,…..

      Recession proof is an idealistic perspective that there are areas in the country or asset types that will not be impacted by the economy…or a recession. Many believe that apartment building investments are “recession proof”…I have also heard Dallas, TX is recession proof….but….it is just an opinion and should be treated as so…..

  2. Ronald Palmer

    60% is not realistic, If you meet all your other criteria then BUY! I have 9 properties and only 2 of them bought below APPRAISAL value. When I find a property now I enter into an agreement with the seller that the transaction will take place at the appraisal value. So it’s neutral. I can’t lower it and they can’t raise it. They are all commercial and I generally already know if I can lease it out at 100% occupancy and about what my rates will be. My primary focus is to buy, remodel, lease and manage them myself. I have no payroll…just a note payment, taxes and insurance all my utility costs are passed on to the tenant + 15% so that pays for my maintenance. I rarely make money in the first year because of capital expenditures but I’m looking at the second year going forward. Pretty simple. Oh and I try to find properties off-market and go directly to the seller BEFORE he gets a broker involved. If I can’t do the above then I move on. My basic requirement is anywhere from a 1.5 – 1.0 to a 2.3 – 1.0 revenue to expense ratio. However, that does not mean I’m not flexible. You need a great banking relationship…one where you always have a working capital line of credit and then a banker who will accept as much as a 75% LTV loan. If you are in Texas go to FrostBank. They are Texas only with 157 branches and give very personal service. They do not have to deal with anything but the Texas RE market which I consider a big plus.

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