What property type(s) do you invest in and how did you choose what to focus on?

10 Replies

With the many different types of commercial real estate, how did you choose what to focus on at first?  Was it a space you worked in/lived in and were comfortable with?  Was it what was hot in the market at the time you were starting?  Was it a space that was underrepresented in your area and you saw opportunity?  Was it an area with very few investors so you had less competition?  Was it process of elimination and what made you stay away from other property types?  

I look for what is at the bottom of the real estate cycle and what I understand.

Then I either try to by myself or I do a syndicate on a property or partnership.

You need to be able to assess all the different categories in your market, understand them based on your market and choose one that you can get your head around and find value in.  Super generic response, but there is not a single asset class that is better, it is about where you are in the cycle and has growth and what is peaking. 

I think the most important thing to consider right now, given where we are in the cycle, is to focus on asset classes that could potentially do well during a downturn. Of course, everyone is going to have their own opinion about where we are in the current cycle and how long we have until a downturn but I personally believe we're 1-4 years away from a downturn. With that in mind, I'm currently focused on Mobile Home Parks, Self-Storage, and Retail Strip Centers with anchor tenants that do well during downturns (ie. grocery stores, dollar stores, etc).

If you don't pay attention to the cycle then you can really get caught off guard. I would also recommend considering longer-term loans (ie. 10 years) due to both interest rate risk and credit market risk, as if we have a downturn then there could be a credit crunch that could make refinancing or finding a buyer very challenging.

I hope this is helpful.

Good luck to everyone,

Jeremy Roll

Thanks everyone.  Looks like everyone focuses more on the cycle moreso than strictly an property type.  Understandable, but definitely intimidating for a rookie.  I figured I'd pick one, maybe two types at most to really focus on.  I haven't made a firm choice, but retail is most familiar to me and interests me the most, so that's the direction I am leaning towards.  In Cleveland, office has the highest vacancy and a lot of old office space is being converted to apartments, so that's an area I have little interest in.  But to all your points, at a different time in the cycle, office could be the hot thing again.

How do you guys typically determine where each property type is in the cycle? Cap Rates?

I would definitely agree. Try to be contrarian. I do that by both researching national trends and local. On the national front, I read financial papers and news sites and of course read Biggerpocket blogs and listen to the podcasts. For instance, I think everyone knows multi-family is hot right now nationally. I would be cautious to invest in that area, not that I wouldn't, just that I would be conservative in the numbers. Latest Zillow research shows rental rates actually decreased in the Minneapolis area. At the same time, you have to be an expert in the area. Find a good broker that specializes in commercial properties. Many realtors will say they know commercial but ask them to show you how they analyze deals. You'll find out quickly which ones know calculations such as cap rates. They will be invaluable. I believe right now the contrarian investor should be in office space. Factor in longer vacancy rates (and have adequate reserves) and negotiate good deals. I think 5 to 10 years from now, you will be in great shape. Of course, it's all local in the end.

Originally posted by @Lee I.:

 In Cleveland, office has the highest vacancy and a lot of old office space is being converted to apartments, so that's an area I have little interest in.  But to all your points, at a different time in the cycle, office could be the hot thing again.

I was reading some local articles today and came across an article that reminded me of this cycle discussion.  

"Offices: The downtown office market is improving, but that's not because tenants are squabbling over space. The CBRE Group Inc. real estate brokerage says that conversion projects have pulled 2.3 million square feet out of the market, cutting vacant downtown office space by 3.7 percent between 2007 and the third quarter of last year."

...

"As developers earmark partially occupied office buildings - the Leader Building, theStandard Building and the Halle Building, for example - for residential projects, the size of downtown's older office market will continue to decline. Tenants who are forced to move could fill up other empty spaces, helping to chip away at overall vacancy and enabling landlords to charge more money for space.

"This is a supply and demand game," David Browning, managing director of CBRE's Cleveland office, said in an interview late last year. "Yes, we all want to hit the home run and lure 800 to 1,000 jobs downtown to change that scenario. But it's more likely that we need to do things to affect the supply ... and then do other things as a municipality to affect the demand side.""

Downtown Cleveland apartment occupancy climbs, office supply shrinks due to conversions (photos)

I'm not in a position to take advantage of the downtown office situation, but this article really helped me see what you all are saying about the cycle.  More people living downtown --->need more living space, but lack of building space -----> convert office (and some industrial) to living space----> less office space------>more demand for office due to less inventory. 

Plus you have the potential situation of more offices moving downtown to follow the population.  In theory, this could hurt the office market in the suburbs if the job increase is from businesses returning to downtown and not from new jobs or jobs poached from outside the metropolitan area. 

Good discussion.  I have been selling out of apartments during the past year.  Have been moving money to strip centers in quality locations and sitting on some cash.  Retail is not really at the bottom of the cycle but it is not as played out as apartments.

I started out doing only small residential. SFR's & Duplexes. This was all that I could afford at the time. From there I began looking into residential buildings with 6+ units. Currently I am looking into my largest purchase, a 58 unit apartment complex in one of the suburbs. I prefer residential because I believe like @Lee I.  that office space has a high vacancy risk here in Cleveland.

I have also been looking into some small mixed use & commercial space. Slightly more risky IMO but with the guaranty of occupying at least the residential units & my desire to open up another small business this year, I cannot resist.

I bought into my first commercial property because it was cheap, and had several buildings on it.  The owner was also willing to finance it because no bank would lend on an old refinery property.  We are still waiting for EPA to drop the other boot, but it has paid itself off and is currently cash flowing fairly decently.  We have bought out 2 of the original partners.

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