The Northwood Group

Building Partner Investors

The “Why” of Commercial Real Estate Investment

June 1

Commercial Real Estate Investment

Commercial real estate investment, why do you invest?  It is an interesting question with a multitude of answers none of which are right or wrong in and of themselves.  However it is an important question for us to understand individually if we are the prosper in our ventures.

The traditional interaction between the commercial real estate investor and the broker typically involves dialogue surrounding topics such as:

  • What type of returns are you seeking?
  • Do you prefer stabilized or value-added investments?
  • What is your risk tolerance?
  • Do you prefer single-tenant or multiple-tenants?
  • How much do you want to be involved in the management of your property?

These are all very important questions as the investor is interviewing the broker for competency and the broker is seeking understanding of the investors criteria.  These are conversations that I have had on many occasions.

However I noticed an interesting trend over the last 15 years as I have developed long-term relationships with different investors and completed several commercial real estate investment transactions with each.  Most fully understand the fact that they want to invest in commercial real estate.  They know what they like and why they like it but often they have not gone to the next level of understanding “why” they are investing.

Why are we investing in commercial real estate?  What is the ultimate outcome?  Does it have meaning in our lives outside of the intrinsic financial benefits it provides?  How do we know when we have enough?  Are we saving for retirement?  What are we going to do during retirement? Why are we willing to take this risk but not that risk?  What will this investment do for me in my life now and what will it mean to me in the future?

Over the years I have seen investors get in the game too early before they are sufficiently capitalized and I have also seen investors stay in too long, under estimating the completion time of the next project and being stuck working through a challenging commercial real estate investment property when they would prefer to be off doing different things.  As I have thought about this and talked with investors about it the most common responses generally fall into the following categories:

  • “I want to build “x” amount of cash flow so that I can retire by the age “y”.
  • “I enjoy doing deals and don’t know what else I would do.”
  • “I want to acquire as much as I can to pass down to the next generation.”
  • “I want to out-do my peers.”
  • “I want to create cash flow to be able to use for charitable service.”
  • “I need to invest in something and I don’t have confidence in the financial markets.
  • “I want to own hard assets.”
  • “I have to make up for past bad decisions and dig out of the hole I’m in.”
  • “I want to stick around to teach my kids how to invest and start their own portfolios.”

Although most do not come out and say it I think that many of us also fall into the pattern of just wanting to accumulate more.  There is nothing good or bad in any of these motives but I think that we can be smarter as investors and it can have more meaning and effectiveness if we really understand “why” we’re making investments and have that path clear before us.

For me, commercial real estate investment has the ability to produce cash flow more consistently than any other investment that I understand.  That cash flow has the ability to give me the freedom to be more discerning about the types of deal and the types of clients I choose to work with.  I also get a lot of joy from working with tenants and helping them to succeed in their businesses along the way.

I guess the point of these thoughts is that there is likely no right or wrong answer to the “why” of investing in commercial real estate.  That is not nearly as important as fully understanding what it means to us individually and to our own portfolio’s.  Understanding our own personal motives helps us to be better and more discerning investors and increases our opportunities for success.