Sound Advice for the Small Investor Planning to Build a Investment Real Estate Portfolio in Greater Phoenix, AZ
Individual stocks and bonds. Mutual funds. Precious metals. Certificates of deposit and interest-bearing checking accounts.
Ask the “average” investor or even investment advisor where he or she directs investment money and more than likely the answer will include one or more of the vehicles listed above. But what other options are available to the investor who wants to truly diversify his or her portfolio?
Commercial investment real estate may be that option. For the individual willing to take on a little work and research, commercial properties offers a wide range of alternatives, from small multifamily apartment buildings to strip shopping centers to self-storage warehouses, offices and single family home portfolios.
There’s a tremendous range of commercial properties available in Greater Phoenix for the small investor to consider. Each type of property presents its own potential for returns, management responsibilities and, levels of risk. However, a property that is well-managed and properly financed can yield significant returns over the short but more likely long term.
Investors making a first-time foray into investment real estate should keep the following in mind before closing on a commercial property. • | Establish a realistic objective and time frame – Just as one would with stocks and bonds, an investor planning to purchase a commercial property should set objectives that are defined and attainable. Since returns on leased commercial properties aren’t subject to the short-term roller coaster ups and downs of Bay or Wall Street, investors should not expect dramatic short-term returns during the ownership. Smart investors, however, determine an exit strategy for disposition of the property at a prescribed time, preferably when the property has appreciated in value and market demand is strong. This is the sell high theory. Identify what type of factors may trigger the sale (retirement, the purchase of a new home, relocation, etc.), and keep in mind the following: Real estate -- governed in part by the economic principle of supply and demand -- is not always a liquid asset, but it allows for some liquidity when you factor in lines of credit or cash out refinancing. | • | Add sweat equity or smart equity– Add to the bottom line by investing personal time in the upkeep and management of the property. General remodeling tasks, minor interior and exterior maintenance, general accounting and other related chores often can be completed by the investor. This helps reduce overhead costs while letting the investor retain more of a “hands-on” property owner. When you calculate sweat equity consider the value of your time. If you can hire someone to do something for $20 per hour if you, at the same time, can earn $40 per hour then you should let it be done cheaper by someone else. | • | Be careful with highly leveraged deals – A highly leveraged financing package is one in which a small amount of cash is used to purchase a large or expensive property investment. These types of deals can prove extremely risky because a market fluctuation can outpace income. Leave highly leveraged deals to experienced investors, which of course, we all can become in time. These are more risky but can allow you to acquire more properties, or keep more of your cash at hand. |
Go to Part 2. Artur Ciesielski, CCIM 602.628.4349 |
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