The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When looking for industrial commercial real estate to buy for any reason, the first thing to remember is not to overpay. Paying a fair market value is okay, but overpaying will lower your basis and make you more reluctant to sell. When you do buy, adding value to your investment can be done in a number of ways, but it should always be goal for any new investment. Raising ceilings, adding onto the property, revamping the tenants leasing the property are all great ways to add value to your industrial real estate investment. For an easier exit, invest in industrial properties of the same type, it’s easier to manage and you have opportunity to sell your entire portfolio in “bulk”.
Richard Wilson: What advice do you have for companies listening to this interview that are looking to buy an industrial real estate asset for their balance sheet?
Robert Borris: Say that again?
Richard: Oh, what advice for companies looking to buy an asset for their balance sheet that’s something industrial…
Robert: Well, the first thing is don’t overpay. Which is kind of logical, however you know as we’ve talked before paying fair market value is not necessarily bad, but I wouldn’t overpay that’s for sure. There’s an adage in the commercial real estate business as you may know “You make your money on the buy”. The money is in the buy, and that’s probably right because if your basis is low, you don’t want to sell it, you’re not going to sell at that low basis. That’s where the spread is, where you really make the money. The other thing is, look at a piece of real estate and say “how can I make this better?” You need to make a change of some type. It could be a physical change, it could be you kick out a bad tenant and bring in a new tenant, it could be kind of a change in zoning actually where you get more density out of the project, or you can add to the building, or fix the roof, there are people who have literally raised the roof in buildings – they bought the buildings and the buildings had interior clear height of 18 feet, and raised it to 30. That adds plenty of value, adding value can be as simple as managing the building well, too. I’ve seen that more often, I’m always surprised when I see that. So, that’s another one.
Another one is you want to buy in a growth area. All ships rise in, you know, go up in a rising tide or whatever the saying is. If you’re buying in a growth area, it’s great, if you’re buying in a non-growth area, you’re going to get the reverse. Which you don’t want of course. And I would say I would build a portfolio, I would look at a net investment like this not as a one off but as a potential to buy a multiple number of buildings and with the idea that the exit – that’s another item – the exit is critical. So when you buy the building think about how you’re going to exit. If you have multiple buildings of the same type, your exit is probably going to be easier. Not to mention it’s better to manage, you get to know what the real estate is really all about, what the market is – I mean, you learn a lot in the same period of time. But this way you develop a portfolio and at the end of the day you could, perhaps, sell the portfolio and get a premium for that also because institutions like to buy in bulk, basically.
Richard: Right, yep, for sure. Good point.
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