Does what we do become who we are?  My brother Bob allowed me to recognize the value of going onto law school by employing me in his construction firm.  

One summer of back breaking work made clear to me that my future was in the study of real estate rather than in the creation thereof.  Walking the length of a 30 footlong porch to place concrete (as the shoot only reach to one end of the porch) still brings memory pain to my back!  

That summer I learned, with certain real estate, a low-cost improvement can make all the difference in the world in tenant comfort and hence investment value. Large tenants may bring a more secure balance sheet, but they may not be worth their demands on the owner.

IDEAL REAL ESTATE INVESTMENTS (for me)

One size does not fit all.  One type of real estate does not work for everyone.  Today we are focused on buying direct real estate (in a future article we will focus on real estate interest acquired in a fund). What works for me may not be your cup of tea.  

1. TENANTS ARE FUNGIBLE.  In certain property types – housing, self-storage, flex, hotels – no one individual tenant makes or breaks the investment. The demise of a large retail (e.g., Circuit City) or office (e.g., LandAmerica) tenant may cause the financial roof to collapse.
2. PAY AS YOU GO. Financial engineering to get through a short period of renovation and leasing may make sense. Financial engineering, though, can also be a way to mask that a property does not generate sufficient income to satisfy investors. 
3. CASH NOT KING. Some investors may prefer a shopping center anchored by the Salvation Army over one anchored by Wal-Mart! Cash flow alone does not make an investment great (or even rational). 
4. SHORT TERM. The real estate I prefer has the investor accomplishing the repositioning and up graded leasing within 3 years, followed by a year to “prove concept”, followed by a sale in the fifth year. I believe you harvest the crop when the IRR yield is at its highest.  Then again, it may just be that I have a short span of attention!
5. CHALLENGED OWNER.  My experience is that most of the value achieved with a real estate investment occurs at the time of acquisition.  Anyone giving sufficient time and money can turn around a challenged property.  Only the tenacious and creative locate the troubled owner at exactly the right time when they will accept a lower offer price. 

BOTTOM LINE. I prefer to invest in real estate with fungible tenants (so losing one does not crush my repositioning plan). I want a short hold (get in, get it done, get on to the next investment). And having invested over $2 billion in real estate, the best returns were where the owner was in a challenged position (so that a quick and certain close had a value greater than a higher price).

Want to communicate about your opportunities to buy? Email Rick@ChessLawFirm.com with a narrow/focused question.