Commercial real estate is filled with hidden truths
There are some things that most people don’t know about commercial real estate investments. Some things that are not put in writing, are not taught, and won’t show up on a Google search. After many years studying the topic of investment and commercial real estate, I have found several hidden truths, not talked about around the water cooler.
They are however, shocking. I will attempt to uncover some of these in the months to come, but for now, we’ll just start with this: the rate of return doesn’t matter. What the what?
You may have been previously programmed to believe that this was the end all, be all of investment real estate. Quite the opposite. While it is true that a higher rate of return will build your wealth faster than a lower rate of return, it is not the only factor.
Experienced versus new investors
Take for example an experienced investor that has a rate of return required of let’s say 15 percent. They invest in mobile home parks and have had a very successful run over the last few years. And now, let’s say we have a rookie investor, they have never even closed on an investment property of any kind before. They too are investing in mobile home parks and will be receiving the same 15 percent return.
So far so good, right? Except, the 15 percent return for the rookie is not equal to the 15 percent return of the experienced investor. Why? Several reasons, and while opportunity costs may be a correct answer (more on that in a later column), the main reason is due to risk tolerance.
If you are new to real estate investing, it may be worth it to first go for a lower rate of return than a higher rate of return. This is contrary to popular belief. Your first couple of deals, your first deal in a specific property type or investment strategy is going to be uncomfortable for you at first.
You are going to feel it in your stomach, your headaches, and the arguments at home over it, the figuring out of systems, the growing pains, and sometimes the heart ache. Don’t worry though, these are all common side effects of investing in real estate, they too shall pass.
So while that 15 percent is by all accounts a great rate of return, if you have to have blood, sweat, and tears to enjoy it, it may just be easier to go with a slow, steady, and lower rate of return. Because you will also have to compete to get that rate of return against that experienced investor that has already been through the learning curves and enjoys that 15 percent quite comfortably.
The number one thing in real estate investing is not the rate of return, but your risk tolerance. Make sure it’s an investment you can stomach or the return won’t matter. And that is something that all those property blasts won’t tell you.