Real estate expert Avner Motaev is a firm believer in the benefits of having a good mentor. Throughout his career in commercial real estate he’s often leaned on the expertise and experience of others to help him make the right decisions.
“Yet as beginners in commercial real estate investment, that isn’t always possible. Diving straight into the world of real estate investment can seem complex and daunting,” says Avner, who is sharing his tips with beginners.
“My area of focus is the European markets – Austrian and German in particular – but these principles can be applied anywhere successfully.
“With this guide, you will find some ideas that will help you to build a successful commercial real estate portfolio. These are just a few of the basics that you will need to get you started.”
Why invest in commercial real estate?
First, a quick overview of why commercial real estate is such an attractive investment option. It can be broken down into several areas. Generally speaking, with commercial real estate, investors can enjoy:
- Longer lease times – meaning you have greater stability and financial security.
- Far more potential for higher rental income.
- Fewer risks of vacant properties.
- A regular and reliable cash income.
So, if you’re new to commercial real estate investment – where should you start?
Pick your strategy
Your investment strategy – how you choose commercial properties to buy – is defined by your financial goals. These goals will take several forms.
It could be that you are keen to see a regular cash income. Or your focus may be more long-term, and you are looking for price appreciation to fund your retirement. It is helpful to ask yourself the following questions:
- What do you want to achieve financially?
- How soon do you need to see returns?
- Is commercial real estate investment the best way to achieve those aims?
Building on this initial goal setting process, your next consideration is how involved in the investment you want to be. You have a couple of options here at least – one active, one more passive.
Taking a passive approach to commercial real estate investment
Commercial properties can take a lot of management. However, with the right team around you – and the right purchases – you can build a portfolio that will give you a steady, regular income with less personal involvement.
Having the right team (handling everything from maintenance issues to the legal requirements of commercial waste management) is just one part of the equation.
But choosing the right property itself is key too. Clearly, if you want to have a more hands-off approach, choose busy, valuable commercial properties that will give you a good monthly cash flow.
Take Vienna, for example. As a result of a building boom, commercial rents have grown significantly with average rents rising to €178/sq m/year. Learn to spot those areas where rental yields are steadily and naturally increasing and focus on buying there while you can still afford to.
A more active approach to commercial real estate investment
Of course, it may be that you want to take a more active approach to building your commercial property portfolio.
By this, I mean investing in or purchasing commercial units that need value adding to them in some way to make them more attractive to tenants or buyers. Once again, the key here is having a team around you that you can trust to do the work for you.
How long do you have?
Overarching both approaches – active and passive – is another consideration. How long do you want to hold on to the property for?
If you are looking to actively fix up and sell commercial units it may be that you do this in a matter of months. On the other hand, if you’re following a more passive ‘buy and hold’ strategy, especially in areas where property prices are appreciating greatly, you may need to maintain the property for years.
As always, try to be aware of true value, and beware overvaluations.
The currently booming commercial real estate market in Germany is a great example of this – PWC recently said that Berlin, Frankfurt, Hamburg and Munich are seen as overpriced by many investors. As a result, volumes of commercial deals there have fallen recently, although the overall trend is still upwards.
Diversification is key
The best way to mitigate against risks like an overvalued market is, as always, to diversify. I always suggest that a good mix of quick-fix properties and longer-term investments is best.
Get the balance right, and you’ll find that the income from one can help to finance investing in or buying more (instead of you having to borrow and add to your debt burden).
A final word on mentors and getting external support. Commercial real estate is complex. The risks are certainly higher than in the residential sector. As a commercial landlord, you’re exposed to everything from litigation from customers to responsibility for disposing of toxic waste created on the property.
So, surround yourself with people you trust. Find legal experts who understand the relevant rules and regulations. Invest in sound, local commercial real estate experts.
And find yourself a team of trusted maintenance and building contractors to help you add value to the property. You’ll need every single one of them.
Avner Motaev manages several companies in the real estate and telecommunications industries. He is the founder and CEO of mobile2business and lives and works in Vienna.