A commercial real estate (CRE) investment differs considerably from more traditional instruments such as stocks and bonds. There are significant barriers to entry into CRE investments, including more restrictive bank lending requirements, the need for ongoing asset management, the illiquidity of your invested capital, and the significant time and effort required to find a CRE asset suitable for your specific needs.
CRE Options in the Immediate Market
A typical commercial real estate purchase for investment in greater Houston, including Downtown Houston, The Woodlands, Katy, Sugar Land and all surrounding areas, the commercial real estate market usually range from $2 million and $10 million. Options in this price range can be existing office or medical buildings, retail centers, industrial spaces, multi-tenant warehouses or flex facilities, and in some cases, commercial land for development. Given current financing available, investors typically need to fund 50-75 percent of the total purchase price.
What’s It Worth?
Arriving at the proper valuation for a potential purchase is critically important and will usually involve in-depth discussions between the buyer, seller, their representatives, attorneys, and partners, if applicable. Investors often evaluate commercial real estate investments based an overall capitalization rate, or “CAP” rate. This is the ratio of the current net operating income over the contemplated sale price. However, this is probably one of the most misunderstood and often misleading measurements of risk and return, because the CAP rate can be influenced greatly by a number of factors, including lease provisions (rental steps, lease expirations, etc.), changes in occupancy, and the perceived creditworthiness of the tenants.
Another measurement used by investors to determine the proper valuation is the “cash-on-cash” return, which measures the investor’s anticipated return on investment (in cash flow) over the amount of equity invested. This cash-on-cash rate takes into account any financing used, along with the associated debt service and other capital costs, such as lease-up or tenant improvements.
Seek Expert Guidance Before You Buy
Given the upfront cost, illiquidity, and other ongoing risks of investing in commercial real estate, the decision to purchase a given property is best undertaken with the help of an experienced team of commercial real estate professionals, including lenders, attorneys, architects, engineers, and brokers. At The J. Beard Real Estate Company, we use our extensive market knowledge and business relationships to identify assets that meet the specific criteria and goals of our clients. By carefully evaluating pricing assumptions, valuations, financing strategies, and other factors affecting the investment (such as time horizon), we can present you with a menu of commercial real estate investment choices.
We average more than 200 CRE investments per year for clients in the Greater Houston market. Together, we will review the risks and rewards to determine if this investment is right for you. If so, The J. Beard Real Estate Company is uniquely qualified to help you begin or add to your CRE portfolio.
For all your commercial real estate needs in Houston and surrounding areas, The J. Beard Real Estate Company is here to point you in the right direction. Please contact our team of qualified Houston real estate development professionals at 281-367-2220 or visit our website at www.jbeardcompany.com.
