Investing Strategy & Tips
Determine The Best Type of Real Estate Investment - Part III
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Nov 13, 2005, 11:11

Office Buildings

Office buildings are a difficult first investment. Adequate income is the key. If you decide to buy an office building, be sure to make a thorough tenant demand analysis for the subject property. Briefly, a demand analysis would include a forecast or estimate of the need and desire for office space in the community over a long period of time and what the future competition from other similar existing and proposed projects might do to the office building market. If there is nothing in the immediate area renting for $3.5 per square foot of floor area per month, it would be virtually impossible to get any more for your space unless you have a better quality building.

It is not advisable to buy an office building unless you really know what you are doing or have an immediate need for it. The current glut of vacant office space in most major metropolitan area makes investing in this type of real estate quite hazardous.

About 15 years ago, I made an appraisal of a Medical Building in downtown Los Angeles. When I finished with my appraisal, I met with a group of doctors who owned the medical building as well as a large lot in the rear of the complex. I told them at the time that they ought to build a hospital on the lot because if they didn't, they would have a difficult time keeping the medical building leased. Other developers would come into the area and build office buildings adjacent to the medical buildings, driving the medical tenants out.

The best arrangement for a commercial property is an owner-user. For any commercial property, whether it's a restaurant, business, supermarket, hardware store, or clothing store, the ultimate tenant is an owner-user. If you own a medical office building, it is best to have doctor participation. To keep commercial tenants in the building over a period of time requires that they get a piece of the action. If you are interested in buying an office building, you might want to syndicate it through a partnership, corporation, or trust with a group of professionals who will occupy the space. 

I represent a company that has seven office and industrial buildings. The company leases these buildings from the employees, who own the properties in a profit-sharing trust. This trust is set up through the Securities and Exchange Commission. The company leases these buildings on a short-term basis, and every three years they have to be appraised to figure out how much the employees have made to increase their pension fund benefits.

If you are planning to purchase an office building for an investment, be sure to obtain expert, unbiased advice before you commit yourself to anything.

Specialty Investments: Miniwarehouses

Similar to other types of commercial real estate investments, a specialty investment such as a miniwarehouse requires that you know how to operate it. The key to a thriving miniwarehouse business is a good location. If you owned a miniwarehouse in a high-density resort community or bustling metropolis, you'd be a millionaire because there is such a high concentration of people who have wealth and all sort of junk they don't need or want. A storage facility would attract ample customers. Even so, it's more of a speculative investment, really.

Recently, a friend of mine who owned a miniwarehouse went broke. He's one of the smartest guys I've ever met. He's brilliant, absolutely brilliant. He understands the tax laws and the economic forces of finance. He's given many lectures on these subject. But he had to file bankruptcy recently because the miniwarehouse he owned and operated was to poorly managed. He didn't know how to generate enough interest and enthusiasm to fill up the building. he basically didn't know how to market his product property.

With expensive commercial investments, there is a lot of money going out each month, so you've got to be sure that it comes back in. That might not sound difficult, but sometimes it takes tremendous effort and expenditures to first find suitable tenants and then to get everything that is coming to you, even when you have signed leases.

Shopping Centers

There are two basic types of shopping centers: "strip" and "anchored". A strip shopping center, or mini-mall, consists of a collection of independently operated or franchised retail stores with a common parking area but no "anchor" or main tenant that dominates the complex. An "anchored" shopping center, on the other hand, is characterized by a substantial commercial tenant, such as a major drug or discount store, supermarket, or department store, that serves as a primary tenant to anchor the project.

Strip Shopping Centers: Mini-malls

Mini-malls can make secure investments if you have a good long-term lease with reliable tenants and you understand the retail business. With some understanding of the commercial real estate business, you can probably make it work. But all kinds of outside factors can change the value of that property. The traffic pattern can change because of a decision by the state transportation department; the local planning commission can recommend a zoning change; a key store in your complex can declare bankruptcy and go out of business. You're vulnerable to all of these factors, plus the rulings and decisions of local, state, and regional agencies.

Moreover, some cities are difficult to do business in. They'll impose taxes and assessments. They won't allow you to put up a sign, to set up a display in front of your store, or to erect any kind of awning that upsets the character of the street. They'll ticket anyone who is two seconds over the parking limit. Whether by design or happenstance, some cities to everything they can do to harass customers and keep them away.

I've seen this happen in many cities. On the one hand, the city council says it likes business, but on the other it does everything it can to undermine economic activity. The city won't provide adequate parking; the meter maids will ticket too much; a laborious permit process makes new construction virtually impossible. By doing such things, the city destroys the business incentive and, along with it, the value of commercial property.