Study conditions, goals before investing in real estate

“Akamai Money” seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put “Akamai Money” in the subject line.

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QUESTION: How does commercial real estate differ from residential real estate?

ANSWER: For those seeking a home to live in, purchasing residential real estate can be an emotional process. Commercial real estate tends to be less emotional and generally focused on the investment returns from the property. Capitalization rates, which is a ratio of a property’s net operating income divided by the acquisition price, is a basic way of evaluating the returns on a property. There is always a risk vs. return equation to consider for any investment. Typically, the higher the capitalization rate, the riskier the investment.

Q: My money market certificates are getting such a low interest rate. Should I consider investing in real estate?

A: With such low interest rates for bank money market certificates, many investors are considering other alternatives with the hope of getting a better return for their hard-earned money. Luckily, on the flip side, the low interest rate environment is a great incentive to borrow capital to invest in real estate.

Q: How much money is needed to invest in commercial real estate?

A: Many small investors can be intimidated by headline acquisitions of major hotels, shopping centers and office buildings for hundreds of millions of dollars. In reality, small investors constitute the majority of the commercial real estate transactions. For those acquiring a residential condominium with the intent to rent it out, or a business owner acquiring their facilities to house their operation, these are more representative of typical commercial real estate investments.

Commercial real estate investment can range from a small $10 purchase of Real Estate Investment Trust (REIT) stocks to a multimillion-dollar acquisition of the Grand Wailea Hotel. You should understand your investment objectives and the level of risk you want to assume. Real estate can often be a good hedge against inflation and can also provide a way to diversify risk for an investment portfolio.

There are also tax benefits to investing in real estate. It is best to seek consultation from tax, legal and real estate experts prior to seriously considering a major investment.

Q: What should I do to begin investing in commercial real estate?

A: The first step is to do your homework: Understand current market conditions for the geographic area that you are considering purchasing a property. So many variables can impact the performance of a commercial property, such as a change in economic conditions, whether there is additional development planned for the area, or if there are infrastructure capacity concerns or environmental issues. Colliers regularly conducts market surveys that track commercial real estate market performance. Vacancy rates (ratio of available space for lease divided by total inventory) and net absorption (measure of growth or contraction in a market) are ways the industry gauges the direction of the market. There can be investment opportunities for both growing and contracting markets. 

Q: Do I need to take accounting classes to learn to invest in real estate?

A: Your understanding of your acquisition property’s financial performance is vitally important. For a multi-tenanted property, the seller is likely to provide financial statements that provide information on operating expenses and rental income. An astute investor will be able to highlight those areas of concerns and identify whether a property’s underperformance can be corrected and result in a potentially higher return.

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Interviewed by Kristen Consillio.