6 Timeless Commercial Real Estate Investment Principles
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As interest rates and oil prices drop and Canadian investors look to restructure and expand their investment portfolios, it's important to remind ourselves of the core principles when investing.
1. Make Money When You Buy
Appreciation and a bright forecast for price growth can be emboldening. However, it is still important for Canadian investors to lock in gains when they acquire new assets versus hoping for them to appear later. In many cases this consists of buying undervalued real estate at a discount, but can also pertain to securing passive income streams or at the very least, acquiring properties that can quickly increase in value after the completion of cosmetic renovations or operational improvements.
2. Exit Strategy
With the exception of income yields, investors really don't realize capital gains until they exit (or perhaps refinance). That can be a rough guideline, but without an idea or several pre-determined exit strategies, investors may miss an opportunity to capitalize on ideal market conditions.
3. Buy & Expect to Hold
While fortunes have been made from buying and reselling commercial real estate in short periods of time, legends like Warren Buffett continue to repeat the wisdom of only buying what you would be happy holding onto for a very long time. This doesn't necessarily mean that you have to hold your investments for the long term, but it ensures that you will acquire solid investments that you will be happy with even if you don't end up selling the property in the next few years.
4. Minimize Tax Liabilities
More experienced investors recognize the importance of investing with taxes in mind first. You need to determine how different investment opportunities compare in regards to net tax liability to ensure that you are maximizing your potential returns.
Diversification has served as the foundation for consistent investment returns for many successful investors. This can mean holding a blend of stocks, bonds, cash and real estate, as well as implementing diversification within your real estate portfolio. Generally the better diversified your portfolio, the safer and better it will perform over the long run. This can mean investing in different markets, multiple types of commercial real estate and even diversifying your typical tenant profile.
6. The Power of Leverage
Leverage is one of the most powerful wealth and passive income building tools available to investors. It can fuel gains faster, while simultaneously reducing your risk. This doesn't mean that you should over-leverage your properties, but instead utilizing leverage either via commercial mortgage lending or through the use of partners (or both) to produce dramatically better investment results.
Sticking to these timeless investment principles can help investors make better investment decisions and maximize opportunities without taking on unnecessary risk.