When it comes to real estate investing, what’s the appropriate amount of risk and return?
One of my favorite Ben Stiller movie roles is his paranoid, risk-averse actuary in 2004’s Along Came Polly. We know he’s always on the lookout for the next falling piano, but he has his neuroses down to a decimal point:
“I know that I have a .013% chance of being hit by a car on my way home. Or a one in 46,000 chance of falling through a subway grate. So, I try to manage that risk by avoiding danger and having a plan and knowing what my next move is.”
Whether it’s subway grates or investment properties, we all have our risk parameters. But just as important as the risk evaluation is the ability to see opportunity and potential for relatively greater returns.
Value-add properties may be your preference for wealth creation when investing in commercial real estate.
The best way to break down real estate investments is to look at three main categories:
We and our investors are often attracted to the value-add properties because we can see the potential “trapped value” – whether that be physical, operational or economic – and can visualize a path to freeing that value and maximizing profit.
Once the value-add property has been improved (which increases the operating income), it can usually be sold at a higher value. That appreciation typically means a higher return than a core property investment. And while the gamble is greater, many investors we work with enjoy that balance of risk and return, and they appreciate the cash flow after the property is acquired with the increased potential down the road.
Brad Capas espouses some of the benefits of value-add in an article for CIRE Magazine:
“Value-add investment blends art and science. Success requires creativity to uncover an asset's hidden potential and strategic discipline to execute an enhancement program that maximizes results ... As long as properties age and market conditions change, opportunities to harvest new revenue and drive value will continue.”
Of course, choosing the right value-add property is trickier than it looks. It takes a skilled operator who has the vision and the capabilities to execute the right strategy. Besides understanding the physical property, the operator needs to look at how it’s competitively positioned in the market, its current cash flow, and its leasing prospects on the horizon.
Copaken Brooks is an ideal partner for many investors wanting to create wealth through real estate investing. Over the past 95 years, we have developed and invested in various real estate properties totaling millions of square feet built throughout Kansas City and the Midwest.
We work with a wide range of investors, each with their own tolerance for risk, so we’ll help you evaluate many types of properties to find those that match your preferences regarding timeline, risk and return.
You may still have a minute chance of getting hit by a car on your way home tonight, but at least you’ll know your real estate investments are in safer hands.Bucky Brooks is a principal at Copaken Brooks, a full-service commercial real estate firm headquartered in Kansas City and serving the Midwest. The company’s full suite of services includes: investment acquisition and sales, tenant representation and HQ relocations, condo management, property management, asset management, development, leasing (office, retail and industrial), and construction management. Share your thoughts on our Facebook page or on Twitter @CopakenBrooks.