You’ve probably heard the saying, “Investing in real estate is a marathon, not a sprint.” What they don’t tell you is real estate investing often requires a blend of strategic thinking, teamwork, financial intelligence, and a keen understanding of the marketplace. Here are five guiding principles I’ve discovered over the last ten years for building a profitable yet balanced real estate investment business:
1. Teamwork and Shared Responsibility
One of the cornerstones of a successful investment team is shared responsibility. Recently, we had a team call to discuss our development activity. It’s always nice when team members have great ideas and others are willing to take responsibility to get things done. The load becomes lighter, and we can accomplish much more. It also fosters resilience in tough times, keeping the team united even when deal momentum slows like we’re currently experiencing.
2. Market Positioning and Public Relations
Creating a strong market presence is a significant aspect of growing a real estate investment business. We weren’t well-known in the industry when we started the storage division. The attitude of storage brokers was generally polite and hopeful that we could do business but somewhat dismissive of our abilities. Success in one asset class (multifamily) does not equate to success in another asset class. But because of our position with investors like you and the partners’ tenacity, we found success and gained market share. We sent out social media press releases tooting our own horn because how else will brokers and investors get to know, like, and trust us if they don’t even know who we are? That’s why I try to stay active on social media and have re-launched our Storage Investor Nation Podcast. You need to hear from us regularly, and our friends in the industry need to know we can get the job done.
3. Capital and Property Market Understanding
To fully appreciate commercial real estate investing, one must understand three markets: the space market, the development industry, and the asset market. The space market is the consumer-facing side of supply (from landlords) and demand (from tenants) for space of a particular type. In other words, how many 10×10 units are available in an area, how many are occupied, and at what rent level? It also encompasses other aspects like expenses, location, and lease terms.
The development industry evaluates if future development is likely by considering the relationship between property values and the cost to build. If values are higher than the cost to build, including the cost of land, then more development is likely. If values are less than the cost, development is unlikely. If a storage facility recently sold for $200 per foot, and the cost to build plus the cost of land are $150 per foot, developers will probably build more storage in that area, and vice versa.
Lastly, the asset market involves the flow of equity and debt in and out of the asset class. It considers valuations via cap rates, the cost of equity (investor’s required returns to invest), and the cost of debt (i.e., interest rates) and their effects on cash flows. These factors influence both acquisitions and development.
Understanding the relationship between these three markets is critical to identifying suitable new opportunities in commercial real estate investing.
4. Strategic Planning and Risk Management
Every real estate investment journey is unique, requiring strategic planning and risk-taking. High aspirations, such as the goal of owning a one-billion-dollar portfolio, can fuel the drive to reach higher and think bigger—something we should all do. However, the downsides can be steep. Personal guarantees and any shortfall in returns may mean tightening the purse strings on fees and repaying loans from personal assets. I’ve discovered it’s crucial to have a steady source of income while building an investment portfolio. During an upcycle, one income stream may be profitable for a time, but the cycle eventually dips back down. Another stream can provide financial stability during the downtime while the search continues for profitable deals.
5. The Art of Acquisitions and the Power of Partnership
Real estate acquisition is an art. It involves identifying properties that have been undervalued or have upside by taking on lease-up risk. Once stabilized, these properties can be sold for a profit. This is one level of value add. The second level comes from aggregating a portfolio of like-kind properties and selling to an institutional investor who prefers to buy many assets at once. This is called achieving a portfolio premium, which is what we are aiming for in the long term.
The art is identifying properties that institutional investors want to own—in markets where they want to own—then buying or building those properties in mass. It takes time and patience and often requires loosening the company’s reins to allow talented teammates to contribute to growth. This balance of control can lead to tremendous financial success and a larger, more efficient company. What can stop it? An unhealthy ego. I confess I’ve dealt with this. I try to remind myself that having an ego can benefit competition but should not hinder the team’s shared vision. I have excellent big-picture thinking, strategy, and drive. But my teammates can execute better than I can. You might feel like you must do it all, but try not to give in to that thinking. Give your team some room and let them execute the vision. That’s why they are there.
Real estate investors can build a robust and profitable business by adhering to these principles without sacrificing personal values or work-life balance. I’ve just scratched the surface of these topics, so keep a lookout for my upcoming articles that will dive deeper into each one.
Remember, the goal is not to win at all costs but to build a sustainable, rewarding lifestyle that offers opportunities for those willing to think strategically, work collaboratively, and take calculated risks!
