As you advance in your career in commercial real estate, you may be given the opportunity to invest in commercial real estate with development deals, building purchases and more. But just because you have the opportunity to invest, should a commercial real estate broker invest in commercial real estate?
Here are five things to consider.
Your Experience
They say a sucker is born every minute. The more experienced you are as a commercial real estate broker, the less likely you are to be a sucker. If you’re relatively new to the business or haven’t been involved in many transactions, it may be too early to start investing for yourself because you don’t have enough experience to judge good from bad.
Your Expertise
As you build expertise, you come to have “asymmetric information.” That’s a fancy way of saying that you have knowledge that other people don’t have. This gives you better insights and understanding. Use that to your advantage but stick to what you know. If you are a retail broker in El Paso, consider retail real estate development deals in El Paso. Don’t consider office developments in Spokane, for example.
Your Responsibility
Understand what you’re getting into. Does the deal require you to be responsible for potential cash calls in the future? If you’re a limited partner, how much say-so does the general partner have to make decisions differently from how you would make them? You should have an attorney advise you on the partnership agreement so that you fully understand your ongoing role and the risks and responsibilities you are assuming.
Your Liquidity
Do you have–or do you continually earn–enough cash so that you won’t need to rely on the investment for liquidity? Development projects notoriously take longer to build and cost more money than planned. Counting on rents for cash flow can be risky. What if a major tenant fails to renew or goes dark? What if the leasing market shifts lower? You should not count on your commercial real estate investment for your cash needs. For your personal life, be sure to keep an emergency fund on hand and fully stocked at all times. And certainly don’t draw on it to make your initial investment in the deal!
Seek Diversification Elsewhere
When your income and your investments stem from the same source, your financial risk is consolidated and increased. This is the opposite of diversification, which is the foundation of a sound investment plan. Do not over-concentrate your investments in real estate. Seek to have a diversified portfolio of other less risky, less concentrated, more liquid investments to help you continue to build wealth.
While real estate may be a smart and logical portion of your overall financial picture, you should consider your financial picture as a whole, and how real estate may or may not fit into that. A comprehensive financial plan can help to make sure that you are taking a reasoned, holistic view.
Schedule a complimentary consultation with Dominion Financial Advisors to see how we can work together to help you manage the risks of investing while planning and building toward your future.