Owning real estate for investment can take a little or a lot of work, depending on the type of asset you purchase. Passive investments in real estate offerings managed by professional sponsors require little-to-no work on the part of investors. Single-tenant, triple-net leased commercial properties also require little time and effort on the part of the owner-investors. The tenant is responsible for payment and performance of maintenance obligations and real estate taxes for the properties.
This is in contrast to multi-tenant commercial properties.
The tenant is responsible for payment and performance of maintenance obligations and real estate taxes of the properties.
These properties include shopping centers, offices with common areas that require upkeep, and apartments. They will demand more attention from the landlord.
Owning investment real estate can be very time intensive, especially operational properties. Some examples include self-storage facilities, hotels, resorts, certain senior living facilities, and parking structures. An operational property’s revenue is dependent upon the success of the property’s business. The income stream is determined by a percentage of sales instead of a fixed annual or monthly rate. As a result, very few investors choose to self-operate these types of assets, especially on a large scale.
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Instead, it is most common for an operational property to have a lease in place with the operator of the underlying business. The rent is determined based on actual net operating income rather than a fixed monthly or annual rate. Therefore, an investment in an operational asset is both an investment in the ongoing business at the property and an investment in the real estate itself.
Cash flow from owning operational real estate can vary greatly based on numerous factors. All these factors can act to make cash flow uneven on a daily, monthly, or quarterly basis. When trying to project rents, operational real estate measures prospective income with financial reporting and metrics other than a rent roll. Hotels, for example, look to occupancy, average daily rate, and revenue per available room to benchmark their performance. They check both independently and compare to other competitive hotels in the area.
Parking lots track their revenue not only on a daily basis, but also on an hourly basis. They monitor the duration of clients’ stays, as well as entry and exit times. Senior facilities take into account the level of care required for their residents. They could possibly move their clients to different areas within the property as their medical needs increase. You should know and understand these metrics before owning operational real estate or properties.
Special events, such as concerts, weddings, conventions, and major sporting events, can generate business at times that would normally be less busy. They can provide a basis for elevated income during the time in question. School calendars, including breaks and moving seasons, can also impact business and cash flow.
Your success in owning operational real estate can also be affected by the weather
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Because of these uncertainties, owning operational real estate comes with a higher overall degree of risk (and hopefully a correspondingly higher return) than more traditional types of investment real estate. One of the best ways to understand and manage that risk is to lease to companies with strong, proven experience operating the type of asset in question.
Owning operational real estate comes with a higher overall degree of risk
While the right team cannot protect you from losses due to forces outside of your reasonable control, like the weather, they can help you literally weather the storms. Finally, you should always consult with your own personal financial and legal advisors before making any investments like owning operational real estate.
Tracy is a Principal at Syndicated Equities where she helps high net worth individuals and family offices to profitably invest in real estate. She also assists investors in identifying appropriate replacement property to complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Drawing upon her 20 years of legal experience in the areas…
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