Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Acquisition Philosophy

Your buying criterion defines what you tell the outside world. It sets forth general parameters as to property type and location, and various property, leasing, and tenant requirements. It allows you to screen all types of submissions within broad guidelines. However, it is necessary to go beyond the general to a specific economic framework outlining what works for you. You must establish a understanding of what you are attempting to accomplish from a yield perspective. It is important to be clear about what your economic goals are. To some extent, your economic goals might be dictated by your capital source, meaning your investor or investors. If your investor base requires a 10 percent return, how can you buy at a 6 percent cap rate? Even with leverage, your yield will most likely not reach 10 percent. Another important factor to take into account with a target yield might be maintaining a spread between the cost of capital and the capitalization rate, that is, the degree of positive leverage. The upside potential might also factor into the equation. Depending upon your horizon, if the potential exists to turn the project into a home run, a lower initial yield could possibly be acceptable. The point is that, in addition to general categories, a specific desired return on investment should be established, at least internally, so you can quickly evaluate projects and seize opportunities if the right fit arises.