Commercial Real Estate Investment Strategy for 2008

A classic definition of strategy may read as follows: A plan of action or policy designed to achieve a major or overall aim. When applied to purchasing commercial real estate, it means setting the rules for achieving the desired return on investment with the least risk.

Before we set any rules, we need to know the current issues that will affect the value of commercial real estate. A perfunctory list would include the war in Iraq, terrorism, illegal immigration, the trade imbalance, energy dependence with unfriendly dictatorships, nuclear proliferation, the weak dollar, a softer economy, health care problems, environmental issues, a decline in educational performance, a subprime credit crunch, decreasing job creation, a questionable future for social security, increasing energy costs, and tax reform. Not exactly a favorable climate for investing in commercial real estate.

When analyzing the business cycles for the last one hundred years, we find history has shown that, when compared to everything looking rosy, now is a better time to invest. Today's successful investors will be the ones who ignore naivety and greed. That said, current times dictate that you don't buy real estate using the greater fool theory (there will be a greater fool than you who will buy the real estate from you). The present economic climate dictates that you adhere to sound economic guidelines. Following is a composite list of those guidelines that my organization, NetGainRealEstate.com, believes are a necessary requirement for successfully investing in commercial real estate for 2008.

- Buy commercial real estate that has a positive spread. Positive spread means the capitalization rate is greater than the annual percentage rate (APR) cost for debt service. Negative spread is a guaranteed mathematical loss.

- Do not use projected income when computing the capitalization rate. Use current collected income.

- Do not use guaranteed income when computing the capitalization rate. Use market rate rents.