Real estate is one of the best ways to build wealth because it offers the prospect of capital appreciation and rental income. Unfortunately, many people shy away from real estate because they believe it costs too much to start investing or don’t believe they have the market knowledge to succeed. However, there are many ways to get involved as a real estate investor. You don’t need to buy a home to rent out or undertake fix-and-flips. A passive way you can invest in real estate is by investing with commercial real estate acquisition companies!
Partnering with these companies means that you can take advantage of the benefits of real estate: appreciation, tax advantages, cash flow, and more. However, since these investments are passive, you take the stress out of handling and managing these real estate properties.
What are these companies, and how can you find them? We’re glad you asked! Here’s your guide to finding, vetting, and making your next real estate investment with a commercial acquisition company!
What Are Commercial Real Estate Acquisition Companies?
As the name implies, commercial real estate acquisition companies invest in commercial properties. They typically have many investors, some with investments as low as $50k to others that might be putting in $500k or more. The general partners (the people running the company) look to use those investment dollars to purchase large commercial real estate buildings. A good example would be an office or apartment buildings.
The company is responsible for finding and underwriting the entire transaction. The company also handles raising equity, running the property, performing maintenance, and paying out all the investors on time.
In short, these companies acquire commercial real estate, run it profitably, and then sell it later for a profit (hopefully)!
What Are the Benefits of These Investments?
There are many benefits to partnering with one of these companies. The biggest one is that you can have so many more opportunities by investing with a commercial acquisition firm.
Most people approach real estate from the solo investor mindset. The problem with this perception is that it significantly limits your investment choices and requires a more considerable amount of experience and time from your end. Suppose you have $100,000 to invest and decide to put this all into a single-family home. In that case, you’ll need to be the landlord yourself for it, or you’ll need to contract out this responsibility to a property management company which most likely would not make sense with one or two houses.
When investing with a commercial acquisition company passively, your investment options are opened up to a variety of asset classes, locations, and projects across the country that would be managed end to end by an expert in the industry.
What Returns Can I Expect from Commercial Real Estate Acquisition Companies?
Your returns will also depend heavily on the project that the company chooses. An office building will have a different return and risk structure than a mall!
Although to give you an example, at Disrupt Equity, a commercial acquisition company that specializes in apartment buildings offers the following real estate syndication returns.
- Average annualized return: 15%+
- Internal Rate of Return (IRR): 10%-15%
- Cash on Cash: 7%-12%
- Total Return: Usually about 100% over 5 years
- Preferred Returns: 6%-10%
Of course, these returns are averages. All investments risk loss and past performance is no guarantee of future returns. However, these companies have historically provided far better returns than many other common asset classes.
Therefore, you must research the company and opportunity you select thoroughly before making any decisions!
How to Find These Companies
Finding a trustworthy, capable company is vital to ensure your investment has the highest chance of success. Unfortunately, that’s not always a straightforward task. There’s no national database of “good acquisition companies.” Instead, you’ll need to use a little resourcefulness to locate these firms.
Here are three tips to help you start the process of finding commercial real estate acquisition companies:
- Network with others in this space. You might connect via Facebook or Meetup. Join groups with other real estate investors to see which places they have had success in the past. These groups tend to be quite beginner-friendly, and they can help you start your investment journey!
- Look in public records, such as those from CoStar, to find these companies. If you have particular buildings or projects that seem interesting to you, looking up to see if there’s an acquisition company behind them is a great way to connect with that company and invest in it!
- Attend conferences! Similar to meet-ups and Facebook groups, conferences are a fantastic way to meet with other investors in the business!
Finding these companies requires some patience, but once you have a few companies of interest, the next step is to vet them!
How to Vet These Companies
There’s no concrete blueprint for vetting these acquisition companies. Instead, you need to ask intelligent questions, listen carefully, and ensure that all answers are logical.
Here are five questions you should consider asking:
- What is your background? How many years of experience do you have putting together these deals?
- What type of deals do you typically do, and have they ever gone full-cycle?
- What have your historical returns been?
- Have any of your previous deals underperformed?
- Can you provide referrals of other investors who have participated in previous deals you have done?
These are some examples. Don’t be confrontational, of course, but do ask direct questions. You want to get a sense of how honest, transparent, and knowledgeable the company’s general partners are! After all, they will be handling your money!
The above questions are for the company itself. However, you should also ask questions about a prospective deal. In particular, dig into the deal’s structure (who gets paid what and when). Additionally, look for any fees, like acquisition fees. Ensure you understand the costs and how they will affect your returns!
Remember, you’re trusting this company to do right with your money. If you sense any issues with the company’s answers or get the sense that something is off, you may wish to move on and consider another firm!
The Top 10 Warning Signs for Commerical Real Estate Acquisition Companies
If you see any of the warning signs below in the opportunity presented by the acquisition company, please re-consider investing!
- Decreasing population growth (fewer people may mean higher vacancies).
- Low absorption rates
- No GP fee disclosure (if the people making the deals won’t disclose how much they’re making, that’s a red flag!)
- They guarantee returns (no investment is ever 100% certain)
- No reserves for issues
- Unrealistic revenue growth targets
- Exit cap rate exceeds in-place cap rate
- Comps for the project aren’t near the actual project’s site
- Decreasing rental prospects
- Undisclosed distribution split details
Conversely, a company that does not have any of the red flags above is one that you should look into further and might be a good candidate for an investment!
When investing in commercial real estate acquisition companies, you can separate the good companies from the bad by figuring out their loyalty. Good companies take their fiduciary duties seriously and put investors above everything else. Problematic companies are in it for themselves and don’t care about investors.
The payoff is worth it for prospective investors if you can find the right company and investment opportunity! When done right with a well-run company, commercial real estate typically has some of the most lucrative investment opportunities of any asset class.
Use your skills to find the right acquisition company. Once you do, you’ll have found a fantastic partner and a formidable ally on your quest to improve your overall net worth and cash flow!