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Effective commercial real estate investment requires a prudent and thorough asset selection process that must carefully analyze the demographic and economic profiles of the region in which the property is located. This assessment must validate the asset-specific profile of the property. The tenants should be providing essential goods and services to neighborhoods in which the property is located.
Such analysis, both macro and micro, must be vigorously maintained and updated in order for the investment manager to monitor the asset’s ongoing risk profile and relative value. Buy-and-hold cannot mean buy-and-ignore. All regions are vulnerable to the unpredictability of ever-changing economic conditions, and a real estate manager must monitor selling opportunities as vigorously as it monitors purchase opportunities.
The market for commercial real estate assets is a highly efficient network of informed buyers and sellers. It is unlikely that a transaction occurs where the risk and return are not efficiently correlated. That said, asset managers are far more variable in their skills, efficiency and transparency. What kinds of returns are reasonable? It depends on the asset profile and the asset manager.
An ideal minimum current cash flow is 6.5 percent, plus the investment should have the potential for long-term growth in asset value that matches or exceeds inflation.
Liquidity risk can be carefully managed by assessing the property and demographic profile of the region while employing conservative leverage metrics. In doing so, we are endeavoring to maintain and grow wealth over time.
An investment manager's financial reward (other than reasonable overhead) must be based on success and outcome of the realized profits of the investment. There can be no hidden fees or undeclared expense allocations that direct cash from the investment to the investment manager. Transparency is essential to the integrity of transactions.
A final bit of advice: Do your due diligence. Just because you're a wonderful manager of apartment building investments doesn't mean you'll automatically be able to provide similar results when investing in shopping centers.
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