According to a study by Fidelity Investments, over 88% of today’s millionaires are self-made. How’d they do it?
Simple: they paid off debt, lived below their means, and diversified their income with wise investments.
One such investment, shown by the Fidelity study, is rental property, a subtype of commercial real estate investments.
Commercial real estate and the investment opportunities around it are growing in popularity, and new technology such as free commercial real estate listings, for example, allow new CRE investors to enter the industry without paying an arm and a leg for exclusive listings and market data.
Let’s look at how commercial real estate can help you grow your net worth.
Defining Net Worth
Net worth is defined as the total of an individual’s assets minus their liabilities. Net worth is often used as an indicator in determining how wealthy a person is.
Assets are more than just how much money a person has. They include:
- The money within their banking accounts;
- Any investments the person may have;
- The value of their home;
- Any valuable personal property such as jewelry or collectibles.
The value of a person’s debt (mortgages, car or student loans, and credit card debt, for example) is subtracted from these assets to give them their net worth.
The Benefits of a High Net Worth
Since net worth varies so much per each person’s assets and debts, there is no ideal value that someone should have.
The ideal net worth is simply just a positive one, and a higher net worth is even more ideal.
High net worth is an indicator of financial stability, which is useful in terms of acquiring sufficient retirement funds.
You’ll also have greater investment and financing opportunities once you are deemed an accredited investor.
An accredited investor is someone with a net worth of $1 million, excluding their primary residence, or with an annual income of $200,000 for at least the previous two years.
How Real Estate Investing Grows Net Worth
In general, real estate investment is considered a great way to grow your net worth. There are a few reasons for this, including:
- Benefitting from certain tax deductions;
- Ability to earn cash flow or passive income;
- Leverage.
Leverage is when an investment requires borrowed money or debt in hopes to maximize its returns in the future. It comes with great risk but yields high reward when it works out.
Successful CRE Investors
There are a large number of real estate investors who are also billionaires. Andrew Carnegie, who was a successful and famous industrialist in his day, once said that 90% of all millionaires gained their wealth through real estate investment.
Based on the fact that real estate investment remained strong even during a global pandemic, there might be some truth to that sentiment.
Here are some of the most successful commercial real estate investors:
- Donald Bren – Net worth: $17 billion: Much of his investment property is office buildings and apartment complexes in Orange County, California.
- Leonard Stern – Net worth: $6.2 billion: Gained wealth through his 250+ commercial real estate properties throughout the East Coast.
- Edward Roski, Jr. – Net worth: $6.1 billion: Owner of the Majestic Realty development firm in Los Angeles. The company focuses on industrial properties in California as well as other states.
Other successful commercial real estate investors include Robert E. Griffin, Jr., Robert McLean, and Duane Fitch.
Tips on Successfully Investing in Commercial Real Estate
Real estate investment is, stereotypically, only possible for the rich, but nowadays has become more accessible to the general public.
With that being said, the secret to success is understanding how to properly invest in CRE.
Of course, you need to ensure that you have the financial capability to invest in commercial real estate, but you also need to be educated on the different types of investing so you can determine what’s right for you financially.
There are two different investment approaches: direct and indirect investment.
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- Direct investment: Investors can become landlords since they own the property they are investing in. This type of investment is recommended for investors who have a lot of knowledge of the CRE industry or can work with a knowledgable company;
- Indirect investment: In this case, investment involves buying shares, either in a fund or a publicly or privately held company. Buying shares in real estate investment trust (REIT) stocks are the most common starting step. REITs get their income from various real estate property portfolios;
You should also examine the different types of CRE properties to decide which ones could be the most profitable for you.
There are retail, office, industrial, multifamily, and business brokerage properties.
Due Diligence
Buying a commercial property doesn’t end at the purchase; you should always maintain the property to ensure that the purchase was a good investment.
When you are doing your due diligence in this aspect, it refers to three aspects: physical inspection, financial review, and legal inquiries.
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- Physical inspection: As expected, you should inspect the property to see what kind of renovations, repairs, or other improvements should be made before renting out the property. This allows you to see whether the property is even worth it when you factor in all the repair costs.
- Financial review: You’ll want to hire a real estate accountant that has experience in CRE investments. They can then evaluate the property to determine whether or not it will be an asset in the end.
- Legal inquiries: This part of the process involves a real estate attorney or a title company. Your representative will then determine if there are any legal issues with the property as well as ensure that the title is accurate.
It may be advisable to contact an advisor or other CRE professional to ensure that your due diligence is performed correctly and efficiently.
Joining Investment Groups
When you are a beginner at commercial real estate investing, it could be beneficial to join a mastermind group.
These groups consist of entrepreneurs that meet to discuss businesses and give each other advice as well as bounce ideas off of each other.
CRE mastermind groups can help new investors learn the ropes from those with experience in the industry.
