Minimizing Risks as a Passive Investor in Commercial Real Estate

As a passive investor in commercial real estate, it's important to understand and mitigate the risks associated with your investment. There are several key risk factors to consider when evaluating a potential deal, including the deal sponsor, location, and details of the deal itself. By taking the time to carefully assess these factors, you can make informed decisions and minimize your risk as a passive investor.

One key risk factor to consider is the deal sponsor, or the person or group responsible for originating and executing the deal. It's important to thoroughly research the experience and track record of the sponsor, as well as the management team that will be responsible for managing the property. Look for sponsors with a proven track record of successful deals, and be sure to ask about their experience with similar properties in the past.

The location of the property is also an important risk factor to consider. Research the local market to understand the current demand for commercial real estate in the area, as well as any potential economic or demographic shifts that may impact the success of the property. Consider factors such as the local job market, population growth, and the availability of transportation and amenities.

When evaluating the details of the deal itself, there are several key points to consider. The debt structure and level of leverage used to finance the deal are important factors to consider, as a high level of leverage can increase the risk of default if the property does not perform as expected. Be sure to carefully review the terms of any debt financing, including the interest rate and repayment terms.

Another key factor to consider is the availability of reserves to cover unexpected expenses or vacancies. Adequate reserves can provide a cushion in case of unexpected costs or a temporary dip in occupancy. It's also important to understand the break-even occupancy rate for the property, as this will give you an idea of how much occupancy is needed to cover expenses and start generating a return on your investment.

Finally, be sure to review the business plan for the property, as this will provide insight into how the sponsor plans to generate revenue and increase the value of the property over time. Look for a well-thought-out plan that takes into account the specific needs and characteristics of the local market.

In summary, as a passive investor in commercial real estate, it's important to carefully assess the risks associated with your investment. This includes researching the deal sponsor, location, and details of the deal itself, and looking for experienced sponsors with a track record of success, properties in strong markets, and well-structured deals with adequate reserves and realistic business plans. By taking the time to thoroughly evaluate these risk factors, you can make informed decisions and minimize your risk as a passive investor in commercial real estate.

Are you interested in learning more about minimizing risks as a passive investor in commercial real estate? Contact us today to speak with one of our experienced advisors and get the information you need to make informed investment decisions.