On his 29th birthday, at an age when most people are still deciding whether to spring for a home mortgage, Charles A. Wallace II did something different. He closed on a $2 million hotel.
The proud new hotelier joins a growing cadre of African Americans prepared to enter the high-risk, but potentially high yield, world of commercial real estate. Whether you’re sitting on acres of undeveloped land in the South (as Wallace’s family does), living in a city with an urban core undergoing redevelopment or have just always wanted to own a housing unit, hotel, strip mall, factory or office building, you could be looking at one of the best ways in America to reach millionaire status–a commercial real estate investment opportunity.
However, it isn’t one of the easiest ways to get rich. “Commercial real estate investing is a very serious business,” says Olusola Seriki, principal in Metroventures/USA Inc., a real estate development and management firm in Columbia, Maryland. “Because of the liabilities associated with it, it’s extremely important to know the realities of what you’re getting into.”
First, investors should understand that investing in commercial real estate is not like playing the stock market, where assets are more liquid (easily convertible to cash). “You invest in commercial real estate for two reasons: income and appreciation,” says Seriki. “The income can be healthy, but the appreciation is where you really enjoy the benefits. Therefore, you must be prepared to hold your ownership position long enough, maybe five years or more, to reach the point of profitability.” People who can’t hold the position may have to liquidate quickly, often at deep discounts to the price [of the property]. Such circumstances are better known as “fire sales.”
Another issue is upkeep of the property. “The art of the deal is not in the buying or development of the property, but in the everyday protection of your assets,” continues Seriki. “You can lose your shirt if you don’t do that.” Shopping centers are the best way to illustrate the importance of property management. “More so than in an office building, where people must come in order to work, shopping is a selective decision,” Seriki explains.
“If the property doesn’t meet certain standards of cleanliness or comfort, stores lose their customers, and you lose your leases. Before you know it, you’re unable to meet your notes. Next step: fire sale or bankruptcy.”
In short, you can’t afford much of a learning curve when starting in commercial real estate. Mistakes can cost you bigtime because, as Seriki says, “the property can eat you alive.” But there are enough success stories out there to prove that it’s a profitable game to play if you know what you’re doing. According to Arthur Zabarkes, former director of the Real Estate Institute of New York University, commercial real estate is a $3 trillion revenue-producing industry, representing 35% of all investable wealth in America. In addition, those who own commercial property often decide which businesses are opened where, help influence efforts to revitalize their community