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Commercial Real Estate Economies of Scale


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As with acquisition and strategy, income properties offer economies of scale when it comes to making improvements. To reposition, say, 12 houses, you work with 12 different buildings in 12 different locations. Each property requires its own unique market research, design, repairs, and renovations. In contrast, you can improve one 12-unit property with less time and effort (per rental unit). Your renovation costs also incorporate economies of scale. One large roof costs much less than 12 individual roofs. To the extent that each of a building's individual units are similar, you can apply one redesign to all units. When you focus on one, two, or even three larger properties instead of a dozen or more smaller properties, you achieve more return for each hour you invest.

As we look in to the years ahead, real estate investors who in previous years would have searched only for single-family houses will switch to income properties. Such investments provide economies of scale; they cost less per unit; they yield higher annual cash flows; and they present greater opportunities to create value, to reposition, and to turnaround through improved operational and strategic management. When compared to stocks, bonds, annuities, or other assets, owners of income properties will produce superior performance. In fact, just as I was completing this book, a feature article in the Wall Street Journal ("Investors Considering Retirement Opt for [Commercial] Property Investments, " December 18, 2007) essentially promotes the same message that I advocate here. The article quotes a Mr. Larson who says, “With the stock market, you're investing in faith. But with commercial real estate you can quantify everything and even drive by it on Saturday to make sure that it's still there. "

The journal goes on to report that “more investors are following Mr. Larson's example. As they're looking to build nest eggs that may need to last 30 to 40 years or more, commercial real estate seems like a stable investment compared to stocks-and it delivers a larger regular income stream. . . . Indeed while the residential markets in some areas continues to struggle, commercial real estate shows solid fundamentals. " But as the article also points out, beginning commercial multifamily investors must study the local economies where they plan to invest, learn to run the numbers, and figure out target markets. Fortunately, that's the knowledge that you will take away from this book. Although, as noted, I focus primarily on the multifamily side of the commercial real estate market, the world of affordable commercial properties offers a magnificent
Affordable income properties yield superior performance.

Variety of other choices - I urge you to consider starting here and then move on to other opportunities as you gain experience. But if you do wish to jump right in to retail, offices, self-storage, or other types of commercial properties, you just follow the same fundamental analysis.

Step-by-Step, low price Training Videos on How to Build or maintain a Powerful commercial property Portfolio, covers land, apts, multifam, retail and more!

By: Raymond Pedersen


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