I want to impart all the knowledge that I have about risk mitigation in commercial Real Estate Investing. I want to give a background.

What are the real risks in Real Estate Investing?

There are many risks in real estate investing. One could be a bad location. The second is negative cash flow. Possible negative cash flow, huge vacancies problem tenants, and on top of it, in a commercial Real Estate. You may have risks like if you have a single-tenant property that is the riskiest property or a single-use building like an auto dealership, that could be a very risky proposition because if the dealership has moved out, you are stuck with that commercial property for a long time trying to rent it or try to rehab it to switch to another tenant.

Disadvantages in Real Estate Investing.

Number one is it’s a long-term investment. Money is not liquid. Your real estate properties need maintenance. There could potentially be rent controls. In New York City, we have rent controls. You cannot just raise the rent depending upon your wish. When you have Real Estate, it requires time and of course, transaction costs are a little bit higher. Commercial properties increase in vacancy, complicated lease terms, we have complicated listings and retails, we have other advantages like you have upfront capital required and reduced capital growth.There are many disadvantages. Physical risk is always there(hail, rain, thunderstorm). You have tenant risk. You have market condition risk. I’m going to talk about What do we do in terms of taking care of those risks? The biggest risk is folks think about recession is coming. So let’s talk about them one by one.When I say vacancy risk or negative cash flow or bad location, we at My Realty Gains invest in properties that are in good locations. They are not C minus or D class assets. They are typically C plus, B minus A class assets in good locations. We as Passive Investors have to look for sponsors who invest in a good quality asset. You as investors or we as investors invest in these assets only when we know the sponsor can take care of those assets. The sponsor is the one who’s professional to do the job. They know that even if there’s a negative cash flow on the property. They know how to turn around. They can remove the problem tenants, and improve the cash situation on the property. Decrease the vacancy by putting the right kind of tenants in the property in multi-family and single in assisted living or storage or mobile home parks. These are not single-tenant properties. Even if one or two tenants move out, that doesn’t matter. I mean, unlike single-use commercial assets.

Assets that have a huge tenant base are better than single-tenant properties.

Even if one guy leaves out of 100 units, it’s not going to affect the cash flow anyway too much because you have already underwritten that vacancy, 10% vacancy in your underwriting, right? So that risk is mitigated. Yes, your money is locked for a long time in the deal, but it is cash flowing from day one. We buy an apartment complex which is cash flow from day one so that you give returns to investors. Somebody buying the property themselves and managing it. Meaning that it is dependent on their skills and contacts in the market. But somebody investing with a sponsor who is professional and has far larger outreach in terms of context, in terms of trying to maintain the property, we as investors end up making more. If we invest with a seasoned operator, I’m 100% sure that we manage the asset ourselves.

As an investor, we will end up making mistakes and those mistakes are pretty expensive.

Those mistakes are pretty expensive. So better let those things be handled by a seasoned operator.

In addition to that, as I mentioned earlier, complicated lease process. If you are in retail, the lease process is very complicated but in multifamily or storage, the lease process is pretty simple. It’s just renting an apartment upfront. Capital is high but it comes from a lot of investors. Investors own a part of the property and they get part of the rent. Investors own part of the property and they get part of the rent. Tenants are not giving them the rent directly but investors are getting it anyway. The tenant risk is minimal. If you have 100 people, one or two tenants are bad, which is okay then we can evict them that’s our job. The seasoned operator doesn’t get worried about those things. These things are management. So that real property managers take care of those big assets. It’s not being handled by mom and pop folks, it is handled by Real Professional folks.

Advantages of Investing

There are advantages of Investing in multi-tenant-based assets which are sort of recession-proof in a way. The biggest challenge that people have been thinking about is the recession is coming, what to do? If you think about it, the session will come, what will happen? Maybe some offices will get closed, maybe some people will lose jobs. If that happens, what will happen? People will downgrade their houses, they will sell their houses, they’ll move to apartments, they’ll move their stuff to storage. These are multi-tenant. Are people going to leave their apartments and go somewhere else? I don’t think so. Folks need a place to live. Your occupancy intercession goes high on some of these multi-tenant assets like multifamily storage or mobile home parks and even assisted living.

Occupancy in my mind goes high because for obvious reasons.

We are aging every day!

10,000 baby boomers are aging, coming to the retirement age every day. These are some of the asset classes which are not affected by the session. The session is coming? Yes. You may not be able to exit a property. There may not be buyers in the market for those assets but you will be able to get the cash flow out of it. I want to emphasize it you will be able to get the regular cash flow out of your deal regularly even during the session because I have not seen in an emerging market, I have not seen rents going down even during recessions. If you find a place in the middle of nowhere their potential rents may go down, but not in an emerging market. There is population growth in a market, rents can never go down.