Four Principles that Make Commercial Real Estate One of the Best Investments

I’ve been in the real estate business a long time. I got my real estate license in 1973 while getting my bachelor’s degree in Accounting from Brigham Young University. I had just returned from a very successful two-year mission to New Zealand for The Church of Jesus Christ of Latter-day Saints. My uncle, Blaine Harris, was the sales manager for Terracor Corporation, a single-family residential home development company started by two of the most successful real estate gurus in Utah, i.e., Roger Boyer and Ellis Ivory, they married sisters and became lifelong friends.

My uncle invited me to study for the real estate exam so one slow day when I didn’t have many classes, I drove to Salt Lake City and started studying for the exam. Driving my Plymouth Fury in the big city turned out to be a little precarious. I was driving down a one-way street and took a hard left turn right into the oncoming traffic. In New Zealand, being a British Commonwealth country, I got used to driving on the opposite side of the street than they do in the United States. Fortunately, I and several others escaped injury by me driving up on the lawn of a nearby government building. Thankfully, no one was hurt.

A few weeks later I passed the test and so began my career in real estate. That summer I sold subdivision lots. I went on to get not only my degree in Accounting from BYU but also a Masters degree in Business Administration (MBA) from the University of Utah. Prior to graduating, I was hired by a financial planning firm who was acquiring large apartment projects for their clients and they asked me to oversee the management of their portfolio. From that humble beginning in real estate, I have never looked back. It’s been real estate all the way for me. It’s in my blood.

A few years later, the partners of the firm split and I was offered a position to lead an acquisition and management team that over the next few years acquired and managed 5,000 units in five states. As the company grew rapidly, the primary principal of the company started making decisions I thought were unwise, so I started my own firm, Kenman Corporation in 1979 and I’ve been doing real estate ever since. Today, we’re known as the Overland Group which consists of five companies doing commercial brokerage, development, construction, management and investing.

I’ve been through several major downturns in both the real estate and the stock market. Most of the downturns in real estate have been caused by poor decisions by the federal government. Jimmy Carter had no clue how to manage the economy. Under his administration interest rates climbed to 17%. Ronald Reagan, fixed the problem but passed the 1986 Tax Reform Act which stopped real estate investing cold and caused the collapse of the Savings and Loan industry. Over 1,500 S&Ls closed their doors, which was a major blow to the real estate industry.

From that we got the Resolution Trust Corporation (RTC) which helped launch BlackRock, one of the biggest investment companies in the world. Since then, we’ve had a few other recessions that have affected the real estate market, i.e., the Iraq War in the 1990s, the Dot.com Crash in 2001 and subsequent attack on September 11, 2001, and the Great Recession which lasted from 2007 to 2012 before we began an era of prosperity. Donald Trump did a masterful job managing the economy and now we have Joe Biden who can’t seem to figure it out.

During every one of these downturns in the economy and for years to come I have witnessed the resilience of the real estate industry. Values may wane for a period of time but they always rebound. There are a few important principles to follow when investing in commercial real estate:

1. Buy properties that are well located. That means they are in the path of growth with high visibility and good access. They are located where demand exceeds supply. They have the potential of future growth and longevity.
2. Don’t over-leverage. That means you give up some of the potential return by not borrowing too much. Debt can amp-up your returns because you can typically borrow at a lower interest rate than the property can generate through appreciation. When you over-leverage you risk getting caught in a downturn and losing your investment because you can’t continue to pay the debt. It’s a recipe for disaster.
3. Buy or build quality assets. Some investment models choose to do the value-add concept which is buying an older piece of property, fixing it up, and renting it at a higher price until you can sell it to some other value-add guy. That model has made people money but it’s not the preferred model for savvy real estate investors. When you buy a pig, put lipstick on it, then sell it, you still have a pig you’re trying to sell. That’s the reason I develop and build. I have no desire to buy someone else’s problems unless the asset has great potential, I won’t touch it. It takes longer to develop and hold an asset to stabilization but in the end the appreciation is significantly better and the returns are usually higher and more predictable.
4. Be patient. Don’t be in too big of a hurry to sell and move on. Sure, when you sell it gives you a chance to measure your performance but good assets just get better over time because the risk diminishes and the cash becomes a bigger part of your return. Some of my biggest regrets are when I have sold assets too soon.

?Over my long career in real estate, I have been an eyewitness and benefactor to the success of following these principles. Many, many people have followed these principles to build great wealth without ever risking their capital in the stock market. It’s a winning formula for success in real estate. ?

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