A very unexpected idea

This second blog post is going to be dedicated to the market I've somehow waded into, commercial real estate.

If someone had asked me three months ago if I was going to write a blog post about commercial real estate I would've laughed at them. Anyways.


The basis: The market is nowadays viewed as something you put your money into AFTER you've made a dime other places. Commercial real estate is usually medium yield, low risk, and with a very high barrier to entry. A decent investment can bankroll your life, your kids life and probably your grand kid's life. Other investors that view real estate as attractive are pensions funds and alternative investment firms. Probably a lot of others I forgot. It's an old boys game though, that's for sure.

For those managing real estate this is shown in that they have a clear long term horizon, contracts are signed for three, five or ten years, with longer ones common as well. A big shopping centre will often just have a couple of employees managing real estate that is worth billions of dollars. Similar to how an index fund operates, this form of passive management will usually garner a good return but is entirely dependent on the economy in general.

I had the crazy though, what if you applied the rules of running a hedge fund to running commercial property. Although talking about rules in hedge funds is silly, since there aren't any as long as you beat the market. You can invest in whatever you like as long as you get high enough returns.

Let's say you owned a storefront on street A, and you rent it out to an ice cream parlour. You can take 1000 dollars in rent a month even though they don't make enough to cover the rent the majority of the year, but that's ok since they probably have a three month window they use to pay for 9 months of loosing money. In this way everyone makes a nice clean margin and a space sits underused 9 months a year. Doesn't matter, made money.

SOOOOOO

What if you own storefront B right next to storefront A.

Storefront A gets its owner $12,000 a year for signing a contract once a year, but you decide you want to take a risk. You want to try to get a lot more than him, since you realise that the central real estate you both own is worth a lot to different people.

You want to rent out your space for three months at a time, but to the people that make the most possible money at that time of the year for much higher rent. So 1st of January to the First of April, the slowest part of the year, you rent it out to whoever makes the most money then. Let's say a yoga centre as everyone tries to get healthy after a long christmas. April-July you rent it out to someone else that makes the most money in those months. Let's say this is a clothes store as people get ready for summer. July 1st you get your ice cream parlour to move in. The first of October you get ready for christmas you get a toy store to take over until the new year.

Although these might be bad examples of businesses that are seasonal the basic message is there. The world isn't static, and if you own something that's potentially worth a lot to different people you shouldn't settle for mediocrity despite it requiring a lot more effort.