A Guide to Investments in Indian Real Estate

Real estate has traditionally been an avenue for considerable investment per se and investment opportunity for High Net-worth Individuals, Financial institutions as well as individuals looking at viable alternatives for investing money among stocks, bullion, property and other avenues.

Money invested in property for its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a regular return on investment, if property is rented as well as possibility of capital appreciation. Like all other investment options, real estate investment also has certain risks attached to it, which is quite different from other investments. The available investment opportunities can broadly be categorized into residential, commercial office space and retail sectors.

Investment scenario in real estate

Any investor before considering real estate investments should consider the risk involved in it. This investment option demands a high entry price, suffers from lack of liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as one could have done by selling some units of equities, debts or even mutual funds) in case of urgent need of funds.

The maturity period of property investment is uncertain. Investor also has to check the clear property title, especially for the investments in India. The industry experts in this regard claim that property investment should be done by persons who have deeper pockets and longer-term view of their investments. From a long-term financial returns perspective, it is advisable to invest in higher-grade commercial properties.

The returns from property market are comparable to that of certain equities and index funds in longer term. Any investor looking for balancing his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. A right tenant, location, segmental categories of the Indian property market and individual risk preferences will hence forth prove to be key indicators in achieving the target yields from investments.

The proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors’ point of view. This will also allow small investors to enter the real estate market with contribution as less as INR 10,000.

There is also a demand and need from different market players of the property segment to gradually relax certain norms for FDI in this sector. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.

Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years. This attractiveness of real estate investment would be further enhanced on account of favourable inflation and low interest rate regime.

Looking forward, it is possible that with the progress towards the possible opening up of the real estate mutual funds industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment real estate in India, which would be an apt way for investors to get an alternative to invest in property portfolios at marginal level.

Investor’s Profile

The two most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference to commercial investment, the high net worth individuals show interest in investing in residential as well as commercial properties.

Apart from these, is the third category of Non-Resident Indians (NRIs). There is a clear bias towards investing in residential properties than commercial properties by the NRIs, the fact could be reasoned as emotional attachment and future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside India, NRIs have increased their role as investors in real estate

Foreign direct investments (FDIs) in real estate form a small portion of the total investments as there are restrictions such as a minimum lock in period of three years, a minimum size of property to be developed and conditional exit. Besides the conditions, the foreign investor will have to deal with a number of government departments and interpret many complex laws/bylaws.

The concept of Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there are going to be problems for this new concept to be accepted.

Real Estate Investment Trust (REIT) would be structured as a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties.

Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. The main purpose of REITs is to pass the profits to the investors in as intact manner as possible. Hence initially, the REIT’s business activities would generally be restricted to generation of property rental income.

The role of the investor is instrumental in scenarios where the interest of the seller and the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified; however, an investor can have competitive yields by buying the property and leasing it out to the occupier.

Rationale for real estate investment schemes

The activity of real estate includes a wide range of activities such as development and construction of townships, housing and commercial properties, maintenance of existing properties etc.

The construction sector is one the highest employment sector of the economy and directly or indirectly affects the fortunes of many other sectors. It provides employment to a large work force including a substantial proportion of unskilled labor. However for many reasons this sector does not have smooth access to institutional finance. This is perceived as one of the reasons for the sector not performing to its potential.

By channeling small savings into property, investments would greatly increase access to organized institutional finance. Improved activity in the property sector also improves the revenue flows to the State exchequer through-increased sales-tax, octroi and other collections.

Real estate is an important asset class, which is under conventional circumstances not a viable route for investors in India at present, except by means of direct ownership of properties. For many investors the time is ripe for introducing product to enable diversification by allocating some part of their investment portfolio to real estate investment products. This can be effectively achieved through real estate funds.

Property investment products provide opportunity for capital gains as well as regular periodic incomes. The capital gains may arise from properties developed for sale to actual users or direct investors and the income stream arises out of rentals, income from deposits and service charges for property maintenance.

Advantages of investment in real estate

The following are the advantages for investing in Real Estate Investment Schemes

• As an asset class, property is distinct from the other investment avenues available to a small as well as large investor. Investment in property has its own methodology, advantages, and risk factors that are unlike those for conventional investments. A completely different set of factors, including capital formation, economic performance and supply considerations, influence the realty market, leading to a low correlation in price behaviour vis-à-vis other asset classes.

• Historically, over a longer term, real estate provides returns that are comparable with returns on equities. However, the volatility in prices of realty is lower than equities leading to a better risk management to return trade-off for the investment.

• Real estate returns also show a high correlation with inflation. Therefore, real estate investments made over long periods of time provide an inflation hedge and yield real returns

Risks of investment in real estate

The risks involved in investing in real estate are primarily to do with future rental depreciation or general property market risk, liquidity, tenancy risk and property depreciation. The fundamental factors affecting the value of a specific property are:

Location – The location of a building is crucially important and a significant factor in determining its market value. A property investment is likely to be held for several years and the attractiveness of a given location may change over the holding period, for the better or worse. For example, part of a city may be undergoing regeneration, in which case the perception of the location is likely to improve. In contrast, a major new shopping center development may reduce the appeal of existing peaceful, residential properties.

Physical Characteristics – The type and utility of the building will affect its value, i.e. an office or a shop. By utility is meant the benefits an occupier gets from utilizing space within the building. The risk factor is depreciation. All buildings suffer wear and tear but advances in building technology or the requirements of tenants may also render buildings less attractive over time. For example, the need for large magnitude of under-floor cabling in modern city offices has changed the specifications of the required buildings’ space. Also, a building which is designed as an office block may not be usable as a Cineplex, though Cineplex may serve better returns than office space.

Tenant Credit Risk – The value of a building is a function of the rental income that you can expect to receive from owning it. If the tenant defaults then the owner loses the rental income. However, it is not just the risk of outright default that matters. If the credit quality of the tenant were to deteriorate materially during the period of ownership then the sale value will likely be worse than it otherwise would have been.

Lease Length – The length of the leases is also an important consideration. If a building is let to a good quality tenant for a long period then the rental income is assured even if market conditions for property are volatile. This is one of the attractive features of property investment. Because the length of lease is a significant feature, it is important at the time of purchase to consider the length of lease at the point in time when the property is likely to be re-occupied. Many leases incorporate break options, and it is a standard market practice to assume that the lease will terminate at the break point.

Liquidity – All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions and hence illiquid. In poor market conditions it will take even longer to find a buyer. There is a high cost of error in property investments. Thus, while a wrong stock investment can be sold immediately, undoing a wrong real estate investment may be tedious and distress process.

Tax Implications – Apart from income tax which is to be paid on rental income and capital gains, there are two more levies which have to be paid by the investor i.e. property tax and stamp duty. The stamp duty and property tax differ from state to state and can impact the investment returns ones expected from a property.

High Cost Of Investment – Real Estate values are high compared to other forms of investment. This nature of real estate investment puts it out of reach of the common masses. On the other hand, stocks and bonds can now be bought in quantities as small as-one share, thus enabling diversification of the portfolio despite lower outlays. Borrowing for investment in real estate increases the risks further.

Risk Of Single Property – Purchasing a single – property exposes the investor to specific risks associated with the property and does not provide any benefits of diversification. Thus, if the property prices fall, the investor is exposed to a high degree of risk.

Distress Sales – Illiquidity of the real estate market also brings in the risk of lower returns or losses in the event of an urgent need to divest. Distress sales are common in the real estate market and lead to returns that are much lower than the fair value of the property.

Legal Issues – While stock exchanges guarantee, to a certain extent, the legitimacy of a trade in equities or bonds and thus protect against bad delivery or fake and forged shares, no similar safety net is available in the property market. It is also difficult to check the title of a property and requires time, money and expertise.

Overall keeping an eye on market trends can reduce most of these risks. For instance, investing in properties where the rentals are at market rates, also, investing in assets that come with high-credit tenants and looking for lease lock-ins to reuse tenancy risk are simple guidelines to follow.

Future Outlook

The real estate market is witnessing a heightened activity from year 2000 both in terms of magnitude of space being developed as well as rational increase in price. Easy availability of housing loans at much lesser rates has encouraged people who are small investors to buy their own house, which may well be their second home too.

High net worth individuals have also demonstrated greater zeal in investing in residential real estate with an intention of reaping capital appreciation and simultaneously securing regular returns.

In the wake of strong economic growth, real estate market should continue to gain momentum resulting in falling vacancies in CBD areas and more development in suburbs; it is unlikely that commercial property prices will rise or fall significantly, beyond rational reasoning.

As the stamp duty on leave and license agreements has been further reduced, it should further attract to deal in this manner encouraging the investors and the occupiers.

With current budget focusing on infrastructure, it will attract quality tenants and add to market growth. Heighten retail activity will give upward push for space requirement.

Further, the proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors’ point of view. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.

Looking forward, it is possible that with evident steps of the possible opening up of the REMF industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment in real estate in India, which would be an apt way for retail investors to get an alternative to invest in property portfolios at all levels. Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years.

Commercial Real Estate, A Career – How Do You Get Into It?

1. WHAT IS IT AND HOW DO YOU GET INTO IT?

Several years ago, I was attending a Society of Industrial Realtors Annual Spring Conference in Maui. My wife had accompanied me on the trip so that we could also do a lot of sightseeing. Colliers International, a 241 office worldwide firm, sponsored its own company cocktail party the night before the Conference officially began and my wife and I attended the party.

A short while into introductions, a fellow came in from the golf course and he sat down at our table. Andrew Friedlander introduced himself an we discussed our home in Philadelphia, his original home in Brooklyn and his new home in Honolulu. As to how he ended up in Hawaii, Andrew told us that on R&R during his tours in the Army in Vietnam, he decided to take a break in Hawaii after he was finished his last duty tour. He rented an apartment, waited tables, washed cars, etc. to have some extra cash. He said that he paid his apartment rent to an older man who came around once a month and he finally asked the man whether that was his business. Andrew said that he never thought about property management as a business, but the more he spoke to the man the more that he realized how diverse a business commercial real estate could be, particularly in Hawaii. The rental agent began to show Andrew the basics of the business and Andrew decided not to return to Brooklyn.

Forty years later, Andrew is the manager of approximately six Colliers International offices in Hawaii with over 40 brokers and salespeople as his responsibility. Aside from selling and leasing commercial real estate and traditional brokerage transactions through the islands, Andrew’s team is involved in all of the other aspects of commercial and industrial real estate.

As one concierge person told my wife and I while we were touring there, “Yes, it is a great place, now where would you ever think of moving to once you are here.”

In the past year, a young Army Captain and friend called me from Hawaii. He and his wife were taking in some R&R after his last duty tour and he called to ask me for some advice on commercial real estate firms. I gave him Andrews phone number after I checked with Andrew on his availability. Andrew treated my friend to lunch and introduced him to Colliers’ business in the islands. As it turned out, my friend and his wife decided later to relocate to Florida to be closer to their parents. Our Colliers office in Ft. Lauderdale was anxious to interview him and did so. He found a better fit for a concentration in office brokerage with another firm, but I think that it is clear that opportunities do exist with major firms for someone who has an interest, who can demonstrate that they are self motivated and whose comportment (manners, speech, personal grooming, business attire) are all positive. A long time friend told me one night after we and our wives checked in, very late, at a hotel owned by a well known hotel group, “That desk clerk is the person representing this hotel company to its customers and I know the CEO. That clerk’s slight rudeness toward us does not at all represent what their CEO wants his company to be known for in their business. He will need to learn that if he is going to be more than the late night clerk.”

I mention this because a company such as Colliers or any of its competitors must ensure that a salesperson or broker first meeting a potential customer properly represents the company’s image. So much money is spent defining that image to the business community that each person, including all staff, must reflect that effort. Otherwise, a potential customer will choose to hire a competitor whose act is together. My understanding is that customer relation training at Wal-Mart is quite strong for all personnel. I would think that any major restaurant chain has in place a thorough program for staff training and it may pay to observe whether if the customer is not always right at an establishment how the staff person handles a customer who is being a bit particular.

2. Entry

I use Andrew’s story as an example of the opportunity that commercial real estate offers. A senior business mentor and good friend of mine told me in Florida in 1971, just at the beginning of that recession, that commercial real estate offered an opportunity to enter a business without having my own capital to invest other than my time and energy, and, with no limit on the size of transactions that could be put together. We discussed this in relation to my going back to law school. His opinion was that it was almost a “sky is the limit” approach, but with some basic sense to it. I had done a few financial reports on potential deals offered to him. I also handed over that year, at my mentor’s instruction, a $300k commission check to a broker who he had employed to buy a property that he had settled on the year prior to that. The next year, at the same time, I handed over the same check to that broker as the second half of that commission to that broker. Please realize that in 1972 that commission amount in the onset of that recession was a significant amount of money for any transaction.

Each state has its own regulations for licensure. Florida required a person to take a sales licensing course, pass that, then work in a licensed real estate broker’s office for a minimum of two years before being eligible to take a state broker’s exam. The sales course is offered by numerous private firms and colleges, evening courses in particular. The cost of the course is minimal. The basic skills for reading, writing and math portions are not difficult. Depending upon your educational qualifications, commercial real estate firms may often offer to provide the course. Smaller, more generalized, brokerage firms may also do the same in order to gain a salesperson.

There typically is a recognized “culture” or business reputation known for a real estate firm in any community, The community can be local, regional or national. It pays to do your homework as to which firm appears to suit your style. The internet is definitely one of the most productive sources for finding a firm’s history, its areas of expertise, personnel, and its successes. Recognize that major metropolitan commercial firms often outsource client needs in an outlying area to a smaller commercial firm in that area rather than requiring one of their main office brokers to commit to travel time. Consequently, if you are in a rural market outside or between major metropolitan markets, you should investigate which real estate firms have those relationships for the larger deals.

Your time for success starting in commercial real estate (particularly without capital) will be the result of what you put into it. I had the option in the early ’70’s of returning to law school and finishing. What I realized most was that I liked being out of an office and “on the street.” My attorney friends in Ft. Lauderdale were spending innumerable hours, as needed, in their offices to write briefs, draft documents, etc., all of which that profession requires. My decision was to put in the same hours on commercial real estate that I would have to put in for any law practice. If it worked, then fine, if not I would go back to school.

Considering that the early ’70’s recession in Florida hit every occupation with almost equal damage, many attorneys had practices with slim billings and clients whose businesses were suffering economically. Several real estate brokers who I met were having very difficult times because the banks were not lending money for deals. Florida had a usury cap of 14% at that time. Deposits were down and when interest rates in California started to go above 14% that is where the money went.

Weekdays in those years, I was knocking on the doors of businesses in the West Palm to Miami corridor. Weekends, I was often painting a house or captaining a motor sailer owned by a friend’s corporation. Weekday evenings after dinner, I was at the office reviewing property information, ownerships, tax data, etc. for the next day’s driving or phone calls. I found that it was possible to earn a living while getting into the commercial real estate field. I later found out after moving back to Philadelphia, that several of the commercial real estate firms did not mind their starting salespeople to moonlight as bartenders, waiters, or whatever until they had enough experience to close transactions. That has changed somewhat in the larger cities due to the financial strength of the larger firms and their ability to either offer a base salary or draw to new salespersons.

Gender in today’s commercial real estate world is not an issue as it was in the ’70’s. At that time, men only eating clubs were often the norm and women were not often able to match that type of selling locale. The number of women who have joined commercial real estate organizations such as SIOR, CCIM, etc. (which I will discuss later) has increased dramatically over the past 15 years. The commercial real estate courses offered today provide an excellent means of obtaining knowledge that once was taught generally “in house” by senior brokerage personnel responsible for a new salesperson’s progress.

Therefore, in considering commercial real estate the aspect of having minimal capital has not changed. Gender is not an issue and many women who have chosen to specialize in industrial or office real estate have done very well. You
can choose your hours, choose your area of specialty(s), choose your market area(s), and choose who you want to approach as a firm to join. Most commercial real estate involes the standard business week, not including late Saturday or Sunday hours (vs. residential Sunday open houses). These are several of the positive aspects of working in commercial real estate. The competition is keen, your competitors respect a good work effort and, most importantly, they respect a strong reputation for any individual.

You should investigate both larger commercial firms and smaller real estate brokerage firms. There are advantages and disadvantages to both.

A). Larger firms may be willing to offer a base salary or a draw against commissions. They may prefer prior business experience, but not necessarily prior real estate brokerage experience that may conflict with what their “culture” is and what their in-house training entails. Typically, a new salesperson would be assigned to a senior broker or brokers to do cold calling, marketing materials, marketing reports for any existing client’s property and probably handle property inspections by other competing brokers with their prospects.

A few points on Larger Firms:

Future ownership potential for you in the company may be limited or non-existent.

Control over what market, territory or discipline that you work in may not be your choice. If you are hired for one department, such as retail, that may change if they need personnel support in another department, such as office. You may find that they prefer a new person to rotate through each department and possible each regional office if they have multiple offices.

Depending upon whether the firm is privately held or a public company it could be sold or merged without you being involved in the discussion. There is no real “safety blanket” for any position in a larger firm. If a primary, large, client is lost to a competitor, cuts may be relatively fast to absorb the lack of revenues.

Senior brokers who are successful occasionally leave to join another firm or to start their own competing firm. Clients usually follow those brokers and that could disrupt your potential income if you are in that department and the rain makers leave.

Deal volume can be significant as can be the size of the deals. If an institutional owner (bank, insurance company, pension fund, etc.) has a presence in an urban market, the leasing or sale assignment that they may award to a larger firm can be a “year maker” if the assignment is completed. Usually some year end bonus money flows down to the salespersons who may have participated in the marketing effort.

Senior brokers should have upper level corporate contacts through either a business association, country club, educational institutions, commercial lenders, or contacts referred from other cities where a corporate headquarters may be located. If the firm owners or top brokers are not developing those contacts and relationships, but are relying on the mid-level brokers to do that you may want to look at another firm whose top management is better involved. You want work to filter down from the top instead of getting the crumbs leftover from competing firms who have a solid community (business and non-business) presence.

B). Smaller firms usually will have a broker/owner running the operations with or without broker partners in the firm. Quite often they will have a residential department and a separate commercial department in which a few of the brokers may work in residential and commercial properties.

A few points about Smaller Firms:

Future ownership shares may be offered depending upon deal volume and commitment to the firm. If the founding broker of the firm is nearing retirement age, the opportunity may be better provided that they are maintaining an fully active presence in the community.

Commission percentages may be much more liberal once a minimum threshold of deal volume is met to cover the cost of your desk, phone, secretarial, etc..

A salary or draw is less likely to be offered.

A senior broker may be more likely to have you work directly under him on any property. You will be accountable directly to him and, as should be the case, learn “on the job.”

If there is a residential component to the firm, those brokers specializing in that area should be a source of commercial referrals and the same for you referring any possible single family residential to them. Smaller multi-family buildings should be on the commercial side of the business, but motels may be on either side. This can vary in an area such as Ft. Lauderdale, Hilton Head, or New Jersey resorts where a residential owner with a relationship to the firm may also own retail rentals.

Most regional areas have a Realtors Association, Chamber of Commerce or other organization that offers discounted insurance and other benefits to its members. Whereas a larger firm may have a good corporate health plan and other bulk discounted benefits to its employees, you should look at the costs for each that are offered. I have not found that much of a saving on either side, but if you leave a larger firm you will need to find the alternatives that are affordable.

Your business exposure may actually be more effective working out of a smaller firm and being a primary contact for that firm instead of a secondary contact at a larger firm.

Property databases and the Internet have provided smaller firms with much better access to real estate information than in the mid-’90’s and before when only larger firms could afford to maintain proprietary property information for a larger market. Launching a significant marketing campaign for a property can be expensive even with the Internet and smaller firms will have a lack of cash resources to compete for major property listings. Deal size, therefore, will be smaller and you will have to strive for volume,

Best regards.

Peter P. Liebert,IV-SIOR
Flourtown, PA

Pop Quiz Commercial Real Estate Investing

I read once that if you took all the real estate lawyers in Illinois and laid them end to end along the equator – it would be a good idea to leave them there. That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! “Let the buyer beware!”

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars when the deal goes bad. It’s like the old Fram® oil filter slogan during the 1970’s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the exercise of “due diligence”.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”.

If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do “harp” on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

POP QUIZ: Here’s is a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE:

Scenario No. 1: It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.

TRUE OR FALSE: Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.

Scenario No. 2: For several years you eyesight deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.

TRUE OR FALSE: Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.

Scenario No. 3: Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your townhome. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your wife for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.

Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.

TRUE OR FALSE: Commercial real estate is the same as residential real estate [Hey, its all dirt, isn’t it (?)], so you are being a shrewd businessman by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this “due diligence” stuff anyway?]

ANSWERS:

If you answered “TRUE” for any of the foregoing Scenarios

STOP!

The Quiz is over.

Please find a quite place to reflect upon your life and consider whether the decisions you make consistently give you the results you desire.

If, on the other hand, you understand that the answer to each of the foregoing questions is FALSE, I am available to help you in Scenario No. 3.

For Scenario No. 2, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.

For Scenario No. 1, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]

Investing in commercial real estate can be profitable and rewarding – but it requires good critical thinking skills and competent counsel.

You have a have a brain. It is strongly recommended that you use it.