Operational Real Estate
Operational Real Estate Investment
Real estate offers several options for garnering income depending on which type that you select. While many people are familiar with the buying and selling of property, there is the option of owning operational real estate. This option provides you with an income stream, but also offers some challenges depending on which type of operational real estate you own.
What is Operational Real Estate?
Unlike the buying and selling or renting of property for residents, operational real estate is based on owning commercial property. There are different types of operational real estate which include hotels, resorts, and certain types of senior living centers. But this term also includes businesses that operate self-storage facilities and parking lots.
The income that is generated by this type of real estate depends on the profits of the business rather than charging a monthly rate for renting the property. It is why in most cases the owner of the property does not run the business itself, especially if it is a large business. In addition, a lease is in place with the operator of the business who pays rent based on a percentage of the profits.
Because the income is derived from the profits and not a fixed rate, the success of the business determines the amount of money generated according to the lease. This means that that the property owner can expect rises and falls in the income received with this arrangement.
Expected Cash Flow from Operational Real Estate
The amount of cash flow generated will depend on the type and success of the business on the property. This will influence the amount of income delivered to the property owner. Depending on the arrangement, this could be daily, weekly, or monthly. What follows are some examples of businesses commonly associated with operational real estate investment and their profit potential.
Types of Operational Real Estate Investments
Parking lots that require fees for usage generate profits on an hourly basis. However, many parking lots offer monthly fees as well. Different rates can be charged for lower use times such as during the evening and weekends. On the upside, parking lots require relatively little maintenance and personnel which makes the profit potential considerable. However, the competition is quite stiff in most cases, so it will be challenging.
Hotels generate income by renting rooms, selling food and beverages, and offering amenities that may come with an extra fee or rate. However, the higher the occupancy rate, the higher the expenses as more staff and services are needed to keep up with the business being generated.
While hotels offer strong profit margin, they also have considerable operating expenses. The success of the hotel will depend on factors, some of which may be out of control by the property owner. Location is probably the most important. And the success potential of a hotel may be predicted based on indicators such as how other hotels in the area are performing.
In some ways, senior centers operate the same way as hotels, although the residents tend to be around for a long time. However, this type of facility will have high operational costs, especially for residents that have medical needs.
Self-Storage Operational Real Estate
This type of facility offers different rates based on the size of the spaces being rented and the extras that are offered, such as temperature control. You may have noticed self-storage facilities dotting suburban and even rural areas. This is because such facilities tend to do better during times of economic distress as people must store their items elsewhere as they downsize their residence or business.
Factors to Consider Before Investing in Operational Real Estate
Before you take the plunge, you should consider the important factors of operational real estate investment. Such factors will be focused on the type of business that you are considering.
While many investors may be wary of a business that has fierce competition, there are positives to consider in such situations. Heavy competition means that there is a considerable demand for that type of business. What is crucial is finding an angle that separates your business from the rest, so that it can stand out and garner attention. This may mean offering lower rates in exchange for greater volume.
How well your local area performs will determine in large part how the business performs on your property. The better the economy, the more people will be moving in to find work, the greater the need for parking, storage, and hotels. This means that for businesses with a higher expense rate such as hotels and senior centers, a booming economy will improve overall performance.
Naturally, a slowdown in economic growth becomes detrimental to the overall performance of most businesses with the possible exception of self-storage centers.
In addition, you’ll need to account for local laws and tax rates affecting businesses. The more expensive the community makes it to earn a profit, the more difficult it will be to maintain a smoothly operating business.
The profits generated will depend on the vacancy rate of the business. You can expect parking lots to fluctuate daily while commercial buildings and apartments will have a slower turnover rate. This means that seasonal considerations must be accounted for when determining profit potential. For hotels and resorts, the time of the year is an important consideration.
Such seasonal variations are quite important for locations that depend on tourists, such as beaches for example. Consider the room rates at hotels which vary depending on the season. In addition, bad weather can affect occupancy at hotels as well. Other factors include schools and the time when people are most likely to move.
Of course, the success of the business will depend in large part on the quality of management. Those who are skilled and experienced in running successful businesses will stand a far greater chance of earning you a consistent profit.
Be sure to consider all factors and get assistance from real estate experts in the field before making your decision. There are no guarantees, but the more work you put into research, the better your chances of the operational real estate investment being a profitable one.
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe