Real Estate Development – Building Wealth

Investing in REAL ESTATE to Build Wealth

Almost all human beings would like to build some wealth for their material well being. But, mistakenly, many believe that almost all good investments are possible only if and when you are already rich! How does an ordinary person with small savings get into the realm of good investments?

 

A. WRONG LESSONS LEARNED

In my personal experience, particularly with Punjabi Sikhs with limited schooling, I have observed the presence of two major defects in their thinking:

(1) No special training or experience is required for the working or managing partner in your group business or investment as long as the managing partner is honest and

(2) Working partner does not deserve any special and fair compensation because he/she will also benefit financially from the common business or investment and he/she is a friend.

In order to understand better these two major defects in many Punjabis’ thinking, let me tell you an all too common a phenomenon. Most Punjabis are very hard working and can make good money in whatever avocation they choose. Second strength most happen to possess is their habit of saving. But, when they accumulate one hundred or several hundred thousand dollars, they find other similarly situated acquaintances or friends (2 to 4 people) and buy a gas station, a motel, or another business-cum-investment that they can afford to put their down payment on. All Partners are happy to get a loan (almost at any terms) and they don’t allow for much compensation, if any at all, for the managing partner in their cash flow projections if they bother to project at all. None of these partners are “experts” in the investment/business that they decide to invest their hard earned savings in. After all, all partners are “honest”, friends, and willing to pitch in whatever they can for their common business/investment to survive and thrive!

Most often, primarily because of undercapitalization and poor cash flow, this partnership and their investment fails within a few months to several years. Unfortunately, they lose all their equity invested, ruin their credit, and lose mutual friendships! Bitten by this failure, they begin to blame each other, particularly the managing partner who received no or little compensation for endless hours of work! Now, they all turn against the very concept of partnerships and confidently advise others Never to forma partnership! They learn but wrong lessons from this story book failure.

 

B. LEARN RIGHT LESSONS

Wealthy people respect expertise and are willing to pay the top dollars to recruit the top talent to acquire and manage their investments. The poor typically believe that they “can’t afford” to hire the best in the business and don’t even look for them. So, they generally get into the above noted “blind leading the blind” situation which significantly increases the chances of failure in today’s complex technology and information age. So, the poor should completely turn-around their thinking and should believe that they surely cannot afford to buy 2nd class or “budget” advice if they ever really wish to become rich! While this may or may not be universally true, it is certainly true in the Commercial Real Estate (CRE) Investments in 2026.

Economy of scale has its own advantages: the bigger is often better! When many small investors pool their individual savings together thru an experienced “expert” in CRE (called Syndicator), they collectively can buy “Investment Grade” CRE. But, doesn’t this “Syndicator” charge a lot for his/her services? The honest answer is probably Yes and No! A real expert should not cost you anything on your Net Earnings (after their fees) basis. On the other hand, an unqualified Syndicator can surely lose all your investment as noted above for small partnerships. Real expertise and proven success experience, based on the actual track record of the Syndicator in the property type of your interest, must be checked to verify that you are investing with a true professional, not a quack! Competence succeeds and incompetence fails in any business or investment.

 

C. SELECT PROPERTY TYPE & EXPERT

IF you want to invest in any other type of CRE (e.g. Office, Warehouse, multi-family housing, mixed-use, etc.) even within my geographic specialty (SE US), I definitely would NOT be the right expert for you to choose. Why? There are other “experts” who deal with those property types daily and have developed industry contacts, relationships, market insights, etc. who could serve your needs much better. Broadly speaking, I am a highly experienced Commercial Real Estate (CRE) Broker, Owner, Manager, and Syndicator but operate in a very narrow range of specializations: Big Box Retail and Southeastern U.S. I do not have the same level of expertise in other geographic areas and property types as I do in the big outdoor shopping centers (Community Centers and RPC’s) in the Southeast. True “experts” choose both the property type and geography for their focused attention to add real value to their investing partners.

 

D. KNOW YOUR RISK TOLERANCE

Every investor would like to get as high a return on their investment in CRE as possible. However, there is a definite relationship between the Risk (loss of investment) and Reward (Return OF + Return ON original investment) in any investment type. CRE expert/syndicator typically sets up his/her investment group based on the risk tolerance of most investors in that group. For example, our Retail-CRE investment group is set up for Medium Risk and Returns. We do not buy highly vacant/unstable property at bargain basement prices which have much Higher risk (may not find the right tenants for many years!) and Higher Rewards (find tenants quickly and substantially increase Net Operating Income (NOI) and Value). So, even within the same property type and location, there are different approaches to take based on your risk tolerance.

When you try to seek higher return than bank CD’s pay, you MUST be willing to take Higher Risk. Remember, there is NO such thing as a Free Lunch! Risk premium = Investment Return. The higher the risk, the higher the reward/return must be. Otherwise, why take the higher risk? Your CRE expert should know the various risks and earns his/her keep thru managing those risks well for you. No expert can eliminate the risks altogether, but their early detection and timely corrective action can (should) minimize the economic damage sustained. Many novice investors in CRE fret when their periodic (monthly or quarterly) cash distributions are reduced or paused. They fail to plan for this possibility in most CRE investments.

Tenant failure in Retail-CRE is a common phenomenon. Unprecedentedly, more than 7,000 big national retail chain stores closed in 2023-2024 in the U.S. Among our 2 dozen centers, we too lost 5 dozen stores (and their big rents!). Being an Asset based investment group, this severely reduced our Rental Income in one-third of our Centers.

 

E. INVESTMENT DECISION

Your Investment Criteria must match the profile of a professional investment group before you decide to join it. This group will Not be able to change its investment criteria (after your joining it) because it has already established itself in a very narrow niche. It is your responsibility to ask all your important questions. If any group’s answers and explanations are not satisfactory to you, don’t join the group! Don’t hesitate to ask tough questions such as “describe your several big problems and how you solved them”. Marketing materials generally talk about success stories and good times. Yet, real test of an experienced expert is in how he/she performs under
economically bad times and tough challenges. Your “expert” must get going when going gets tough for your investment!

CRE Investment Decision, being generally for many years, should be made very deliberately. In asset based investments, don’t put all your “eggs” (savings) in one basket (no matter how good the return looks!), For example, as noted above, two-thirds of our centers lost NO big tenants. Thus, the repeat investors in several centers (income averaging) did not lose all their cash flow when we had to pause distributions in one-third of our centers. So, there is the possibility of diversification and risk reduction within a professional investment group thru proper planning and investing in as many different assets and locations as possible.

F. REASONABLE RETURN EXPECTATIONS

 

Safe Investment has Low Return

Federally insured CD in a major bank (No to Low Risk) pays 4% Interest per year would return $4,000/Year Gross or before tax. However, this entire sum is taxable (say at 30% tax rate). Your NAT return then would be ($4,000 – $1,200 =) $2,800 or 2.8% which is barely above the rate of inflation in 2026. If inflation heats up, the buying power of your hard earned savings would go down with time. So, you don’t like that option and wonder whether you could do better – much better-than the 2.8% NAT return.

Accept Risk for Higher Returns

 

Invest in Working & Middle Class Areas

So, practically speaking, CRE investment is limited to (1) poor (AHHI below $60,000/year) and (2) middle – income (AHHI from $60,000 to $125,000/year) areas. You must deal with the older, class C&D, assets in the poor, commonly called the “ghetto”, areas which are characterized by high C/C return, but low to no price appreciation for the investors. The typical Total Return (C/C+ Principal Reduction + Appreciation) in the ghetto can stillrange from 20% to 30% /year.The risk of loss of your entire investment is High here. You must ask whether this range of Return is ON or OF your original investment? Secondly, is the return Gross or Net (after U.S. Income tax)? Return “OF” includes the return of your original investment, but ON is Net Return after the recovery of your original investment. For clarification of this important differentiation, let’s assume that you invested your $100,000 for 10 year term in CRE and received a total of $300,000 back in C/C+ Price Appreciation at the end. This would be 30% /year Return “OF”, but only 20% “ON” your original investment of $100,000. Compared with the 4% /year Return ON the bank CD above, this 20% /year is 5 times higher. Because of the IRS allowed Depreciation expense write off for CRE, but not for income from CD’s or stocks, etc. almost all the 20% Return ON CRE is NAT. So, the CRE 20% should really be compared with the 2.8% NAT from the bank CD which makes the actual CRE Return 7.14 times higher! Is that not worth taking some risk?

 

G. RISK MINIMIZATION & MITIGATION

When you don’t have much, the thought of preserving what you have appears academic, remote, and uninteresting! However, as you grow wealthy and lenders require higher percents of Purchase Price as down payments (25 to 35% in 2025) on CRE investments, preservation of what you have built up and are investing in any new CRE deal become far more compelling considerations. Higher returns are still important, but lowering the risk of loss of the invested capital becomes a highly important consideration as well. Risk reduction and mitigation strategies become instinctive, attractive, and habitual.

 

H. SWITCH TO LOWER RISK

In mid-2016, we upgraded our risk profile (lowered risk) and started acquiring Class A &B assets only in more affluent communities. Since all properties are more expensive (lower Cap Rates) in more affluent areas, we had to lower our C/C Return expectations (& Targets) from the previous 12% to 18% /year range down to 8 to 12% range -5% or 1/3rd reduction in cash yield to reduce the potential risk of total loss of equity. We also changed our focus from C/C to Total Return by trading lower C/C (instant gratification) with higher expected/projected Appreciation in value return. Even though our aggregate Total Returns are expected (but Not proven yet) to be higher than before, some of our original investors did not like this change in our strategy and decided Not to participate in our post -2016 acquisitions. We respect their right to choose, but we have grown substantially with hundreds of new investors who liked this switch from class C&D to Class A&B shopping Centers and lesser level of risk.

 

I. MANY CHOICES TO INVEST IN CRE

There are many different types of CRE and Classes of Assets within each type. CRE “trading” is rare due to high transaction costs, but there are some short-term (2 to 4 years) value add groups who don’t hold CRE for longer periods (5 years and beyond). What is your time horizon for CRE investment? Are you willing to take and absorb some risk of loss of your original investment? Know your risk profile and match that with the established CRE group’s before you join it. Your investment In CRE with a group is the expert’s business, not yours! If you are not comfortable in giving up control, don’t invest with a successful group! Why pay for their expertise and then fight with them? If you are risk averse and a control freak, do not invest in any CRE project with any “expert”, it would be a nightmare for both!