Brick and mortar real estate investment refers to investing in physical commercial and residential properties, as opposed to financial assets. It covers a wide range of real estate types including apartments, hotels, offices, retail spaces, warehouses and more. Mortar investment has long been a popular way for investors to generate rental income, benefit from property value appreciation, and diversify their portfolios. However, evaluating potential deals requires deep understanding of local property markets, development trends, financing, operations, and macroeconomic factors. Thoughtful due diligence and financial modeling are key to ensuring attractive risk-adjusted returns.
Understand property fundamentals like demand, supply, and cap rates
When evaluating potential brick and mortar investments, the first step is analyzing property fundamentals in the local market. Factors like demographics, job growth, infrastructure development, and zoning regulations all affect demand for different property types. Meanwhile, new construction and redevelopment shape the supply side. By studying current vacancy rates, absorption trends, and cap rates, investors can gauge the balance of supply and demand. Markets with strong demand and limited new supply often present the best opportunities. Once attractive submarkets are identified, investors still need to underwrite deals thoroughly through financial modeling and sensitivity analysis. Cap rates and cash yields should be benchmarked relative to comparable deals.
Conduct due diligence on operations, tenants, and physical assets
Beyond desktop research, on-the-ground due diligence is crucial for mortar investments. For existing properties, investors need to assess the operator’s capabilities, audit expenses, and evaluate tenant rosters. Top tenants, long leases, and low rollover risk are ideal. For development projects, feasibility studies, entitlements, construction bids, and pre-leasing levels need to be reviewed. The physical condition of properties also requires inspection via site visits. Critical building systems, facade and roof condition, compliance issues, and renovation needs should be assessed by experienced engineers. Environmental assessments help avoid costly liabilities. Speaking with local brokers, managers, and vendors provides additional perspectives.
Modelscenarios and stress test key assumptions
Successful real estate investors use detailed financial models to evaluate potential deals and stress test assumptions. Key inputs like rental rates, vacancies, operating expenses, capital costs, financing terms, tax rates and exit cap rates should be modeled based on current data and reasonable upside/downside scenarios. Since mortar investments are illiquid and have long holding periods, conservatively testing downside cases is prudent. Sensitivities showing breakeven occupancy rates, market rental declines before generating negative returns, and so forth provide helpful risk insights. An attractive margin of safety should exist between base case projections and downside scenarios.
In summary, prudent brick and mortar real estate investment requires rigorous study of property fundamentals, thorough due diligence across operations, tenants, and physical assets, plus financial modeling and scenario testing. Investors who understand local markets, execute sound underwriting, and stress test key assumptions can achieve strong risk-adjusted returns from mortar investments over long time horizons.