Cherif Medawar is recognized as the nation’s top commercial real estate fund manager, managing assets over $100 million. He shares why investing in commercial real estate isn’t as daunting as you think, the key difference between a syndicate and a fund, and why he LOVES single tenant retail properties.
Cherif’s overall real estate investing philosophy:
“I worked based on formulas so I don’t have to recreate the wheel. My formula is very simple. I look at six things. Number one is the safety of the assets. That has to do with location, the type of assets, etc. Number two, I look for solvency, meaning the cash flow of the asset or the “cash out.” Number three, I look for liquidity. Can I borrow against it, can I sell it fast, can I carry financing against it without problems. Number four, I look for actual cash reserves. I always have to have cash reserves; whether by having a second line of credit against the property or having certain money sitting with the lender or certain money sitting with the bank. Number five is diversification. I like to have different types of assets in different locations with different styles of investing. And then, number six, I have to have a plan B, a plan C, a plan D; as many backup plans as I can because there are a lot of surprises and ups and downs in these markets.”
One advantage he has over other investors:
“People get so confused. They don’t know what to buy. They don’t know what to do. They’re looking for certainty. I like the confusion. I like the problem. I’m buying from a person who wants to sell because there is no cash flow.”
You don’t need a lot of money to buy your first commercial property:
“Anybody can set up a real estate syndication or a real estate fund, and just group investors together. I mean, who wouldn’t want to own a McDonalds (as a featured tenant)? Get 20 people who want to own a McDonalds. Each one of them would put $25,000 or $50,000 down and you’ve got yourself one to two million dollars and you can purchase the property all cash. McDonalds comes in (as the vendor), and the property is time-and-a-half what you paid. Everybody benefits. And now you’re the guru who set it up, but you only had $25,000 to begin with.”
Why are cash reserves so important when owning real estate?
“Reserves help you in two ways. If the market goes down, you’re able to sustain and recover. Let’s say it’s a residential home; you can maybe add a master bedroom, make it more appealing. If it’s a commercial building, maybe you can promote it better. Maybe you can sustain with negative cash flow for a period of time until you adjust and have a plan B. And then it also helps you when the market is good and you want to jump in some opportunities, you have the cash reserves and you can grab something great.”
Is he bullish on the short-term future of real estate?
“I’m always optimistic. I just focus on the opportunities in commercial real estate for upside. I like hotels because you can get them at better cap rates, and you buy them with a team. And if the team isn’t good, you can get a professional management team to run them, like a Hilton or companies that trained under the Hilton guidelines, or the Marriott guidelines. So, it’s so much easier to make money with assets like this because the goal is to free myself, not to tie myself up with daily problems or daily operations. So, the opportunities are all around us. If you’re telling me right now that the market is very hot, beautiful, I’m going to sell some properties. And if the market is slow, I’m going to be buying some properties.
His strategy on residential real estate:
“With residential real estate, you have to do three steps: you have to focus on a market, you have to focus on a specific type – let’s say three bedroom-two bathroom or four bedroom-two bathroom, whatever – and then understand the values. So, when you know this area is selling at $500,000, for example. And then you can find something at $400,000, you go from being afraid to move forward to being excited about getting it at $400,000 because you know you can either rent it for the cash flow or you can flip it at $480,000 and you’re going to get out quick and you’re going to make some money.”