R. Craig Coppola and R. Craig
Based on my degree in finance and knowing that a “smart investor” is a diversified investor, I diligently socked away money in various mutual funds and stocks, believing, as most everyone does, that I was building wealth for my future. I believed the statistics that said the stock market, over the long period, delivers an annual rate of return between nine and ten percent. What I didn’t know were the subtle details of that statistic. (Location 101)
After a few years, I had learned a thing or two about the stock market. The first thing I learned was that it was making me no money. Nearly ten years into my diversification strategy, my investments had hardly appreciated. At the same time, as a commercial real estate broker—and by now a pretty successful one working with big clients—I had been brokering deals that were making the investors, my clients, a lot of money. (Location 108)
Here are some facts: • There are huge tax advantages to owning real estate that few other investment vehicles can come close to touching. • Owning real estate is a great investment during inflationary times because, typically, in inflationary periods when prices are rising, so do real estate prices and values. • There’s a freedom that comes with owning real estate because, while it’s not a passive investment like a stock, you can make it a semi-passive occupation that affords you free time. (Location 124)
• A large percentage of all the millionaires ever created were in real estate. • There’s a pride of ownership in real estate that you simply don’t get when you own stocks. • You can buy real estate and you can personally help grow your investment. (Location 131)
First and foremost, real estate is a hard asset. That means that lenders will loan you money to buy it. In fact, lenders will loan you as much as 75 percent of the purchase price, allowing you to leverage your money and acquire additional properties. On top of that, they will let you borrow against your investment. And at times, you can even get financing that doesn’t require a personal guarantee, which means you don’t have to risk your home and wealth to invest. Try doing that with stocks! (Location 156)
Perhaps the biggest advantage is that real estate can actually provide you cash flow: monthly cash in your pocket in the form of rent from your investment properties. (Location 160)
I’ll keep it simple here because the most lucrative advantage really is simple: the IRS has determined that you can depreciate real estate while it is appreciating in value. So believe it or not, you actually get tax deductions on your investment while it increases in value. (Location 169)
Because a commercial property’s value is based on its operations and the income that comes from it. Improve operations and income, and you increase the value of the property. (Location 177)
First, many factors can change when it comes to real estate and those factors can vary by country, region, state, town, and even neighborhood. They include financing, location modifications, multiple uses, zoning changes, multiple tenants in multiple industries, market cycles, functional uses, and more. (Location 192)
The point of all this is that when you do your research, you will know your exposures to the market as a whole and will have the unfair advantage. What is called insider trading in stocks is called being smart in real estate, and I love that. (Location 201)
If you invest with the pack, you’re going to get the same results as the pack. In every aspect of my life, I had always wanted the unfair advantage. (Location 211)
When it became clear that my stock and bond investments gave me no edge, I made some changes. As a result, my new asset allocation looks far different than the pack’s. And best of (Location 213)
all, it also performs far differently than the pack’s. My revised allocation strategy has delivered more than 23 percent return annually in the last 20 years. It has been through three big real estate cycles—the ups and the downs—and has been actively managed to deliver the results and achieve the goals I’ve set for it. It wasn’t magic. It was about being in control. It was about betting on myself. (Location 215)
Included in this book is a program that, if you start today and take action right now, will position you to make your first offer on a property in nine weeks. (Location 233)
Here’s my list of tangible must-haves: HP12C or HP17B Calculator (or Similar Mobile Apps): (Location 280)
I now have my HP 12C loaded on my iPad and that works great. You still will need to know how to use this tool and for that, I recommend two helpful handbooks: The Real Estate Applications Handbook and the Leasing Applications Handbook. (Location 288)
Demographic Data: One of the best tools is a simple one. It’s a file—on your computer, in a drawer or in a binder—that contains all the demographics of your city, town, and state. You’ll want to know this material inside and out. (Location 301)
The first type of demographic is what I call micro data and it’s all about drilling down on your area of investment opportunity. I am a big believer in “farming” an area, and farming is nothing more than selecting a small part of your city or town and becoming an expert on it. (Location 305)
What about in a more mature market, a market where growth is slow or declining? This is where you look for areas that are the best locations or where there is a resurgence happening. I was in Pittsburgh, Pennsylvania several years back and witnessed this very thing. (Location 311)
Knowing where other resurgence areas are, which areas are growing, and which are declining, is key to your real estate investment career. It all starts with doing your homework through area demographics. (Location 313)
Knowing where an area currently is, isn’t enough. Demographics can help you discover something perhaps more important. Demographics can help you understand the long-term projections of various areas of (Location 315)
your town. I think in terms of neighborhoods and blocks rather than zip codes. (Location 317)
Later we’ll go over where you find this kind information, but a good start are websites such as Loopnet.com and CoStar.com, which give you a general picture of demographics along with tons of information about specific properties. (Location 318)
before you get excited about the building, it’s more important to understand where a neighborhood is going. Is it trending up, staying flat, or declining? It’s all about looking forward, not backward, because when you’re buying real estate, you’re buying futures. You must understand why the investment makes sense years from now, not just for today. (Location 323)
In this same neighborhood with these demographic trends, you might be interested in a Dollar Store investment. (Location 329)
Maps: It used to be that a map was a map. But thanks to satellite imaging, a map is actually a picture of your town, your block, your street, even your building. The precision in the aerial mapping of many regions of the country is photographic quality. It comes in handy when understanding things like property accessibility, amenities, building density, neighborhood, proximity to other amenities, location feel, and traffic flow. (Location 330)
Remember Sizzler Steakhouse? How did I know that a neighborhood with a $50,000 household income average was acceptable and anything below that wasn’t? Because a quick (Location 346)
search of Sizzler Steakhouse franchising reveals its site selection criteria. The company’s many location requirements included a neighborhood with household income no lower than $50,000. It’s that easy. (Location 348)
Another software application that I use is ARGUS (argussoftware. com), which is an investment analysis program. It is the industry standard for analyzing a property’s cash flow, creating “what-if” analyses, determining property valuations, performing (Location 358)
sensitivity analysis, and the like. Without ARGUS, you must build your own spreadsheets in Excel. (Location 360)
On the property management side the name to know is Yardi (yardi.com), both online and in the mobile app space. I use Yardi (Location 366)
to manage things like accounts receivable and accounts payable, leasing, square footage tracking, expenses and rent adjustments. (Location 367)
So even if you are planning to raise capital to fund your first property, have at least five to ten percent of the money you expect to raise be your own. (Location 375)
My first investment was small and funded with just four friends. It was not commercial real estate, it was land. We purchased three residential lots in a master-planned development called Mirabel in Scottsdale, Arizona, and I funded a portion of the deal with my own money. Within (Location 377)
three years, we closed it out and doubled everyone’s money on the asset appreciation. (Location 379)
The most important word about capital is this: your real estate capital fund, meaning the dollars you have to invest, should not be the first and only investment/savings you have. People who have no other form of savings and then put everything they have in real estate are rolling the dice. (Location 388)
If you want to be taken seriously in this business and be successful, doing your homework is more than a must. It’s a critical prerequisite for establishing a solid reputation. Reputation leads to contacts, and like in every business, in real estate investing, contacts are golden. (Location 408)
My gut told me I liked business and being in the business world, so commercial office space was a natural product type choice for me. But I didn’t know that on day one. It took time. (Location 555)
What you’ll find is that, at this stage, you simply must narrow down locations to one or two. (Location 565)
In case you haven’t caught on by now, the first two weeks are a process of narrowing or pinpointing the opportunities. Nothing is more critical at this stage, and nothing takes more discipline. (Location 568)
The key here is to understand where the market is right now so that you can understand where it is headed two or three years down the road. When you buy property, you buy it for the long term. (Location 579)
One of the reasons that I win more than most at real estate isn’t because I’m smarter. It’s because I do more research than most. Real estate is not an efficient market, so this is an area of potential advantage. (Location 593)
I am working to achieve my goals financially, in business, personally, and with my family. (Location 663)
Dan Sullivan, founder of The Strategic Coach® and my personal (Location 681)
coach for more than a decade, (Location 682)
WHAT DOES A REAL ESTATE GOAL LOOK LIKE? (Location 695)
A goal must be written, specific, attainable, and have a deadline. (Location 697)
We wanted a place to raise our children, and a place where we could spend time with them. Because I felt driving to and from work was a huge waste of time, I knew I wanted a home within a two-mile radius of my office. So the first thing I did was draw North, South, East, and West boundaries on a map. That set the general location. Next came the house itself. It had to have at least four bedrooms because of our kids. I wanted to have a (Location 707)
backyard mountain view because the real estate investor in me knows that homes with views appreciate faster than homes without. (Location 710)
In short, I wanted a house that we could enjoy living in, but that I knew was set up to appreciate over time. (Location 714)
After researching every house in my geographic radius that met my specific criteria, I found only thirteen matches, and none of them were for sale. Sounds like an impossible situation, right? Not at all. It just meant I had to launch into action. That meant contacting each homeowner. (Location 718)
My first contact took the form of a personal note to each of the home owners telling them that I wanted to raise my kids in this neighborhood and that we would be living here a long time. I told each homeowner I wanted to buy his or her home and then personally hand delivered each note with one of my kids in tow. (Location 720)
The letter, while certainly significant later in the nine-week program, is the least important part of the story here. The most important part is how I knew exactly what I wanted with such certainty that I was able to go to such lengths with such commitment to move a homeowner who was not considering selling to actually sell her home. (Location 742)
YOUR PERSONAL FINANCIAL FREEDOM PLAN: FOCUS, NARROW, DEFINE For me, personal goal setting and planning has always been about (Location 746)
focusing, narrowing, and defining what I want, then pinpointing that one thing with such complete accuracy and such a vivid picture that there is no doubt. (Location 748)
Self-awareness is the key, and I gain clarity by beginning with the end in mind. What do you want your life to be like now? Five years from now? Ten years from now? This is all relevant. The most relevant picture when it comes to real estate goal-setting is a ten-year goal. (Location 751)
YOUR REAL ESTATE GOAL: THE FOUR PARAMETERS (Location 798)
Just as you will be working on a broader financial freedom plan, you’ll want to begin working on your commercial real estate investment goals. Here’s the simplest way of establishing those goals—simply narrow your choices using the (Location 803)
following four parameters: (Location 805)
Product Type: Choose between office, retail, multi-family, and a host of others in the commercial real estate sector. In the next chapter, we describe the pros and cons of each. Location: We talked a lot about this already. This is the most important parameter because location is the biggest indicator of a property’s future performance. Money: How much money will you have to invest or put into a real estate deal? Be realistic—and remember, it shouldn’t be your first investment dollar. Investment Structure: Do you want to go solo or bring in some investor partners? The choice is yours. (Location 805)
You’ll find real estate is less about finding something that can make you money, and more about narrowing down the options until you arrive at the best one that can make you money. (Location 823)
Put your plan and your goal into one notebook or keep them in a separate folder on your computer. The key is keeping everything together and dated so you can live what you’ve written. Make your life plan and your commercial real estate investing goal something you commit to on paper, so they are solid and real. Be as descriptive as you can be so there’s passion and life there. (Location 830)
Welcome to Week 2. By this point you have your first financial freedom plan and your commercial real estate investment goal on paper and in mind as you begin the journey of becoming a real estate investor. (Location 845)
chapter. Your picture might look something like this: Financial Freedom Plan: By 20XX, I will have attained financial freedom by having $5 million in commercial real estate (Location 849)
which I own, manage, and control that will provide $50,000 a year in passive income, allowing me to fund my kids’ college educations and spend more time doing the things I enjoy. Real Estate Goal: By December 31, 20XX, I will own public mini-storage properties where I invest $50,000 of my own money and raise $250,000 in equity for one or two properties in the west side of town. (Location 851)
Your mission in Week 2 is to get the lay of the land in your market and be in a position to refine and affirm the real estate portion of your goal to perhaps two or three product types in two or three viable locations. (Location 855)
I invested money in other people’s projects just to learn the game. There was a lot to know, and it was a good first step. (Location 864)
Start your drive with the goal of trying to understand the overall city from a land/real estate investment perspective. Be observant. What do you think is impacting real estate values in one neighborhood or another? (Location 873)
When it comes to understanding the environment, I look for what real estate pros call “the path of growth” in the market. Even in cities that, as a whole, are not growing, there are usually areas that are. How do you recognize the path of growth when it comes to commercial real estate? Look for where home builders are buying land, where new homes are being constructed, and where elementary schools are planned and being built. The city government is a great resource for this information. Their staffs and records can tell you (Location 888)
where they are planning to build new facilities and where infrastructure is going in. You can also get good insight from the economic development officials in your city offices. It’s always interesting to see which projects they are the most excited about and what they see coming on line down the road. (Location 892)
That’s not my area of interest or expertise, so for my specialty, commercial office space, I stay clear when I see a lot of graffiti or closed businesses. That seems obvious, but you’ll be surprised how a quaint historic home, recently rezoned commercial, in a troubled neighborhood, can still be (Location 903)
compelling to emotional investors. They can easily talk themselves into a bad decision by thinking that buying this building will be good for the neighborhood, or by telling themselves they can live with the location because the building is so perfect. (Location 905)
Remember, it’s location first, no matter how difficult the dwelling is to pass up. (Location 907)
Tags: orange
Understand they call it real estate for a reason. You’re looking at the real estate first. That’s the key underlying truth to all of this. The building is second. To me, an absolute must is to fully understand where the market is going, not just where it is today. It’s all about feel and not getting in too early. What I mean by that is, unlike some businesses where speed is everything, there is no need to be on the bleeding edge in real estate. You don’t have to be first. You don’t want to be first; leave that to the biggest players, who can afford the risk. (Location 911)
either. You may even want to take a look at the police reports to see how much crime happens in the area. (Location 937)
The bottom line is, you can modify your building but you, alone, can’t modify the neighborhood. (Location 938)
As I mentioned, the buildings (Location 946)
themselves are practically the last things I look at when I’m getting familiar with a city and its neighborhoods. Even when it comes to actual buildings, I don’t initially (Location 946)
see the vertical structure; I see the property it’s sitting on. Are there enough parking spaces? Is it easy to get into and out of? In other words, does the property have good access? Looking at the building and the site it is sitting on, does it feel right and can visitors find the location without getting lost? From there, I take a closer look at who is occupying the building. What are the tenants like—are they quality, established companies or a little on the flaky side? (Location 947)
The following tracking form is a tool you can use to record your first-glance view and impressions of a property. It’s also a great idea to bring along a digital camera or (Location 960)
smartphone so you can take photos of buildings and attach them to the Drive Guide records. (Location 961)
THE COMMERCIAL ASSET CLASS OPTIONS (Location 969)
Multi-Family: Multi-family includes everything from small, duplex apartment buildings to entire apartment complexes with 800 units or more. The biggest risk in this asset class is over-supply, because when people have lots of (Location 974)
choices, rents can fall, affecting operating performance and cash flow. Another risk with multi-family is that when interest rates are low, more people can afford to buy homes, so they don’t have to rent. (Location 976)
Commercial Office: Office buildings and office condos make up one of the largest real estate asset classes. (Location 989)
Offices come in many shapes and sizes, so there is diversity and easy entry for new investors. (Location 991)
sizes. The benefit of commercial office space is that there is likely something in your town that will fit your budget as a first-time investor and give you plenty of room to grow as you increase your wealth and your level of investment. (Location 993)
Industrial: Just like commercial office buildings, industrial buildings tend to have longer leases and lots of options when it comes to investing. (Location 995)
Industrial space is a classic first-time investor property because of the many options available. Many first-time investors also have their own businesses and need this kind of space. (Location 997)
Self-Storage: Self-storage are those mini-warehouse consumer and commercial storage facilities that you most likely have seen in your town. (Location 1006)
They are seemingly recession resistant, and that is a big advantage for you as an investor. Generally, management is relatively easy. Believe it or not, corporations are actually the biggest users of storage facilities, and every year they pay billions to store excess files, records, and general stuff. The down side is that building self-storage facilities is a low-cost proposition. That means it’s easy for competitors to break into the market, charge a lower price, and erode your margins. (Location 1007)
Within each of these asset classes are sub-categories. All these options may at first seem overwhelming, but in reality it’s this diversity that makes commercial real estate so lucrative and why smart investors specialize. This specialization enables us to have an advantage over other types of investments and over other types of investors who are trying to do it all. (Location 1017)
THE REAL ESTATE CYCLE REVEALED You’ll notice that not only are there more kinds of commercial property than you could have imagined, their performance over time is cyclical in whole and in part. What I mean by that is; as I mentioned in the last section, each asset class runs through a cycle. (Location 1020)
Cycles are important, but if you buy right your real estate will do well, regardless of where things are in the cycle. In the beginning, buying right won’t be as intuitive to you, so this cycle becomes golden. (Location 1034)
This diagram shows a classic real estate cycle. In Phase 1, the lower left quadrant, the market is in recovery phase. There is declining vacancy and no new construction. You know the market is in this phase when there is some growth in the market indicated by properties being rented and properties being sold. Unlike when you are investing in the stock market or other efficient investment, this up trend will last a long time, years even. There is no need to rush into an investment. (Location 1038)
During Phase 2, you see the occupancy rates move below the long-term occupancy (“LT Occupancy” line on the diagram), which is defined as the percentage of space occupied on average at a given time for your market. For example, a long-term occupancy of 80 percent says that the commercial real estate in a specific market is 80 percent occupied. (Location 1046)
If you’re going to sell, Phase 2 is when you do it. (Location 1053)
In Phase 3, the market is in obvious decline. (Location 1054)
Phase 3. This is known as hypersupply. Obviously, I never buy during this phase no matter how badly I want a building. I am simply not willing to ride the wave to the bottom, not knowing how far down bottom is. (Location 1056)
Phase 4 signals market bottom. There’s good news in Phase 4, too. The darker it gets in Phase 4, the better the buying opportunities will be in Phase 1. (Location 1061)
You’ll know you’re there when vacancy hits its high well above the long-term occupancy and buildings are no longer under construction. The cranes and bulldozers will be replaced by completed buildings sitting vacant. At this time, I do a lot of research so that when Phase I kicks in, I have pinpointed some ripe buying opportunities. I have lined up investors and financing and spoken to lots of people, telling them I’ll give them a call when the turnaround happens. (Location 1064)
While it is helpful to know that real estate is cyclical and in all cases interconnected by asset class, knowing where you are in a market cycle and predicting where it is going is key. (Location 1067)
For instance, residential real estate is always the first to decline and the first to rebound. Multi-family follows a little later, and retail and commercial after that. Commercial/industrial is usually the last asset class to emerge from a down market; however, it is usually the last to enter it. (Location 1071)
Within each of the commercial property options we discussed earlier in this chapter are four classes that refer to the quality of the property. The class guidelines are as follows: (Location 1076)
Perhaps you’ve seen these letters listed on brokerage signs: “class A,” “class B,” “class C.” Every property in every market is categorized as an A, B, or C. (Location 1085)
Here are the types of leases that are out there. Get to know them. We’ll refer to them in the remainder of the book. (Location 1096)
PREPARING FOR WEEK 3 In the week ahead, you’ll need some serious study time set aside. You’ll be poring over real estate properties on paper and online, learning the terms, understanding the differences, and recognizing what I call red and green flags—those things that signal “pass it up” or “possible opportunity.” You won’t be driving around like you did this week. Instead, you’ll be taking virtual tours of properties on paper and online and getting down to the particulars. Make a pot of coffee and plan on a few late nights or early mornings. (Location 1115)
you should have decided two things: 1) the initial type of commercial real estate you want to pursue, and 2) the areas within your community that will become your focus. These are two very big decisions that are critical as we begin researching the fundamentals of the properties you’ve found that fit that bill— (Location 1130)
READING AND UNDERSTANDING OFFERING MEMORANDUMS (OMs) (Location 1142)
OMs let you compare the features, figures, and value of multiple properties that have actually sold to another investor, apples to apples, as they say. (Location 1144)
Actually, they are sales sheets prepared by brokers to sell a property, so yes, the rule here is buyer beware. (Location 1149)
This is where the knowledge, skill, and, eventually, instinct comes in. Great investors can pull the information they need from the OM quickly; (Location 1151)
Understand that your goal from this point forward is to first understand the potential opportunity and then to minimize risk. (Location 1154)
RESEARCHING THE MARKET—SEEING THE TRENDS (Location 1159)
I’m going to cut through the clutter and recommend the sources and the materials that are truly important. I definitely use CoStar.com, a website from the CoStar Group. You can also go to websites of large brokerage firms like CBRE and Cushman and Wakefield and others to do your research. Some require you to sign up or pay a monthly fee, or you can get your real estate broker to push the trend information your way. He or she certainly has it available. Once you start seeing the patterns, you’ll learn to buy for tomorrow, not today. This is one of the most important concepts in this book. (Location 1162)
RESEARCHING THE PROPERTY—THE OM, DEMYSTIFIED (Location 1167)
This exercise is not about deciding which property is best; it’s about eliminating the ones that don’t measure up. You can easily find OMs online by going to Loopnet.com or the Loopnet app, finding a property or two that you may want to learn (Location 1174)
more about, and contacting the listing broker. (Location 1176)
Take a look at the list and the descriptions below. Read them all so you understand the importance and how they can help you add properties to your short list and eliminate ones that just aren’t a fit with your goals and your situation. (Location 1179)
You can keep your buildings organized by product type, and then build your database in preparation for adding future properties. What you’ll end up with is a building database and greatly expanded market knowledge. (Location 1202)
How do you know if the cap rate on the OM is valid? The number that is listed should equal the listed or derived NOI ÷ Purchase Price. Using simple math, you can calculate the price of the property using cap rate with the formula Cap Rate x NOI. (Location 1297)
USING OMs—MY SIX NON-NEGOTIABLES TEST (Location 1312)
When I am considering a real estate investment, ruling out the ones I’m not interested in has become second nature. (Location 1315)
A building that fails even one aspect of this simple test is off my list. (Location 1317)
What does “buy it right” mean? It means many things, but first and foremost, the property must have positive cash flow and I must be able to get it below replacement cost. (Location 1348)
Additionally, go to the Internet and find as many OMs in your area as you can and begin taking a look at them just for practice. Print them out and mark any and all green flags and red flags you see on a given property. (Location 1361)
As you are working through the OM exercise, keep them organized on your computer, in files, whatever is easy for you, but keep them organized by location and property type. This is the beginning of your market intelligence file. (Location 1365)
Welcome to weeks 4 and 5. So far, if you’ve been following the nine-week program in this book, (Location 1381)
you’ve attained a good idea of what your market looks like. You’ve selected the type of properties that most interest you, and in the last chapter, you learned how to read property, what the terms mean, and how to decipher the important information from the hype. (Location 1381)
Here are examples of questions that signal “rookie”: Inappropriate use of questions are big. “I’m looking for some warehouse space in an office building.” “I need 2,000 square feet in XYZ building”—and that building (Location 1393)
only has 10,000-square-foot tenants. (Location 1395)
Make the easy calls and take the low-stress meetings first. For example, rather than call the top commercial broker in your market to get a feel for a neighborhood or a building, do your own research. (Location 1403)
BACK UP YOUR GUT WITH DATA Once you have your gut feeling from talking with people and hanging around the area at different times of day, back up what you are feeling with hard data. Traffic reports, crime rate reports, business growth, business failures and demographics, home values and raw land values are very important. (Location 1412)
All this information is available online or through your local city or town government offices. It is not hard to find. (Location 1418)
This information is critical and well worth taking time to review. Equally important, if not more important, is a review of comparable commercial properties in the area. Also known in the industry as “comps,” (Location 1421)
The key is to find properties in your target area that have sold recently under open market conditions. You find these property records through paid services like CoStar Comps or online through LoopNet.com. You can pull comps together for free through your county assessor records of all properties. Those are online, too. All it takes is the parcel number or the street address. (Location 1426)
Here’s what a typical comp report looks like: BUILDING DESCRIPTION Deer Valley Business Center is a 48,082 square foot building including a 16,000 square foot mezzanine capability. The building is comprised of tilt concrete construction, steel reinforcement and extensive glass. The clear height is 24 feet and there are 238 total parking stalls. (Location 1431)
GET COMFORTABLE WITH FINANCIAL INFORMATION This is also the time to do some research related to financing and to get comfortable with the financial aspects of the kind of properties you are considering. For example, contact a few lenders and set up (Location 1437)
exploratory meetings. The goal of the meetings is to discover the following information: Current Interest Rates: What are the prime interest rate and the bank rates for commercial property investment? Projected Interest Rates: How much or how little are interest rates expected to rise or decline in the coming quarter? Loan-to-Value Amount for This Type of Property: How much is the bank willing to loan based on projected value, what is the typical amount of equity required, and the loan payments? Fees: What are the loan origination fees for this kind of property, the property taxes, and insurance? (Location 1440)
GET TO KNOW YOUR PREFERRED PROPERTY TYPE…INTIMATELY Now is the time to begin your journey to becoming an expert in your preferred property type. (Location 1462)
Look for all the news related to development and property of your type in geographic areas of interest. Begin building a database of buildings. Even ones that aren’t available now may be available at a later time. I have a database of the fifty-five buildings in Phoenix that I want to own. I keep tabs on them and the neighborhoods they are in. (Location 1467)
Get to know the lingo. There are a number of real estate glossaries online with many of the most commonly used terms in commercial real estate. One I particularly like is InvestorWords.com. You’ll also pick up words and phrases from those whom you meet. (Location 1475)
Here are the people you will want to have on your team and with whom you will want to begin developing solid relationships. (Location 1485)
Lenders: Visit several lenders and get to know them. (Location 1489)
questions. For example, if you are interested in mini-storage properties, be very up-front with questions like these: (Location 1491)
Understand also that in commercial real estate, unlike residential, lenders are not always banks. In fact, they most likely are not banks; often the lenders are institutions like insurance companies, capital companies, or other types of companies that raise and lend large sums of money. So how do you find these companies and contact them? That happens through your bank—simply ask who else lends money for this kind of project. (Location 1505)
Mortgage Brokers: Mortgage brokers will be a tremendous resource to you. Ask if they do or have done the kind of deals you are (Location 1509)
targeting. (Location 1510)
Commercial Real Estate Appraisers: When forming relationships with appraisers, I ask all the same questions I asked lenders regarding area of specialty, competition, and level of interest in my deals. (Location 1515)
I always ask for samples of their work. I find out who does their research. Then I make a point of getting to know that person. I take the researcher to lunch. No one ever takes these people to lunch and the results for me are always eye opening. (Location 1519)
Environmental Professionals: You may be thinking, “Why would I want to talk to people who check buildings for environmental issues so early? Why not wait until I actually have a building to show them?” The fact is, the more you know up front about the environmental issues that property owners face, the better off you’ll be. (Location 1523)
I’ve known lots of people who lost money on their first deal because they didn’t know how to look for “functional obsolescence”—outdated features that can’t easily be changed—in buildings. Certainly you’ve heard of things like asbestos, lead paint, and ADA requirements. Buildings must comply with federal, state, and local laws that apply to these issues. Mold is another concern, and your “Phase 1” environmental contact can educate you on all these kinds of things and more. (Location 1528)
Other Friends in Your Network: (Location 1538)
This is your time to really do your advanced research. It’s not the kind of research that comes primarily from the Internet or from books. It’s the kind of research that comes from people smarter than yourself. It’s important at this point to understand that the only way to succeed in this business is to realize that you need people with more experience, more knowledge, and more contacts to help you. (Location 1556)
I started my real estate investing career as a limited partner investing in other people’s deals. I still have a few investment groups that I invest with today. (Location 1578)
I sought out what I considered the best three groups in my market and invested $25,000 with each one. I looked to see how they analyzed deals, what their deal flow was like, how they communicated with me, and how they treated the property (Location 1580)
asset—in general, the pros and cons of each group. (Location 1581)
I actually participated in several deals as a limited partner before ever leading one as a managing partner. (Location 1584)
When you have negative leverage, you are taking on debt and getting no positive (Location 1651)
cash flow in return. (Location 1652)
Each property will bring different types of loans. I might have to go to fifteen lenders to finally get the loan I need based on what I want the property to achieve. Most of my properties have been funded with loans. I use the lender’s money to set up the deal, then, as the property’s performance—meaning operating income—improves and the value goes up, I refinance and use the equity gain to either pay down the loan or invest tax free in another investment. If I use it to pay down the loan, then my loan payments go down, which improves my cash flow. (Location 1654)
Your Own Building: For many people, their first real estate investments are buildings that will house their own businesses. (Location 1674)
MONEY SOURCES Now that you understand the language of loans and debt, let’s talk about the different ways you can find money. (Location 1704)
Institutions are big sources of capital and they include insurance companies, pension funds, etc. These lenders have funds coming in through premiums in the case of insurance companies and retirement monies in terms of pension funds, and they need to invest it. Some of that money goes into real estate. Typically, institutions are interested in bigger deals and have $5 million (Location 1708)
to $20 million minimums. More typical for me, and you as you are starting out, are investment deals using banks or mortgage brokers who will match your investment with the right lender. (Location 1710)
I also raise private money for the equity portion on all of my investments. (Location 1712)
You’ll quickly find that there are people out there, lots of them in your own backyard, who are looking for good places to put their money. (Location 1713)
When you’re just starting out, investing in more than one building immediately may be difficult. It can take time, and that’s okay. I’ve been investing for almost twenty years, but when I first started out, I only bought a building here and there. There have been some years when I didn’t buy anything because the market was bad—meaning the market was flying high. Today, I’m diversified in numerous holdings. (Location 1719)
Going Solo: If you decide you’d rather not take on partners and would rather limit your investment to your own financial resources, that’s fine if it fits your goals as an investor. (Location 1724)
Look for older buildings in good condition with no functional obsolescence that have excellent tenants. Think of it this way, there’s nothing wrong with a lower-end property that a well-respected local electrician “in business since 1995” calls home. (Location 1728)
I’m never snobbish about properties. If it fits my goals and the location, building, economics, and the outlook are right, then nothing is beneath me. (Location 1731)
Taking on Partners: I’ve never funded a commercial real estate investment with 100 percent of my own money; I’ve always had partners. I like the idea that I can have more diversification and that I can leverage my own financial resources across several investments. (Location 1734)
The truth is, a good real estate deal requires little selling. People are looking for ways to grow their money that makes sense. The key is making sure you truly have a good deal— (Location 1739)
As I mentioned earlier, I participated in a few deals to learn my way around. Before I chose a deal to get in on, I met with several people who were looking for money to learn how they structure deals. I did this to compare; I wanted to see how many different paths there were. To be honest, in some cases I had no real interest in the investment itself, my meetings were learning ventures. (Location 1744)
Lining Up Financing: They say to ask a bank for money when you don’t need it, so that you’ll have it set up when you do. That is true. The most important reason to have your financing all lined up in advance of any deal is so that you can move on an opportunity when you find one and so the seller knows you are serious. (Location 1749)
To me, the best move is prudent amounts of leverage—which is the amount you think is prudent plus five to ten percent of that in additional reserves. (Location 1775)
FINANCING THROUGH PARTNERSHIP STRUCTURES (Location 1777)
work, you’ll find they are not scary at all. To familiarize you, here are the steps: Set Up Your LLC: “LLC” stands for limited liability company, and every property investment you make should be set up in a unique company. (Location 1781)
Setting up an LLC is as easy as calling your attorney and spending a few hundred dollars to have it done. For good information, I suggest visiting corporatedirect.com. Here are the steps: 1. Have your LLC Articles of Organization prepared. Select (Location 1788)
your business name that is unique and does not contain any of the off-limit words like “finance,” “trust,” “city,” etc. Your state will have a list. You must also end the company name with the designator “LLC.” (Location 1791)
Draw Up Your Documents: The documents you need for establishing a partnership include the offering circular, the operating agreement and the purchasers questionnaire. Let’s look at each one individually. (Location 1801)
Your investment opportunity should be so financially sound it sells itself. Your attorney will review this document to ensure it is within the confines of the law. (Location 1807)
The biggest example of this kind of hot and cold investment climate is what Peter Linneman, author of the quarterly real estate research newsletter The Linneman Letter, calls the Great Capital Strike of 2008. (Location 1841)
In this chapter, we’ll go over how to perform what’s known as preliminary due diligence on a property so we can uncover the problems and opportunities (we’re still looking for those flags). We’ll cover how to quickly assess the financial performance of a property and compare it to the performance of other properties. And we’ll go into detail on analyzing tenants, a very critical factor when evaluating commercial property. (Location 1883)
It also comes from comps and looking at alternative real estate investments. The prices other similar properties sold for is critical. (Location 1891)
There are three methods that I use to value a (Location 1894)
building after I’ve narrowed down the choices: Valuation Based on the Comps: (Location 1894)
Valuation Based on Replacement Cost: (Location 1906)
Valuation Based on Cash Flow Analysis and Net Operating Income: (Location 1923)
If we’re going to look at the property you’re considering as an investment, that will mean we (Location 1928)
will want to get out of that investment four important benefits: • Appreciation: I want the property to grow in value. • Cash flow: I want to derive a monthly dividend from my investment based on the property’s operations. • Leverage: I want to use other people’s money to achieve appreciation and cash flow, not all my own. • Depreciation: I want favorable tax treatment to minimize my annual taxes. Understand, however, even though these four things are benefits of real estate, I want a real estate deal to work without taking appreciation or depreciation into account. (Location 1929)
What’s Included in the Initial Investment (Location 1949)
FIRST, DEFINE THE TERMS Initial Investment: (Location 1970)
If I project cash flow to be negative for the first two years, I put these amounts into my initial investment. (Location 2046)
If you want to do more sophisticated analysis, there are ways to do it. One I recommend is to take a CCIM class. You don’t have to do this to be a successful investor, particularly if you are buying smaller investments with ten or fewer tenants. (Location 2113)
I like to buy buildings that are 30 percent below replacement, so that my operating costs can be lower than the other guys’. That gives me the unfair advantage. I’m always ethically looking for the unfair advantage. (Location 2120)