Trump University Commercial Real Estate 101

As a matter of fact, retail space generally lags behind apartments: First come the announcements that new job opportunities will be opening up in an area. That creates a demand for office space. (Location 351)

Then the people who will work in those offices begin to move into town. Because homes can’t be built fast enough, the apartment market suddenly heats up. (Location 353)

After their leases expire, they start to buy single-family houses. Retail space tends to follow housing surges, as merchants realize they can make money by moving closer to where people live and work. (Location 355)

expenses of about 50 percent of gross income. When you see the actual financials of a property with higher expenses, determine if you can lower those expenses to the average level. (Location 378)

repositioning. I wrote an entire book on the topic called Multi-Family Millions, published by John Wiley & Sons. This concept of making low-cost, high-payoff changes to both a property and its tenants is enormously powerful. (Location 403)

When a professional reads a real estate market, it’s altogether a different story. She can tell you specifics about construction, job growth, the path of progress, and much more. Even more impressive is her ability to predict the future. Yes, when you understand the concept of leading indicators and what to look for in a market, you can quickly get a solid idea of what that market will be like in months and even years into the future. (Location 440)

How long does it take for a market to complete a full rotation? It depends on the dynamics of that market. The average market cycle lasts between 10 and 25 years. Cities on the East Coast and West Coast tend to change more quickly from (Location 452)

phase to phase than do cities in the heartland of America. (Location 453)

In a Buyers’ Market, Phase I, you will find a market that’s oversupplied with commercial properties. Supply is one of the key market forces that causes a market to go from boom to bust and back again. (Location 458)

To make matters worse, phase I of a buyers’ market also tends to coincide with stagnant or negative job growth in the area. As the market cools, companies stop expanding and may even begin (Location 470)

to lay off workers. Retail receipts drop, office space becomes abundant, and apartments begin to see higher vacancies. These are the characteristics of an oversupplied market. (Location 472)

In addition to the key factor of supply, job growth is a significant market force. In a Buyers’ Market, Phase I, there is none. Jobs had started to slow down or leave the area in the previous Sellers’ Market, Phase II. At the beginning of… (Location 476)

The market will reach a point at which unemployment peaks and investment property values will decline to their lowest level of any phase in the cycle. When Jobs Become the Engine For a city or town to move to a Buyers’ Market, Phase II—the next phase in the cycle—its leaders must do something to increase employment opportunities. When jobs are created, people begin to migrate back into a community, population increases, vacant spaces begin to fill, and… (Location 478)

leadership. If local government is not committed to change—or if its only activity is finger-pointing about who’s to blame for the lousy economy—the area will continue to wallow in a Buyers’ Market, Phase I. Each city has a master plan to guide it to the next round of growth. City leadership creates the plan to facilitate growth. To get your own copy of the master plan, call the local economic development committee and speak with a local official. He will be happy to talk with you and tell you about all the wonderful things… (Location 484)

Next, determine whether the city has actually taken action on the plan. A continuously updated plan that never comes to fruition is simply a work of fiction. In the plan, you should see many areas that are labeled revitalization zones. These are usually downtrodden areas filled with obsolete buildings. The city usually creates a plan to spur business growth and development in… (Location 492)

to make its plan a reality, and is clearly taking action. Until you see that happen, leave your money in your pocket. Don’t get stuck buying into that work of… (Location 496)

If the city leadership is on the ball, new jobs will begin to emerge in the city. Following the jobs, people will begin to migrate back to the city. The market slowly absorbs its oversupply of properties. Rental spaces fill up. Not only does occupancy increase, but there is a… (Location 499)

As even more jobs come into the area, the pace quickens. Boarded-up residential and commercial properties come to life as investors rehab… (Location 502)

Word gets around and both experienced and new investors circle this… (Location 506)

Rents and lease rates were at their lowest levels in the earlier Buyers’ Market, Phase I, but they’re now on the move. Because of this, property values also rise. Commercial property values rise fairly quickly, because they are largely valued as a… (Location 510)

This is the very beginning stage of an… (Location 512)

For every one professional job that comes into an area, another three to four service jobs are created to support that professional. This is called the Multiplier Effect. (Location 527)

Investors from far away now read about the market and add to the inflow of money. (Location 537)

The second main market force to watch constantly is supply. In every emerging market, a key factor causing that market to lose its momentum is overbuilding and oversupply. When builders build more than demand warrants, they’re forced to lower their prices and sell inventory to pay the bank notes that are marching due. (Location 569)

THE MARKET CYCLE AND LAND USE The commercial real estate value cycle can be measured in three ways: growth, maturity, and decline. (Location 571)

WHAT DRIVES DEMAND IN A MARKET The first demand factor in any market is the local and national economy. Despite what the national (Location 601)

The rank amateurs and a good hunk of investors in between (that third group) do not get their information from hard data on market trends. No, they get it from Fox News, CNN, a couple of blogs they follow, and lots of gossip. (Location 607)

Demographics are also a big predictor of demand in a market. The two big demographic trends happening in many markets right now are the rise of immigrants and the emergence of echo boomers, who are the children of baby boomers. (Location 618)

AMATEUR MISTAKE: “I’LL WAIT UNTIL THE MARKET CHANGES BEFORE I JUMP IN.” (Location 675)

The first very clear signal will come in the form of job growth. I’m not talking about Don’s Donuts hiring two cashiers; I mean that you must watch for announcements that substantial jobs are moving in. (Location 696)

When you hear such things about a market, your next step should be to call the Chamber of Commerce in the lucky market. Ask what other jobs are coming into the market and what the city is doing to attract these jobs. (Location 700)

Here’s another good indication that you’ve found a prime area to invest—new big-box retail stores being built in the area. Is Home Depot, Best Buy, or Wal-Mart establishing a presence in the market? If so, you can bet these outfits did some heavy-duty research and that there is an economic resurgence going on in that area. (Location 715)

Key Factors (Location 718)

Population trends is another key factor. People move for a variety of reasons and they move in waves. In the early 2000s, a wave of people moved from cold-weather states, such as in New England, down to Florida. Then, as prices rose in Florida, part of this wave was priced out of that market. (Location 725)

If you find out where Global or other major van lines have a high percentage of one-way trips, it is sure to be an area where in-migration is happening. (Location 731)

Watch for whether road crews are out widening roads that lead to an area. Those big projects only happen when master plans indicate major growth. Get a list from the state department of transportation for future projects. Few, if any, of your competitors will know to do this. (Location 733)

Areas with state government offices and also universities are often strong, enduring markets. (Location 735)

Demographics We’ve already discussed many demographic factors, but here are some more key considerations. (Location 742)

Each commercial property must attract its own target demographic profile in order to be successful. (Location 744)

A professional demographer will analyze an area by drawing three rings on a map of the property and its market. The rings are drawn at a one-mile, three-mile, and five-mile radius around the property. (Location 746)

As an owner, you should know the demographic makeup within each of these rings. (Location 748)

An apartment owner might have an option to buy a Class B property for a great price. The property is in good repair and the numbers look fine. But if the income level has dropped for residents within that three-mile radius, that’s probably the reason why the price is so attractive. That property will be harder—not impossible, but much harder—to fill. Because 80 percent of apartment (Location 751)

tenants come from within a three-mile radius of the property, this sudden income shift may now mean that they cannot afford your B rents. (Location 753)

Traffic Count All commercial properties are concerned with traffic count. How many potential customers are going by every day? (Location 758)

You can get traffic counts from the local city government, which should be collecting this data regularly. Compare previous traffic counts with the current ones to discover any trends. (Location 761)

Study these numbers and formulate your questions. Then talk with the economic development people and your own network of brokers and property managers to get the answers. (Location 763)

Traffic Flow Determine which way the traffic flows at different times of the day. Is it local traffic, or people passing through as part of their commute? What about future plans of the transportation department: Is there a chance they will widen the roads in the future? If so, try to judge how that will affect your traffic flow, including the ability of traffic to come in and out of your site. (Location 765)

School Districts This is an extremely important factor when you plan to own apartments. Some school districts are far better (Location 769)

than others. Many parents are drawn to districts that will give their kids the best education. In fact, a school district can make or break a property. (Location 770)

Access This factor can cause problems for an otherwise great location. If you can see a property from the highway and it gets a huge daily traffic count, you’re halfway there. If drivers cannot figure out how to get to your property, you will lose a great deal of business. (Location 777)

Once you’ve identified some good markets, the next step is to get your deal-attraction engine humming, so that you see opportunity after opportunity in those markets and can cherry-pick the best. That’s what the next chapter is about. (Location 792)

I discovered how to do direct mail campaigns. At night, exhausted in front of the TV, I would stuff and stamp envelopes. I simply did as many as I could before falling asleep. (Location 839)

I started to see some leads this way. I was slowly getting more calls, and some of those turned into appointments. A few of these leads actually became deals. (Location 841)

On Sundays I would grab the newspaper and go right to the classifieds. I looked for commercial property for sale. At first I just got familiar with the ads. I then called the ads that caught my eye. (Location 843)

I would also attend the local real estate club once a month. (Location 853)

I began to look really closely at those ads. I noticed which brokers were in the paper a lot. I started calling them and eventually took a few out to lunch. Before long I had three brokers giving me deals on a regular basis. (Location 858)

DON’T CHASE DEALS—ATTRACT THEM (Location 873)

The real professionals attract deals. This is not simply a choice of different words: It’s an extremely powerful marketing concept. (Location 875)

What you do is put out the word that you’re looking for real estate, and the only responses you get are from the people who are at least somewhat motivated. (Location 885)

AN EASY WAY TO RECOGNIZE THE MOTIVATED SELLER (Location 892)

The trick is to recognize quickly when you have a mere tire-kicker and when you have a real prospect. All you have to do is ask three questions: (Location 894)

Questions 1& 2: “How Much Are You Asking for Your Property?”. . . Followed Quickly by “How Did You Determine That Price?” (Location 896)

If sellers say they are looking for the current market price, you simply explain that you are an investor. That means you can act very quickly, but need to buy below market price so you can resell at the market. (Location 897)

Question 3: How Fast Are You Looking to Sell? (Location 908)

If they say they have time and are in no big hurry, this usually means they want to put their property on the market and let investors compete for it. These are not profitable deals. Rarely have I won in a situation when I competed directly against other investors. That’s because other investors are usually willing to pay more for a property than I am. Tell the seller: “I can close very quickly and work well with sellers who need to close quickly. . . . But if you have time to market your property to the highest bidder, then I probably am not your buyer. Is this (Location 909)

your situation?” (Location 913)

A SIMPLE AND INEXPENSIVE WAY TO START SEEING DEALS IMMEDIATELY (Location 919)

As I hinted earlier, one of the fastest ways to get your deal-attraction machine cranking is to do direct mail. (Location 920)

Consider the Source (Location 935)

The source of your list is one very important factor in your direct-mail success. Go to your city assessor’s office, where all the tax rolls are kept. By law, much of that information is open to public view. Ask for a list of all commercial property owners. (Location 936)

Sometimes the assessor’s office will give you a difficult time about getting the list. You might be the first person to have asked in a long time, or your request means extra copying work for someone. Be extra friendly but persistent. In my experience, most people at these offices around the country are very friendly and have a helpful attitude. Sometimes the office won’t provide you with the list, but will refer you to a list broker. These people make their livelihood from maintaining lots of mailing lists for practically anything. When I have a choice, I like to get my list from the assessor’s office because it is the most current. (Location 938)

The keys to success are to keep mailing, and tweak your mailings until you find success. Try a different headline, use some local news item in the letter to make it clear you’re a local investor, and so on. (Location 947)

Sometimes I’ll ask a list broker to find people who have owned their properties for 20 years or more. These people have used a large portion of their depreciation and (Location 949)

may be looking to sell. They may also be close to retirement age and just want to move on. (Location 950)

consider asking the broker to give you only names of owners with properties above a certain size. My cutoff usually is properties with assessed values of $2 million or more. That weeds out a lot of properties that I’m no longer interested in buying. That’s just fine with me at this stage. You might want to start somewhat smaller. Here’s another tip: Every letter should have a headline. When owners open your letter, there should be a big, effective headline beckoning them to read on. The sole purpose of that headline is to sell the reader on reading the letter. (Location 958)

Because of this, your headline should state the biggest benefit that owners will get from selling their property to you. For instance, the following headline has worked for me through the years: I want to Buy Your Boston Commercial Property (Location 963)

Letters are easy and inexpensive and will get your phone ringing in a very short time. THE MAGIC THAT HAPPENS WHEN YOUR DEAL PIPELINE IS FULL (Location 969)

You will start to look at deals and analyze numbers. Soon you’ll find a (Location 974)

deal that just might work. That’s when you need to be careful: In your eagerness, you may stop analyzing it dispassionately, and start wanting to make the deal work. (Location 975)

THE SECRET TO FINDING DEALS (Location 988)

Real estate is a relationship business. Your business becomes a real self-sustaining operation when you have a network of contacts and specialists with whom you do deal after deal. You all win that way, because each time it becomes easier and more profitable. (Location 989)

I’m not an engineer, but I sure do love systems. They’ve made me a great deal of money and they’ll do the same for you. Systems work so well because you can set them up, then delegate them to other people. They run the systems, and your job is to monitor and improve the whole thing. (Location 1039)

I read a great book on systems when I started my real estate business. It’s called the E-myth (Location 1042)

Revisited, by Michael Gerber. The book talks about how to create systems so you are constantly working on your business instead of in your business. When you work on your business, you continually look for improvements. The goal is to make tomorrow work better than today. When you merely work in the business, you’re so caught up in the daily grind, you can’t step back and make adjustments. Tomorrow will be the same as today, except you’ll be one day older. (Location 1042)

Your marketing systems are a key component. For example, I have a mailing system. I buy lists of property owners to whom I want to send mail at least once per year. I hand that list to a bunch of little old ladies in a local elderly complex in my hometown. I supply my ladies with my marketing letters, envelopes, and other needed materials. I also give them a written explanation of which letter goes to which type of property owner in what month. When letters come back marked as non-deliverable, they take that owner’s name off the list. They call when they’re running low on supplies and when the letters are (Location 1049)

TEN SOURCES FOR GREAT (Location 1078)

DEALS (Location 1078)

Real Estate Brokers (Location 1081)

In my experience, once you have cultivated three or four good brokers in a given market, you’ll have plenty (Location 1083)

of quality deals over time just from this one source. (Location 1084)

that: I made it my goal to cultivate three different brokers who were seeing most of the foreclosed properties in the area. These guys eventually fed me deal after deal, because I had followed the three relationship rules I gave you earlier: (Location 1085)

I list brokers as the first great source because they really do have the potential to make you wealthy. Still, you must be selective, because some brokers are way better than others. (Location 1088)

Cultivate your brokers not only (Location 1095)

with commissions from deals, but with good old rapport-building. (Location 1096)

Property Ownership Associations (Location 1099)

Thinking about investing in a certain city? The first thing to do is join the local property owners association. Not only will you get a very good education, but you’ll get to know the other owners in the city. (Location 1100)

To help you get started in your search for groups, here are several national property owners associations: • The Building Owners and Managers Association (www.boma.org) • International Council for Shopping Centers (www.icsc.org) • National Association of Apartment Owners (www.naahg.org) • Institute for Real Estate Management (www.irem.org) (Location 1115)

Real Estate Investment Clubs (Location 1122)

Attorneys As good as you may get at real estate, you should always have one or more attorneys review your deals. It’s their job to stay on top of changes in state and local laws. They also know how to rewrite contracts to be as much as possible in your favor. (Location 1129)

Cultivate attorneys the same way that you cultivate real estate brokers. Then explain to them the sort of property you want to buy. If you follow my relationship principles and have some patience, you’ll be privy to deals that never hit the market. You can connect with attorneys through business organizations. Many active ones attend Chamber of Commerce and Rotary Club meetings. They are there to get more business, and so are you. (Location 1134)

Courthouse Because many real-estate-related events are on the public record, your local courthouse is a good source for deals. (Location 1140)

Internet Lazy investors use the Internet as an easy armchair source for deals. The only problem is the vast majority of deals on the Internet are garbage. (Location 1146)

If you simply take the convenient route of trolling the Internet for deals, you’re pretty much staring at the bottom of the barrel. There are exceptions, though: I got a commercial property in Austin, Texas, right from the Internet. I paid $8.6 million for it, and it appraised for $10.5 million. It’s been a good deal. (Location 1155)

Why do good deals occasionally show up on the Internet? It’s because commercial brokers are not the only people who use it to market their deals. Property owners sometimes don’t know a good broker, or don’t want to work with any brokers. They’ll hear that they can list a property right on the Internet, and that’s what they do. The good deals usually originate in this way. My deal in Austin was from a seller in Minneapolis. The granddaddy of all commercial property Internet sites is Loopnet. com. One of its membership levels is free. Another outfit is Costar.com. It is not cheap, so you’ll find more serious investors on that site. (Location 1158)

The Department of Housing and Urban Development (also known as HUD) sells commercial properties, among other types. One government site is www.homesales.gov. Even though it is called homesales, it also contains commercial property. (Location 1174)

When people ask me what I do, I tell them I invest in commercial properties in emerging markets throughout the United States. (Location 1196)

I always (Location 1200)

ask, “Whom do you know who might be looking to sell a commercial property?” (Location 1200)

I give them my card and ask them to call me in the future if something comes up. (Location 1202)

I’ve gotten good referrals from asking that question and sometimes the phone call comes months after the conversation. (Location 1203)

Well, in real estate a similar rule is at work, except it could be called the 90/10 Rule. Try to spend only 10 percent of your time quickly sorting through 90 percent of the deals that come across your desk, because 90 percent of your potential profits will come from that other 10 percent of deals. (Location 1239)

YOU NEED ONLY 10 PERCENT OF THE NUMBERS TO SORT OUT 90 PERCENT OF THE DEALS (Location 1244)

Fortunately for us nonaccounting types, you need only a handful of critical-but-easy calculations to determine whether or not a deal is a strong candidate. Commercial properties usually produce income. There are three types of income: 1. Gross Potential Income (Location 1247)

2. Effective Gross Income 3. Net Operating Income (Location 1250)

Cap rates usually range from 6 to 12 percent. The higher the cap rate, the riskier the property, just as the higher the bond interest rate, the riskier the bond. The more stable the property, the lower the cap rate. You would naturally expect a higher return from a riskier property, right? (Location 1272)

Riskier properties are ones that need many repairs, are in bad areas, or were built more than 30 years ago. (Location 1275)

Institutional investors have been known to pay very low cap rates for properties. As a very rough rule of thumb, we usually find good deals starting at an 8 cap or better. Here’s the nifty thing about cap rates: If I know I need to pay an 8 cap or better for a deal to work for me, then all I need is the NOI. With that number, I can determine what my maximum offer should be for the property. Let’s say I have a shopping center with an NOI of $545,000. I now know two of the three parts of the equation, and any kid can tell you it’s (Location 1277)

possible to find the third number. All I have to do is divide the NOI of $545,000 by the cap rate of 8 and out pops the $6,812,500: (Location 1281)

I cannot pay more than $6,812,500 for that property. (Location 1283)

Now let’s determine value with the cash-on-cash return. I like to use this method when I’m buying, and the cap rate approach when I’m selling. The cash-on-cash return tells us how fast we will get our money back. (Location 1285)

Good deals usually have a starting cash-on-cash return of 10 percent or more. There are exceptions, and some brokers may tell you it’s not possible to get a 10 percent cash-on-cash return in their market. If you hear this, politely thank them and go on to the next broker. (Location 1291)

The next deal in your pipeline comes in and it’s a 5 cap. We don’t want to pay anything below an 8 cap, so we will probably pass on that deal. Another one comes in with a 7 percent cash-on-cash return. That’s not close to the 10 percent threshold, so you should probably pass on that one too. On the other hand, if the person with that property seems really motivated, you might feel like there’s room to negotiate a lower price. (Location 1296)

You can see how these two calculations will very quickly handle (Location 1299)

most of what your deal pipeline delivers. If the cap rate or cash-on-cash return is above or close to your target numbers, it’s worth spending more time to see if this deal could become a live one. You’ll need to analyze further to determine whether you should take the deal to the next stage, and you must analyze quickly: Good deals do not stay on the market long. (Location 1300)

Another Key Measure: Debt Coverage Ratio Many investors buy based on speculation. They get into a deal that produces very little cash flow and hope to make all their dough from appreciation. (Location 1303)

It’s important to gauge the health of your deal by calculating its debt coverage ratio: This ratio tells you how many times your NOI covers your mortgage payment. As a rough guide, lenders like to see a debt coverage ratio of at least 1.2 to 1. For every dollar of mortgage payment you must make, (Location 1309)

you have $1.20 coming in. The higher the debt coverage ratio, the safer the deal. If you are in a deal with a debt coverage ratio of 1.1, the seller will either need to come down on price or you’ll have to put up a higher down payment to drop that loan amount. (Location 1312)

Cash Flow Before Taxes Notice that we’re getting deeper into the analysis, but we’re still covering common sense measurements. Here’s another such number: That last number is important because it’s beginning to approach (Location 1315)

what we could see in cash flow from the property. We may or may not have much of a tax bill, depending on the deal. Real estate definitely receives favorable tax treatment from Uncle Sam, in the form of depreciation of the property and also deduction of many expenses. We can’t spend that cash flow before taxes just yet, but remember that it’s the critical number in the calculation we did earlier: We especially want to know that cash flow figure for two reasons: Not only is it the first benefit we’ll receive from the deal, but it’s also a measure of our safety cushion. (Location 1318)

The Right Numbers Here’s how the professionals take a quick but accurate look at deals: They focus on the last two years of profit-and-loss statements, the year-to-date profit-and-loss statement, and the current rent roll. (Location 1344)

Insider Tip (Location 1355)

A couple of months are likely to pass between the time you sign that P&S and the day you actually close on the property. Do not forget to get updated operating statements for those most recent months! Not only will you want the freshest information, but if the numbers are trending down, the lender may require that you put up more money (Location 1358)

to close the deal. A good closing is one where no such nasty surprises pop up. (Location 1360)

THE THREE WAYS TO VALUE PROPERTIES (Location 1361)

Comparable Method This method compares properties that share a similar form and (Location 1364)

function. For instance, a class-B apartment complex would be compared to a similar class-B property. (Location 1365)

With commercial properties, you compare not only sales prices but also price-per-square-foot. When comparing apartment complexes, you’ll often compare price per unit. One problem with the comparable method is that your market might not contain other properties that are truly comparable. (Location 1367)

Income Method I said in an earlier chapter that the value of a commercial property is not (Location 1370)

We know the NOI, and I just said we plug in cap rate to determine value. You might wonder what cap rate to use. Here’s where we get back (Location 1377)

to comparables again. This time, instead of trying to compare properties of similar age and size, you find out what the current cap rate is for properties like yours. (Location 1378)

Call up your brokers and ask what the cap rate is for your general type of property. (Location 1381)

Cost Method This is the least-used method. However, it does work well when a property is new or almost new. (Location 1387)

This method can still be useful, though. When I started to buy small commercial properties in a worn-out blue-collar city, everyone told me I was crazy. But I didn’t care, because I had run two simple calculations—I knew these properties generated good NOI, and I would be buying the properties well below replacement cost. (Location 1392)

Be on the lookout for markets where you can buy buildings below replacement cost. (Location 1397)

OTHER IMPORTANT COMPONENTS OF VALUE Those three methods are just the beginning steps to becoming comfortable with value. Let’s look at several other considerations. Location (Location 1399)

Location is indeed important, but it’s only one factor. You definitely want to spend time assessing the location, though. For instance, most successful coffee and doughnut shops are on the going-into-town side of the road, where most commuters drive in the morning. This is called the A.M. side. Most successful dry cleaners are located on the P.M. side, going out of town. (Location 1403)

Another way to focus on location is to look for up-and-coming areas. If (Location 1413)

you can get in on the ground floor, you’ll make a bundle when the area matures. (Location 1414)

Just be careful: Enter a revitalization zone only after other investors and the local government have committed to the project. Why? Significant change is often very slow to occur. If you start to buy and rehab properties too early, you may be left carrying those properties financially for a long time before your plan comes to fruition. (Location 1418)

Don’t be a pioneer. You can tell these people because they’re the ones face-down in the mud with all the arrows in their backs. Instead, be a fast follower, who doesn’t get in quite on the ground floor, but doesn’t take nearly the amount of risk, either. (Location 1421)

Expenses Always focus on the expenses your seller is reporting to you. Expenses at most properties run at around 50 percent of gross income, as a general rule. If expenses are running higher, it could indicate inefficient management, or an owner who is paying expenses such as utilities for tenants. Also look at expenses per square foot. Divide total expenses by the (Location 1423)

number of rentable square feet. Each area and property type has a normal range. Any broker, property manager, or appraiser on your team can give you this information. Expenses per unit are calculated by taking the total expenses and dividing them by the total number of units in the property. Price (Location 1426)

Be sure to verify taxes with the local assessor’s office before you finish your analysis of the property. Assessors have a habit of reevaluating properties at the time of sale and increasing the taxes. I do not like surprises. If the assessment is more than 40 percent below market price, assume that the taxes will soon go up and factor that into your numbers. (Location 1435)

Similarly, watch out if rents are dropping and most leases for major tenants will come due in a year or two. The value of the property will soon fall unless the market changes or you do some fancy negotiating. (Location 1448)

To find out exactly what the tenant is paying—and what tenants’ actual security deposits are—be sure to have estoppel letters sent. Then check for discrepancies. Estoppels are used in most commercial transactions, but are very rarely used in multi-family transactions. (Location 1473)

Replacement Reserves Be sure to include replacement reserves in your analysis. Your lender will require that you set aside a certain amount of money in an escrow account for replacement of capital items that wear out over time. Capital items are larger expenses such as roofs, siding, heating and air-conditioning equipment, parking lot repair, and so on. (Location 1476)

With a C property, you can expect significant replacements. Remember that C properties were built 25 to 35 years ago. Unless it’s a Japanese shrine that was built for the ages, it’s going to need a lot of costly (Location 1480)

attention. You will get that money back, but only after you spend it. Typically, you can request that reserves be given back to you from the lender every quarter. You must submit all paid invoices to back up your reserve request. You will only get an amount of money that equals your invoices. (Location 1481)

I’ve passed on many otherwise solid deals because the parking was either not adequate or I could not add it cost-effectively. Breakeven Analysis Before we run the numbers on a couple of deals, let’s first talk about your breakeven occupancy. This is a critical calculation, because if your property drops below this mark, your property will not be supporting you; instead, you will be using money to support it. If you have a property whose breakeven occupancy is 82 percent, (Location 1489)

you must keep it economically occupied at 82 percent to pay expenses and debt service. Notice that I said economically occupied. There are two types of occupancy: physical and economic. Physical occupancy is the obvious version. Economic occupancy is the percentage of units that are actually paying you. The other units may not be paying you as a result of a few months of free rent that you gave away in order to get tenants, for example. Economic occupancy usually lags physical occupancy by a couple of percentage points and sometimes more, depending on the type of property you encounter. The higher the breakeven point, the riskier the property. (Location 1494)

TYPES OF… (Location 1500)

Class A properties were typically built within the… (Location 1503)

Class B properties were built within the past 20… (Location 1505)

Class C properties were built within the last 25 to 35years. These properties are usually in areas with lower-income demographics. They often suffer from deferred maintenance, but… (Location 1506)

Class D properties are in the worst condition and are usually in the worst part of town. Buying these properties… (Location 1508)

SEEING OPPORTUNITY WHERE OTHERS… (Location 1511)

When you invest in commercial properties, you’ll have the opportunity to do two types of deals. The first type—which we’ve been discussing all along—is the momentum play. Those are the ones that generate cash flow right from the time of closing. You close on the deal, hand the property to the management company, and start collecting checks. I suggest that you focus on these lovelies initially, because they provide momentum to your real estate career in the form of check after check. The other type is a repositioning deal.… (Location 1512)

It’s common to reposition a C property in a B area, and turn it into a B property. You do this by upgrading the exterior and interior of the complex. Then you reposition the tenant base by getting in a better group of people who are happy to pay B rents for a B property. There is a whole… (Location 1518)

I’m not talking about slapping a new coat of paint on a property and charging more. If you reposition incorrectly, you simply pour money down the drain. If you do it properly, and give the right time and… (Location 1521)

The ultimate is to reposition a property in an emerging market, where not only the property and tenants get better,… (Location 1524)

Case Study 1: Apartment Complex You get a property package for a 144-unit apartment complex. It was built in 1984 and tenants pay all the utilities. The seller is asking a purchase price of $5.4 million. (Location 1536)

Am I saying that this quick analysis is enough to buy a property? Of course not. But it is enough to do that quick, initial review of all the deals that will soon be coming into your life. Remember, you will apply the 90/10 Rule and spend only 10 percent of your time on 90 percent of the deals. That will allow you and your team to focus the bulk of your efforts on only the most promising deals. (Location 1584)

HOW TO BORROW AN ADDITIONAL SET OF EYES Let’s say that you review a deal and (Location 1587)

get pretty excited. Start the offer process immediately, and send that deal to your mortgage broker to have him take a look at the numbers. It’s critical that you have a good mortgage broker on your team. If this person is well-connected, he knows which lenders specialize in what types of loans. This service alone is worth the one point (that is, one percent of the loan amount) that you’ll pay the broker for putting the financing together. (Location 1588)

Brokers not only save you time and trouble with lenders, but they double-check your analysis and make sure you got it right. It’s like having an expert deal analyst on your team. (Location 1604)

THE LETTER OF INTENT (Location 1615)

When we make an offer on a commercial deal, we use what’s called a Letter of Intent. It’s also known as the LOI. This short document tells the seller the terms under which you (Location 1618)

wish to purchase the deal. Many beginning investors make a big mistake right here. They think the purpose of doing due diligence is to end up making an offer. In reality, the purpose of making an offer is to allow you the time and access to information in order to perform effective due diligence. (Location 1619)

The LOI enables you and the seller to date seriously, so to speak, before you sign the Purchase and Sale Agreement and get engaged. (Location 1624)

Most likely you will be asking for a second mortgage of between 10 and 20 percent. First you must find out if your primary lender will even allow a second mortgage, in the form of seller financing. Some will, and (Location 1652)

others won’t. Such a loan is called subordinated debt. If you truly need it to make the numbers work, tell your mortgage broker to find a lender who will allow it. When you prepare your LOI including a proposal for owner financing, be sure to start the offer process in a way that benefits you the most. The first offer I always make is for the principal to be paid in five years. Notice that I didn’t say anything about interest or payments. What I’m asking for is a five-year loan to be paid off in five years in one lump sum. (Location 1653)

If that goes nowhere, my second seller-financing request is for a loan with simple interest at x percent to be paid in five years. In other words, if the seller insists on getting interest, offer simple interest to be paid with the principal in five years. This again avoids making payments. Cash flow is king in our business; you must guard it energetically. If the seller balks at that request, at least he knows you’re negotiating like a pro! Your third offer will be for simple interest payments monthly, principal to be paid in five years. Save this version for when the seller insists on a monthly payment. (Location 1661)

Your fourth negotiating position is reserved for the moment when the seller insists on acting like a bank and getting principal and interest payments monthly. Your offer then might be 10 percent owner-financing amortized over 25 years, with a 5-year balloon. Translated, that means the loan payments will be calculated as though you will pay them over 25 years, and for the first five years of payments, that’s all you will pay. However, at the end of five years, you’ll make one large payment to bring the loan up to fully-paid status. This has the effect of dropping five years of your payments to a lower level. I know this sounds like a lot of back-and-forth with the seller. (Location 1666)

Assignment Add a paragraph that allows you to assign the contract to a third party. This means you can flip a property (Location 1728)

quickly without first going through a closing. You can also use this clause to move your property from one entity to another. In most cases, I’ll take a property under contract using my company name, The Lindahl Group, LLC. Then I transfer it to the entity that will ultimately hold the property during the period I own it. I’ll name that entity [property name], LLC. For instance, if it’s the Cherry Creek Mall, I’ll name it Cherry Creek, LLC. I don’t want to spend the money on setting up an LLC until I know that the deal will go through. There’s no need to get cute with the names. There is a mistaken notion that different names will throw off attorneys who are trying to find your properties. The name won’t slow down anyone but you, as you (Location 1730)

continually try to remember whether Acme LLC is your Cherry Creek property in Denver or the Pheasant Run property in Raleigh. (Location 1736)

HOW TO PRESENT YOUR OFFER DIRECTLY TO A SELLER When possible, I like to negotiate directly with the seller and with no middlemen. This way you can feel the pulse of the negotiations and change strategies in midstream if you have (Location 1751)

to. (Location 1753)

AMATEUR MISTAKE: “HONEST PEOPLE GIVE THEIR BEST OFFER UP FRONT.” (Location 1755)

That experience taught me something else: If I do want to offer full price in a competitive situation where there are other bidders, I should throw in some other condition that the seller can say “no” to. (Location 1775)

For instance, I should have offered $2.2 million, but requested that the seller take back a second mortgage at ten percent. I didn’t need the second mortgage but it would allow the seller to say “no.” I’d cave in, and we’d be set at $2.2 million. I could instead have requested that the seller pay $40,000 in closing costs, or that furniture be left behind. Always be prepared with a couple of these add-ons. Typically, you should start your negotiations at ten percent below your strike price. That’s the maximum price you will pay for the property. (Location 1777)

The best place to negotiate is in your office. That will give you the advantage. The worst place is the seller’s home or office because that person will have the advantage. (Location 1784)

Always look to collect small advantages when you negotiate. Here (Location 1788)

are a couple: Sit with your back to the window when you can. This sometimes makes it harder for the person to watch your body language closely; it also can give you a halo effect. Sit at a rounded table and sit at 90 degrees to each other instead of on opposite sides of the table. Have everything you will use during your negotiations on the table when you start. Do not introduce anything new during the process, or it can confuse the other party and take away any momentum you’ve built. (Location 1788)

Questions to Ask Sometimes a few key questions can really help your negotiations: “What is it that you’re hoping I can do for you?” By asking this, you’re actually asking the seller how he would like to be sold. You want to know how you can make this a win/win situation for both of you. This should be one of the first questions you ask. After you ask this question and get an answer, then ask: (Location 1802)

EVEN MORE NEGOTIATING TIPS Before we talk about how to present an offer through a real estate broker, here are ten more tips to becoming an effective negotiator: (Location 1833)

HOW TO PRESENT YOUR OFFER TO A REAL ESTATE BROKER (Location 1866)

This brings up another point: Whenever possible, put in your offer through the listing broker. For the exact same reasons that I said not to co-broker, you want your offer presented by the listing broker so (Location 1890)

that he gets both sides of the commission. You will get more deals if you do this. (Location 1892)

We now have to turn it into a done deal. We go into much detail in the coming chapters, but here’s a summary of the steps coming up: (Location 2046)

If you are negotiating over a piece of property, go through the motions, even though you might already be satisfied with the price and terms. Because unless the other party has satisfied his ego, he is not going to make the deal, or he is going to find a reason not to close on the deal. The other party has to be convinced he is making a (Location 2071)

good deal. (Location 2074)

It is possible to hire companies to do the entire due diligence process for you. I suggest that you do as much as you can on your first few deals. Not only will you save money, but, more important, you’ll gain in experience and knowledge. Before you delegate, you really should know something about the task you’re delegating. (Location 2097)

Share your findings with the seller: “Mr. Seller, you did not inform me that a problem with the boiler existed prior to my inspection. Had I known that it did, I would have reflected that in my price. My offer assumed a property in total working order. Do you feel that it would be fair to compensate me for the repairs I will have to make at closing?” (Location 2304)

CRUCIAL ELEMENTS OF YOUR SUCCESS (Location 2507)

I have great news. You get good by doing three things: 1. Look at lots of deals. 2. Realize that your early negotiations with sellers are not binding. Taking the first two steps will then allow you to: (Location 2509)

3. Make offers regularly. (Location 2513)

LOOK AT LOTS OF DEALS When you begin to analyze deals, your goal should not be to get a deal done as soon as possible, strange as that advice may seem. (Location 2515)

You do that by analyzing as many deals as you possibly can. The old advice works great here: Practice (Location 2518)

makes perfect. It’s only through seeing deal after deal that you get a feel for how the numbers work. (Location 2519)

In fact, you can go to www.loopnet.com and begin to see deals five minutes from now. It’s true that most of them will not be what you’re after. That’s okay, because you’re just getting comfortable at this stage. (Location 2528)

As I mention in an earlier chapter, begin to build relationships with brokers just as soon as you can. When doing so, understand that initially you will be tested. The broker will send you a few deals to see if you will take the bait. These are usually (Location 2531)

deals the broker hasn’t been able to sell to anyone else. He’s not only sizing up your knowledge, but, who knows—you just might take the deal off his hands. Even the dog deals can be helpful to you. You’ll be able to analyze that many more deals, and you will have an opportunity to build rapport with the broker. To make that happen, it’s crucial that you handle the dog deals properly. Here are your options: Option 1: Silence. You simply don’t say anything. This is unprofessional. You must thank the broker for sending you anything, and use that opening as a chance to explain what you’re looking for. Option 2: Call the broker and say: “Mr. Broker, why did you send me that piece of junk? You know as well (Location 2532)

as I do that those numbers just don’t work. I’m not stupid, you know.” This is an excellent way to never hear from the broker again. Option 3: Call the broker and say: “Mr. Broker, thank you for sending me that deal. Unfortunately, those numbers do not fit my criteria for buying. For a deal to work for me, I need a minimum cash-on-cash return of 10 percent. What do you have in your pipeline that might fit my criteria?” You’ve just thanked the broker for sending you a deal, even if it’s no good. That’s showing professional courtesy, and it will set you apart from most of the people on his list. What you’ve also done is to start training the broker on the type of deals you’re looking for. (Location 2539)

MAKE OFFERS REGULARLY You should actively strive to put in as many LOIs as you can. It’s crucial that you get the feel of going through the process. When you talk with the broker or seller about a deal, you get to experience the start of the negotiation process. I want to be crystal clear: Even when the numbers are not close, you should still create an LOI and submit it! You won’t be doing this during your entire career, but you should focus on it at first. Remember, you’re (Location 2553)

getting your deal legs. Don’t simply write up any deal. Do first try to analyze the numbers and rate the potential of the opportunity. My point is to make sure you don’t let lack of quality prevent you from making regular offers. So write up your LOI. Then do not just fax it over blindly to the broker or seller. Instead, call the seller and say:     Mr. Seller, I’m about to fax you over an LOI for your Main Street property. I want you to know that I’ve analyzed the numbers and my offer will come in much lower than the asking price. As a matter of (Location 2557)

fact, based on the numbers that I was given and my need to have a 10 percent cash-on-cash return going into the deal, my offer will be X dollars. I know it is much lower than the asking price—should I fax over the offer? (Location 2563)

HOW TO RECOGNIZE A BAD DEAL EARLY IN THE PROCESS (Location 2572)

Let’s talk about the main reasons for deals to fall apart: Bad Numbers (Location 2577)

Dump the deals when the numbers don’t work. Here’s the trick: Be sure you’re out there making offers and not dumping them too soon. But when you realize that a seller will not come down on price, or will not give you great financing to counteract the high price, it’s time to pass on that deal. (Location 2581)

No Numbers (Location 2585)

If all the mechanical and other systems are old, it may be (Location 2604)

prohibitively expensive to maintain it. Such properties can work, but I recommend that you stay away from them until you’ve done many deals. (Location 2604)

You’re much better off avoiding all the headaches by investing in a C (Location 2616)

Properties That Have Been on the Market for a Long Time The real estate market is just too active to let gems lie around for long. If a property’s been on the market for a long time, your antenna should be active, scanning (Location 2618)

After all these eyes review a property, the chances are very low that it’s a great deal. I have found excellent properties that have been picked-over by countless earlier investors, but it’s rare. (Location 2624)

Well then! Only three months later I had three more properties. After six months I had done nine deals. Within one year of confronting my fears I had eleven deals under my belt. There is nothing better than taking action and getting over the hurdle of doing that first deal. (Location 2643)

He is paying for all of the utilities, but you can submeter the property and have tenants pay for utilities going forward. (Location 2663)

When you prepare to submeter (Location 2671)

the property, you realize that you can’t require the tenants to pay utilities until their leases expire. This results in another income gap. When you finally start to raise the rents, you notice something: Some tenants decide to move out instead of paying the higher utility bills. You come to learn that your main competition pays the utilities, and their properties are younger. (Location 2671)

As soon as you find yourself rationalizing how you can “make this deal work,” you need to dump it and move on to the next one. The only thing that you “gotta” make is rational buying decisions to increase your wealth. (Location 2679)

KNOW WHERE YOU ARE IN THE REAL ESTATE CYCLE You must always know this when (Location 2682)

buying a property. Remember, you’re not just buying into a property, but also into a market. How is the local market doing? Are new jobs coming in, and are even more projected to come in? How is the supply? How many permits were pulled in the past couple of years for the same type of property you are buying? How many of those properties are being built near your property? If the number is higher than average, you now have another question to answer: Is the market becoming oversupplied, or is it growing so fast that the absorption far exceeds supply? (Location 2683)

Is there any vacant land near your property that could be built on? Have there been any recent announcements that jobs were leaving the area? What have rents been doing for the past couple of years? Have they been stagnant or rising, or are they just starting to rise after years of weakness? These are all important questions to ask about a market before you enter it. The answers will determine your exit strategy and your buying parameters. If you’ve been in a market that’s had a long run-up, or increase, you know that it will soon be (Location 2690)

oversupplied. In that case, your exit strategy should be to hold nothing in this market. Instead, you should buy the property and quickly sell to another buyer so that you get into a cash position. Cash will be king in the coming down-market in that area. What if you have a killer deal, and you hate the thought of just flipping it? Consider flipping it and when the market rolls over, pick up the same killer deal for less, six to eight months later. (Location 2696)

DON’T LET YOURSELF BE THE CAUSE OF FAILURE This usually happens in one of three ways: 1. Not taking action 2. Being cheap 3. Doing marginal deals (Location 2703)

Don’t try to save money on attorneys, either, by hiring a relative, friend, or a general-practice attorney. Commercial real estate attorneys are expensive. It’s a cheap form of insurance, though, to keep you out of bad deals and protect you in the deals you do invest in. If it makes you feel (Location 2719)

things: You should only get into deals that are good enough to support the additional costs of attorneys and other team members. Also, your attorney can become a great source of future deals, thus earning you much more than the fees cost you. Another great way to get yourself into trouble is by being cheap with your property. When repairs arise, do them. When tenants have maintenance problems, mandate that your property manager jump on the matter. The number-one reason for tenants to leave your building is a lack of response to maintenance problems. They won’t be leaving because of the rent. (Location 2722)

I’m not only advocating that you react quickly, but recommending that you become proactive. Have a program to identify deferred maintenance on your property regularly. When you continuously correct wear and tear, your property will always look good and your tenants will notice the care that you demonstrate, in comparison with your cheapskate competition. (Location 2727)

Marginal deals have numbers below ten percent cash-on-cash return. I know I’ve mentioned this target number before. Some investors will think I’m crazy to expect to get a ten-percent minimum cash-on-cash return to get into a deal. Some realtors and owners may even tell you that it is impossible to get such a return in their area. (Location 2741)

Some commercial investors make a point of noticing where the big boys like McDonald’s® and Starbucks® locate their stores. It’s called the follow-that-cab approach, and it can (Location 2756)

work very well. These companies have site selection down to a science, and you may be able to benefit from that. At the very least, try to notice everything you can about where they locate their properties. Nothing is accidental with them. (Location 2758)

If you’re not at 100 percent, you must be on top of the situation. It’s your job to manage the manager. Even with the goal of 100 percent collections by the end of the month, it’s common to have up to three percent in delinquent rents. Just make sure the manager is actively pursuing these tenants. (Location 2786)

Occupancy The first job of your management company is to fill up the property. The second job is to collect rents, and the third job is to keep that property full. Your biggest expense will be tenant turnover. Occupancy should at least equal the average current occupancy for properties of your type in your market. If it’s lower, the management company is not doing a good job. If it’s higher, then you picked a good company. (Location 2790)

The first element of that program is to ensure maintenance is quickly taken care of. Insist that the manager call the tenant and acknowledge the request. Then, the service standard should be to fix the problem within 24 hours, and preferably the same day. If it’s an emergency, then of course you need immediate response. After the maintenance is complete, tenants should get another call to ask if they are satisfied with the work. If they are not, the work must be quickly attended to. If they are, then you’ve just turned a maintenance request into a positive impression of your property. (Location 2796)

I want to stress again that it’s not enough to be a quick reactor to tenant issues. You should insist that your manager be proactive. They should be continually watching for issues and fixing them whether tenants complain or not. Now you’re really earning goodwill. (Location 2801)

I met with the manager and the lead maintenance person to go over goals for the next 30 to 90 days. As I set one goal, I saw the manager look at the maintenance man and roll her eyes. I knew right then that my property would be in trouble if she remained as manager. I voiced my concern to the management company. To make (Location 2810)

a long story short, she soon decided to pursue other opportunities , as they say. Soon my property was thriving. (Location 2813)

He replied that it had long ago given up focusing mainly on training, and instead focused on finding people whose attitude was already great. (Location 2815)

BE THE RIGHT KIND OF CONTROL FREAK (Location 2818)

Even when you have very little money, you should be looking for ways to delegate easy tasks to family members, or to low-cost helpers from the local elderly center. As I mentioned earlier, you must only be doing deals that can support the involvement of professional specialists such as mortgage brokers and property managers. (Location 2821)

Back to your management company: You must channel your hands-on attitude toward the thorough review of certain key pieces of information that you should get every week. Here’s what your Monday Morning Report should tell you: • Current occupancy • The past week’s occupancy • Projected 30-day occupancy • Projected 60-day occupancy • Number of move-ins projected • Number of make-readies completed in the past week • Number of make-readies projected for this week • Number of work orders requested • Number of work orders completed • Number of potential tenants who inquired about leasing (Location 2830)

• Number of new applicants • Number of new leases • Amount collected for the month • Amount delinquent for the month   This report gives you a snapshot of where the property is right now, and where it’s likely to be 30 to 60 days from now. (Location 2840)

Another point about management companies: Make sure that your management contract can be terminated with no longer than 60 days’ notice. Do not sign yearly contracts, or your leverage over a bad (Location 2846)

management company will diminish. (Location 2847)

In real estate, it’s prudent to diversify by property type and location. When the economy is soft and retail is suffering, it’s often the very time when multi-family properties take off. After all, job losses often result in foreclosures, and apartments become a fall-back choice for housing. (Location 2879)

I’ll repeat a key point: The best commercial deals almost always require that a substantial (Location 2901)

down payment be made. Fortunately, the payment doesn’t have to come from your own pocket. (Location 2902)

She was describing how she owned 1,100 multi-family units in six different emerging markets across the United States. (Location 2912)

Local Banks In this category I’m including commercial banks and savings and loan companies. Even though these are the boring, traditional sources of financing, sometimes they are your best choice. (Location 2926)

Local banks are good to use for repositioning projects. They typically have favorable construction loan (Location 2929)

terms and like to do business with people they know. If you are investing in areas outside of your home base, I suggest you set up a meeting or lunch with a local lender whenever you are in the area. The better they know you, the higher the probability that you will get the loan. (Location 2930)

Here are some general guidelines: When you need money to rehab a property, consider local banks. Go to national lenders when you have a straightforward cookie-cutter deal, and approach conduit lenders when you require the lender to be more creative in its underwriting or due diligence process to get you approved. (Location 2945)

YOUR MORTGAGE BROKER—MONEY WELL SPENT (Location 2948)

Mortgage brokers are to investors what sports agents are to athletes. They’re expensive, but you’re paying for their vast knowledge and their ability to present you in the best possible light. Good brokers have a long list of contacts at all three of the types of lenders I mentioned earlier. Not only can they help you to judge whether the deal you’re reviewing is a winner, but they’ll tell you right away whether it can be financed, and on what terms. This saves you time and money. Cultivate these people because they also know everyone in town. Need a quick drive-by on a property, or a reference to a good management (Location 2949)

company or attorney? Your broker will know. (Location 2954)

Bridge These loans bridge the gap between needing to close now on a property and eventually getting a permanent loan. (Location 2977)

Your bridge lender will recognize the quality of the deal and the predicament you’re in. This lender (Location 2982)

will be happy to finance the property—for a higher interest rate and with your property as collateral. (Location 2983)

I financed a lot of commercial properties with hard money at the beginning of my career. I discovered that if my deal was good enough, these lenders would give me 100 percent financing, and they would act quickly. I got into a few properties that generated excellent cash flow. That allowed me to refinance them for much lower rates and pay off the hard-money lenders. Now I had even better cash flow. (Location 3002)

The great thing about commercial real estate is that much of the lending decision rests on the merits of the property and not on you personally. Nevertheless, conventional lenders do pay some attention to the person requesting the loan. Therefore they will want to see your own financial statement. In addition, they’ll want a schedule of real estate you own, and will check your credit history. (Location 3014)

Insider Tip Many investors don’t realize that the term sheet is negotiable. Even though it comes printed on official letterhead, you don’t have to take what they give you. If your deal is good enough (where did we see that point (Location 3023)

before?) there will be other lenders who would love to do business with you. If there is something in the term sheet that you would like to change, call the lender and start negotiating. If you’re not comfortable negotiating the first time out, then have your attorney do it and listen in on the call. Attorneys who specialize in real estate are well-versed in negotiating term sheets. One key negotiating point is the amount of money that the lender will require up front to start the process. It is likely to be between $7,000 and $25,000. One lender wanted $95,000 from me and I got ’em down to $9,000. (Location 3025)

Make sure the lender orders the appraisal as soon as possible, because it can take from four to six weeks to complete. If there is anything that consistently holds up deals, it’s that appraisal. (Location 3032)

Private Money This is my very favorite financing method. (Location 3156)

When you have multiple partners, it’s called a syndication. There are a number of very specific rules you must follow to syndicate deals. (Location 3163)

From Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor, (Location 3267)

I suggest that you make it a goal to do something that is out of your comfort zone on a regular basis. Meaning daily. Try making an extra offer this week; try going to the Chamber of Commerce cocktail hour and telling three new people what you do; try standing up in front of your local real estate investing association and describing the kind of deal you’re looking for. (Location 3307)

LIVE WHERE YOU WANT, BUT INVEST WHERE IT MAKES SENSE (Location 3312)

A REAL LITMUS TEST OF QUALITY If your management company cannot provide you with frequent reports on all aspects of your property, it’s not a good management company. They must have their act together to provide frequent reports. They need to have systematized their business. (Location 3326)

“Our guy was sick today, so that’s why they’re late,” or “We’re training a new person to get the reports out.” All fine and dandy . . . for some other investor to endure. You, on the other hand, should only go with the outfit that delivers all the reports on time, period. (Location 3331)

It’s interesting that this same litmus test applies to property sellers, too: If you have to beg and cajole the seller to deliver various documents during the due-diligence phase, the chances are, oh, 95 percent or better that you’re dealing with a substandard property. (Location 3333)

You cannot delegate the marketing, financing, and managing aspects. I’m not saying you must do every aspect of them yourself. By all means hire people to assemble and distribute the marketing materials, schedule meetings with brokers and private money lenders, and prepare property management reports. (Location 3348)

I caution you elsewhere in this book to make sure that the person you’re negotiating with also gets a good deal. (Location 3364)

was given a simple but great piece of advice by my mentor, Mark Shavel: Always pay your subcontractors fast. (Location 3371)

Pick up a book called Flow, by Mihaly Csikszentmihalyi. (Location 3390)

When you are starting out, you should be making at least two offers a week. (Location 3399)

do. But what if there are no decent properties to make an offer on? Then you make an offer based on the current numbers. Explain to the seller or broker why you’re making such a low-ball offer, and ask if you should still submit it. I mentioned this technique earlier, and how you will occasionally be told, “Okay, send it to me.” (Location 3399)

At the beginning, you’ll do very few of the deals you make offers on. You have yet to establish your relationships, and many of the deals you’ll first be exposed to are not very good. Then your relationships start kicking in—if you follow my advice in this book. (Location 3406)

THE THREE THINGS THAT ALL GOOD BUSINESSES DO (Location 3510)

Create New Channels (Location 3513)

When my mortgage broker presents me with a couple of financing opportunities on a deal, I’ll usually take the one that requires less of my cash, even if it means somewhat less ultimate profit. (Location 3529)

The Assistant This person will work side-by-side with you in your office or be available on a moment’s notice. He will be the most important person you add to your team early in your career. (Location 3558)

The Marketer The second person I put on my home team would stuff and stamp envelopes for me so that I could get them out to motivated sellers. (Location 3579)

When this person came on my team, I finally had a constant flow of letters going out the door weekly. (Location 3581)

One of the best uses of your time will be to challenge yourself to see just how much you can delegate and still monitor effectively. When you get good at this, you will not believe how it contributes not only to your success, but to your peace of mind. (Location 3588)

Brokers (Location 3592)

Cultivate relationships with as many brokers in each of your target markets as you can. Diversify your relationships, just as brokers would never dream of relying on a single buyer for their deals. (Location 3595)

Where do you find the good brokers? One source is www.CCIM. com. That stands for Certified Commercial Investment Member, and it’s a designation held by only six percent of commercial real estate practitioners. Brokers work hard at a series of courses to earn the CCIM designation. It’s a pretty rigorous program and is prestigious in commercial real estate circles. The CCIM website lists CCIMs in each market. (Location 3600)

At the same time that you are checking out the source above, go to the commercial property websites at www.loopnet.com and www.propertyline.com. There, not only can you view a variety of current (Location 3603)

deals, but you can also get a sense of which brokers are active in a market. Remember in an earlier chapter I recommend that you train brokers who send you bad deals by calling them, thanking them, and explaining what you’re looking for. You can use the same approach here. Just call a broker who listed a deal on the Internet and say “I buy properties based on the following criteria. . . . Do you have any other deals that meet these criteria, either on the market now or coming on the market soon?” You’ll strike out a lot, but it only takes one good commercial deal to make your entire year. Plus, the Internet is where the active brokers post their listings. (Location 3605)

The deals you see on the Internet have been largely picked-over. Still, I’ve been successful buying properties off the Internet from two sources. The first is residential brokers. Many of them have not built a list of commercial buyers, so they immediately put properties on the Internet to see if they can sell them quickly and easily. They tend to price the properties so they make sense. The other source is property owners. Some owners are attracted by the lack of middlemen and fees. I’ve done a couple of really good deals directly with owners who are just looking to move their properties (Location 3612)

quickly. (Location 3617)

Attorneys You will need two types of attorneys in a market: The title attorney or closing attorney will review the deal paperwork, and will create your buying entity to protect your rights. The other attorney will handle any litigation. The title or closing attorney will be easy to find. Every market has good ones. Get a referral from your local savings and loan, mortgage broker, or property manager. Always use a local closing attorney when doing business in another state. (Location 3618)

Make sure you have someone in your corner who knows the state and local laws cold. That person will review your purchase and sale agreement, lender’s term sheet, title, survey, and all other closing documents. She will even review the service contracts in place at the property. (Location 3626)

Other Deal Team Members You’ll work with an insurance agent and title agent in the course of doing a deal. Cultivate strong relationships with them, too. They are often well-connected in town, and see high volumes of deals. (Location 3644)

The watchwords for handling these people are exceed expectations. That means: • Under-promise and over-deliver on investment returns. • Return phone calls and e-mails very promptly. This is not the place for delegation. Working with your money partners is definitely a highest and best use of your time. • Send them detailed monthly reports. They should get a profit-and-loss statement, a budget comparison, a variance report, and an executive summary. (Location 3668)

Let’s say you put a property under contract in an emerging market that is 200 miles away. The numbers seem to work and pictures of the property look good. Your next step is to call the management company that you plan on using and ask them to shop the property. I want them to go over to that property, pretending to be a potential new lease applicant. They will walk through the property and mentally note everything that I should be concerned about. (Location 3700)

A mistake that I see many investors make is to get so excited about putting a deal under contract that they skip the step of having the property shopped. They eventually do find out about the problems, but by then they’ve invested more time and money. (Location 3707)

Your management company will be happy to provide this service, because they look forward to being manager of the property as soon as you close the deal. (Location 3709)

Closely watch your collections, occupancy, and expenses. If the management company starts to get lazy or does not perform up to your expectations, you will see poor results in these areas first. Give them one warning to meet minimum (Location 3716)

standards. If they don’t meet your specific performance goals for the next period, fire them. (Location 3717)

After you raise that problem with the seller, you may very well have a contractor visit the property to determine the likely cost to fix the problem. The best way to find contractors in the local market is from referrals from brokers, property managers, attorneys, and all of your other team members. (Location 3720)

A good contractor is like gold. Do not become a doormat, but do keep (Location 3723)

is always to pay them on time, as I mentioned earlier. Don’t pay them before the job is complete, but write out that check the instant the job is done. (Location 3723)

Your maintenance specialist should be HVAC certified. This will save you a lot of money on subcontracting. It would be good if he held (Location 3741)

electrical certifications as well. A good maintenance staff will not only save you money, but will keep your tenants happy. They’ll get repairs done quickly, which will help to justify above-market rents. In turn, that will enable you eventually to sell the property for top dollar. (Location 3742)

Fill your property with good tenants. Your manager must give you a written marketing plan that shows what they plan on doing to get traffic into your property. They should have proven closers on site who have the ability to convert applications into leases. (Location 3786)

Your manager should give you a detailed tenant retention plan that identifies monthly activities focused on keeping tenants happy and in the property. (Location 3791)

As you now know, lack of response on tenant work orders is the number one reason that good tenants leave. (Location 3798)

property. You must see a regular accounts payable report, with logs of these payments happening like clockwork. (Location 3808)

Speaking of property type, one of the highest designations managers (Location 3841)

can get is Certified Property Manager, or CPM. It is a distinction granted by the Institute of Real Estate Management and can be researched at www.irem.org. (Location 3841)

HOW TO INTERVIEW A MANAGEMENT COMPANY (Location 3861)

You should expect an executive summary, a profit-and-loss statement, and a budget (Location 3908)

“Do you have your own maintenance staff or do you subcontract?” (Location 3909)

If they subcontract, you’ll likely pay much more for repairs and maintenance than if they have their own staff. (Location 3911)

Sometimes property management companies make more from their maintenance department than from their management fees! This happens because they either overbill you for repairs, or they do more repairs than necessary. They might even bill you for repairs that were never done. (Location 3913)

KEY INFORMATION THAT YOU NEED AND HOW OFTEN YOU NEED IT (Location 3979)

Here are several other recommendations that will lift you out of property management and into asset management, where the big money is. (Location 4037)

Know your exit strategy when you purchase the property. Is this a fix-and-flip, a long-term hold, or a repositioning to its highest and best use? (Location 4044)

Know the market where you buy. That means knowing your tenant profile, your competition, the current supply-and-demand situation, and also trends into the future. It’s a lot of work initially, but just think how much easier it will be to buy your second property in that market! • Visit your property every three to six months. It may be more frequent at first, but when your monitoring systems begin to hum, those visits will become further apart. I like to arrive unannounced. That way I can catch people in their regular routines, and see the property as it is normally run. Planned inspections can contain a lot of theater, with a sudden flurry of activity to impress the boss—you. (Location 4048)

If no one expresses interest at the higher price, smart investors pull back to more of a market price. Dumb investors keep their price right up there with their ego—too high. (Location 4088)

HOW TO KNOW WHEN TO SELL (Location 4095)

Always Be Watching Job Growth and Supply (Location 4103)

Job growth is a great leading indicator. Just as canaries would die and thus warn miners when it was time to get out, you must watch the job numbers closely. I’m not talking about job layoffs: Instead, when you notice that growth in jobs is leveling off, it’s time to look hard at the market and make a selling decision. If you actually see declines in jobs, well, you really need to sit up straight. (Location 4106)

How do you get these numbers, by the way? Regularly check in with the building department and economic development department. Watch for trends by comparing the numbers with previous reports you received. (Location 4109)

Though the market continued to climb, we began to notice that permits were being pulled for properties of our type within a mile or two of our property. That was another leading indicator that four (Location 4113)

new properties would come online near us within the next two years. (Location 4114)

Our regular check-in with the building department gave us the information we needed to know that now was the time to sell. We could have stuck it out if our plan were to hold properties in that market for the long term. (Location 4122)

Leave Some Meat on the Bone This is solid advice, regardless of your exit strategy. (Location 4125)

Here’s an easy way to look at it: Sell when your friends and family say you’re crazy. (Location 4133)

The first thing to do when you decide to sell is to create a target net operating income. You must know where you need that NOI to be in order to get the sale price that you want. Determine this by taking a look at recent sales in the area for properties like yours. If you don’t already know, ask your broker network for the current cap rate for properties like yours. Remember, you take the NOI and divide it by the cap rate to determine value. (Location 4171)

If you still have a couple of years or more of ownership, claim as much as you can as operating expenses in order to save on taxes. If you’re close to a sale, then claim as much as you can as capital expenditures so that you can keep your NOI higher and thus maintain a higher selling price. (Location 4201)

Want a real insider tip? Start preparing for the sale from the very moment you purchase the property. Set up a system of folders to track your income, expenses, contracted services, repairs, and all other items you reviewed during the due (Location 4211)

diligence period. You wanted to know that information, and probably had to wait while your seller assembled it. You will now hand the whole thing—all professionally packaged—to your prospective buyer, and blow him away. (Location 4213)

DO YOU NEED A BROKER? (Location 4218)

My answer is a firm maybe. What with all the commercial-property web sites out there now, it is indeed possible for owners to sell their properties directly. You will get callers and will save a commission. Before you conclude that this is the way to go, I have three questions to ask you: 1. Do you have the time to sell it yourself? Maybe you do. If so, why aren’t you spending that time researching other high-potential markets and building your information networks there? 2. Are you experienced enough to sell the property yourself? Do you know what questions to ask a buyer? Do you know what information you’ll need from a buyer (Location 4219)

and what actions you need the buyer to take to ensure that you have a good transaction? (Location 4225)

how to find the right broker through whom to sell your deal. Your first choice should be other brokers with whom you’ve been communicating in that market. (Location 4246)

If no broker fits that description, your next choice is to seek out a broker with whom you want to do business. When I enter a marketplace, I look for two types of brokers: the movers and shakers, who do most of the business in that market, and the up-and-comers. A quick way to get the attention of the movers and shakers is to sell your deal through them. This establishes you as an instant performer, an instant revenue source. (Location 4251)

Perhaps you are selling your one property in a market you have no intention of staying in. In that case, you can also consider offering your deal through one of the big national firms. These outfits do have major databases of potential buyers and a lot of marketing clout. Then again, the local brokers know most of the local investors. You’ll just have to interview a few and find out what their strengths and weaknesses are. The first objective is to establish what price they think they can get for the property. Compare that with the price you determined earlier, (Location 4257)

Find a broker who comes in at the same range you did. He may even say that you could sell for a higher price, but that it will depend on the right buyer coming along at the right time. That’s a realistic statement and a good sign. Conversely, beware of the broker who tries to undercut your deal. He comes in at the lower end of your range and tries to sell you on listing it (Location 4265)

and pricing at that lower point. This person is looking for a quick commission. He knows he will not have many expenses associated with your listing because it will sell quickly. He’s doing you no favors. If you’re in the position of having two or three brokers who pass your test and are finalists, pick the beauty queen based on the best marketing campaign. Make an appointment with each broker and ask him to sell you your own property. That’s right, ask him to pitch you the property so you can see what he will be telling potential buyers. The broker should have a multicolored, multipage brochure made up, describing the property, selling the highlights, and laying out the numbers. If a broker can’t be bothered to make a brochure because (Location 4268)

he’s not sure if he will get the listing, that broker is not the right one. Look for hungry brokers who are happy to go the extra mile. Other questions to ask about their marketing campaign are: how big is their list; how big are the lists within the office (not the broker’s personal list); what web sites will the property be featured on; and will they advertise in the classifieds. Good marketing campaigns are multidimensional, as you know. (Location 4275)

Commissions can go as high as eight percent of the purchase price. More common are commissions around six percent. As the price breaks the million-dollar mark, commissions start to trend downward. (Location 4281)

greedy: Some will tell you that you must pay a six-percent commission when a four-percent one is warranted. They’ll justify it by saying: “Four percent is too low; nobody in this city will cobroker this deal for a four-percent split.” (Location 4290)

What the broker just told you is that he doesn’t believe he can sell it on his own. He’s going to rely on his competition to bring their buyers to the table, too. You do not want this broker. (Location 4292)

The general term of a listing agreement is 180 days. Some will try to get you to sign for a year. Don’t do it. If you do, you’ve just put yourself into a position of weakness. (Location 4298)

HOW TO RESEARCH YOUR BUYER (Location 4357)

The most important question to ask is, “Is he a proven closer?” More specifically: “How many deals of this size has he closed in the past?” This will give you an indication of the buyer’s experience and the probability that he will close on your deal, too. The next key question is to find out where he will get the money for the down payment. It’s smart to require proof of funds. That means that the seller will show you a letter from his lender, indicating that the down payment funds are in fact available. (Location 4359)

Also ask for a financial history from the buyer. You’re unlikely to get a pile of tax returns, but it would be reasonable to get a letter from his lender stating that he is qualified to take down the deal. Make sure you get a big enough deposit to keep the buyer in the deal. Many buyers naturally want to put down as little as possible, and some will even suggest with a straight face that a few dollars should be sufficient. (Location 4374)

If you’re smart, you’ll get a down payment before the due diligence period and then ask for more money when the buyer signs off on the due diligence. This would mean that all of the buyer’s deposits into the deal would be considered hard—in other words, if he walks away, he loses it all. (Location 4379)

For a few dollars you can even go to a service such as www.elance.com and hire professional researchers to do a comprehensive web search on anyone or anything. It’s cheap insurance. (Location 4404)

You’re now very close to selling your deal. Don’t blow it by failing to follow up. If you’ve done your due diligence on the buyer and he checks out, you’ll be moving forward with the purchase and sale agreement. Then the due diligence period will involve lots of questions and back-and-forth . The buyer’s lender will have its own list of To Dos. (Location 4409)

Stay on top of the dates for the inspection, appraisal, survey, and title work. Know when they were (Location 4414)

They can be to review certain chapters, then to start getting hooked into your local real estate investing association. Identify a market that looks promising and begin to cultivate relationships with brokers there. There are only two things that will get you to serious commercial real estate wealth quickly: The first is taking action. Without action, (Location 4442)

everything is just an empty dream. The second is increasing your knowledge. If you’re really impatient about getting on the fast track to becoming a commercial real estate investor, you should consider attending a multiday live event. There you can get every single question answered and concept clarified, when otherwise they may be holding you back from taking action. (Location 4444)