Commercial Real Estate Investing For Dummies, 2nd Edition book cover

Commercial Real Estate Investing For Dummies, 2nd Edition

By: Peter Conti and Peter Harris Published: 04-18-2022

Commercial Real Estate Investing For Dummies, 2nd Edition has the knowledge you need to start growing your real estate portfolio. You'll learn foundational strategies, tips, and tricks for investing in all sorts of commercial properties, from apartments to shopping malls. You'll also learn about financing and how to work with business and investment partners while protecting your own interests with contracts.

Articles From Commercial Real Estate Investing For Dummies, 2nd Edition

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8 results
Commercial Real Estate Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 03-10-2022

Use this handy Cheat Sheet to learn how to sound like a pro real estate investor (even if you’re just getting started.) Then keep it on hand to make sure you’re staying on top of every commercial property you acquire!

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How Management Can Cause a Commercial Real Estate Investment to Fail

Article / Updated 03-26-2016

When you begin your quest for acquiring a commercial property, try to "lead" with a professional property management company — find reputable property management for the type of asset that you're pursuing before you even make offers to purchase. If you can't find experienced and trustworthy property management in that city, don't buy the property. It's that simple. If you spot any of the following management warning signals, take action immediately: Your management is failing to manage. You may notice that the management isn't holding the onsite property manager accountable to the expected promises and actions, isn't meeting with the managers consistently, and isn't reading the property reports regularly. You, as the owner, can take action by starting at the top of the food chain. Get the property management company's management in conference immediately. Be very specific about your concerns. Don't depart until solutions have been agreed on and delegated. Your management often seems to be clueless and is always ineffective at operating the property efficiently. With ineffective management, you'll have higher-than-market vacancies, higher expenses, late property reports, poor communication, and arguments. In the end, you won't have a chance to be profitable. Start interviewing other companies for hire and cut your ties with the current company as quickly as possible. When hiring professional property management, make sure that the candidate has extensive experience in managing the type of property that you're acquiring. Your property manager is ripping you off. It's unfortunate but true: Your property manager can steal from you, lie to you, and hide things from you. The consequences of this disrespect can be devastating. How do you spot a thief? Have your finances audited at least once a year. You can also monitor the cash like a hawk by verifying bank deposits and receipts to checks. It's also smart to visually verify completed work and physically verify rented space or units. You're being managed by your own property. If you're managing a piece of property yourself, it's easy to lose perspective of who you are. When your property begins to run you instead of you running it, you'll start making business decisions based on current circumstances rather than from your set business plan and financial goals. To avoid having your property run you ragged, set appropriate boundaries. Don't take work or your work attitude home. Have a phone dedicated for work and shut it off at quitting time. Have an after-hours service set up or have others on-call for after-hours service calls or for other non-emergencies. Your property doesn't have a business plan. A business plan guides you and your property in the right direction when it comes to making business decisions. It can help you determine when to study the competition, figure out your property's strengths and weaknesses, and set performance benchmarks that keep other management members on track. If your property doesn't have a business plan, from what basis are you making business decisions?

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Commercial Real Estate Investing Lingo

Article / Updated 03-26-2016

Commercial real estate investing is all about numbers. In order to evaluate and analyze a commercial real estate investment, you need to know a few important numbers, what they're called, and how to figure them. Having these terms under your belt is crucial on two fronts: Most likely, you'll use a real estate broker to help you locate and close the deal. Real estate brokers know and use most of the terms mentioned here. If you can speak their language, you gain instant credibility and a relationship advantage over someone without this vocabulary. Just by increasing your word power, you gain increased confidence, which enables you to make sound, efficient investment decisions and gives you an increased ability to hold your position, especially in negotiations. Here are the names, numbers, and equations you need to know: Capitalization rate: The capitalization rate is a measure of a property's performance without considering the mortgage financing. Also known as the cap rate, it's your net operating income divided by the sales price. Cap rates tell you how much you'd make on an investment if you paid all cash for it: Cap rate = net operating income ÷ sales price Cash flow: Your annual cash flow is net operating income minus debt service. You can also figure monthly cash flow by dividing your annual cash flow by 12: Annual cash flow = net operating income – debt service Monthly cash flow = annual cash flow ÷ 12 Cash-on-cash return: This is the velocity of your money — how long it takes for your down payment to come back to you. To find your cash-on-cash return, divide your annual cash flow by the down payment amount: Cash-on-cash return = annual cash flow ÷ down payment Debt service: Debt service is calculated by multiplying your monthly mortgage amount by 12: Debt service = monthly mortgage amount x 12 Effective gross income: You can find your effective gross income by subtracting vacancy from gross income: Effective gross income = income – (vacancy rate % x income) Gross income: Gross income is all of your income, including rents, laundry or vending machine income, and late fees. Net operating income (NOI): Your net operating income is one of the most important numbers when analyzing any deal. The NOI is the dollar amount that's left over after you collect all your income and pay out your operating expenses. This money is used to pay the mortgage. Your NOI is your effective gross income minus operating expenses: Net operating income = effective gross income – operating expenses Operating expenses: Your annual operating expenses of the property typically include taxes, insurance, utilities, management fees, payroll, landscaping, maintenance, and supplies. This category doesn't include mortgage payments or interest expense. Vacancy rate: Your vacancy rate is the number of vacancies divided by the number of units: Vacancy rate = number of vacancies ÷ number of units

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Different Types of Commercial Real Estate Investments

Article / Updated 03-26-2016

Most people think commercial real estate is all about apartment rentals. Even though residential properties are a big part of commercial real estate investing, other types of properties make for excellent investment opportunities. Commercial real estate is defined as any real estate that's bigger than one house on one lot. So even if people live in the property, it's still commercial as long as it's bigger than one house. The following sections show the different types of commercial property. Apartment buildings (also known as residential properties) Residential properties include everything from small apartments (five or more units) to huge multi-story apartment buildings. What's great about investing in apartments is that they're easy to find, banks love to lend on them, and they're great cash-flow generators. Offices and warehouses Offices and warehouses are great for investing because they have triple net leases, in which the tenants pay you rent plus All maintenance and repairs The insurance on the propertyThe real estate taxes Typical triple net leases are 5 to 20 years long with rent increases every couple of years. That can be a disadvantage as well as an advantage, and here's why: Say the lease is for 10 years. If your neighborhood experiences explosive growth over the next five years, you won't be able to capitalize on what's happening because you're locked into a 10-year lease agreement. But overall, triple net lease investments are great for investors. Retail centers Most investors like retail centers — shopping centers and malls — because, like office and warehouse properties, they're leased out on a long-term triple net lease basis. As an investor, your rates of return won't go down over time as the taxes and expenses go up. In fact, as rents go up over time, your returns just keep getting better and better. And as in most triple net lease agreements, rent increases are built into the agreement with the tenant. Hotels and resorts This asset type isn't the best place to get started, but many experienced investors find it to be a fun and profitable area. Of course, other investors have also lost their shirts, so make sure that you know what you're doing before jumping in. One way to get started in this niche is to invest in the property and then lease it out to another company that will operate the hotel or resort. Why? Running a hotel is a business, not an investment, and running a business brings with it a whole new set of rules, regulations, and headaches. Land development Land development is one of the most exciting types of commercial real estate. However, it can also teach you to some quick and painful lessons if you jump in without knowing what you're doing. By taking land that isn't yet fit for building through the approval process, you can dramatically increase its value. Commercial real estate investors call this "taking it to the map." Remember that it also makes sense to start small and work your way up with land development. Starting off small allows you to get comfortable with the land development process before going out to raise millions of dollars.

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Tried and True Tips on Thriving in Commercial Real Estate Investing

Article / Updated 03-26-2016

The most beautiful property could be a part of the worst real estate investment you've ever made. Remember that commercial real estate investing is all about the deal, the terms, and the return on investment. Here are some tips for successful commercial real estate investing: Be an investor instead of an accumulator of commercial properties. The whole idea of making investments is to produce an income or a profit. So, if you buy a property that produces no income or profit, you really just acquired a property (instead of making an investment). Understand that every property has a lifetime. One of the biggest mistakes you can make as an investor is to ignore the fact that over time, you'll have to spend money on the upkeep of the building. The building may need a new roof, and the electrical system may need to be updated. Every building goes through these phases; some more so than others. So make sure you have a long-term plan to handle such repairs. Focus on one investment type at a time. Especially when you're first starting out, you should focus on one type of investment: apartments, offices, retail, land, or whatever. Each deal needs and deserves your undivided attention. It's better to be master of one than average over many. And who wants average-performing properties anyway? Consider environmental problems. A huge potential concern when owning commercial property is hazardous waste problems. Property owners have the primary responsibility for fixing such problems, even if the current property owner didn't cause them. If at some point you held an ownership interest in a property, you're potentially responsible for paying for the cleanup of it. The costs for an environmental cleanup and disposal can run into the millions of dollars. Obtain an environmental report from environmental assessment companies as part of your due diligence if needed. The reports cost a bit, but it can save you even more. Get a mentor so you can learn from his or her mistakes. Mentors can save you from making huge mistakes, identify when you've missed due diligence items, and connect you with resources that you otherwise wouldn't have immediate access to. Determine whether you and your assets are adequately protected. Unfortunately, as life happens, so do lawsuits. That means you need to do everything you can to protect yourself. Ask yourself the following questions to determine whether you're protected: • What do you have at stake if you lose a lawsuit? • How is your property protected? • Is your personal property (for example, your home) protected? • Are your other investments totally separate from each other so that one lawsuit doesn't affect the other investments? Don't guess when it comes to the answers to these questions. Talk to a lawyer to ensure that you're protected if you're sued. If you're in a partnership deal, do your best to finance your deal with a non-recourse loan. Non-recourse means that you aren't personally guaranteeing the loan. This gives you two distinct advantages: it allows you to be taken off the loan if the partnership goes sour and, if the property fails, it won't be tied to you personally.

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Myths and Questions about Investing in Commercial Real Estate

Article / Updated 03-26-2016

Like any complicated business, commercial real estate investing has its share of myths and questions. Knowing this information brings forth some valuable truths that will rescue you from the trappings of confusion. The following are some pretty common misconceptions about investing in commercial real estate: You must start off in residential real estate to get into commercial real estate. There's no rule, rhyme, or reason stating that you must first invest in residential real estate in order to make the leap into commercial real estate investing. These fields are two different animals, two different languages, and two different consumers. It's like comparing apples to oranges. Only the rich need apply. As you can probably imagine, this myth is just that: a myth. It isn't true that you have to be rich to get involved with commercial real estate investing. You can be as creative in your financing here as you can be when investing in homes. This game is only for big-time players. In commercial real estate it doesn't matter where you start, and it doesn't matter if you only want to devote part of your time to do it. Having a full-time job or being a single-parent doesn't matter either. Commercial real estate investing is riskier. Compared to what? If you compare it to stocks, do you have control over the companies you own stock in — in areas such as income, expense, debt, management, and insurance? Probably not. However, you do have these five controls in commercial real estate investing. If you compare it to residential real estate investing, what happens if you rent out your single-family home and the tenant moves out? What's your monthly income then? The answer: Nada. If, on the other hand, you own a 24-unit apartment building and one tenant moves out, what's your monthly income? Answer: 23 paying tenants worth of rent! What's more risky? Commercial real estate is too complex for simple folks. Again, this isn't true. Remember when you got your new smartphone? You had no idea how to use it. It seemed too complicated, and it had entirely too many buttons. But there was a manual to get you started. After that, through repetition and practice, what seemed much like a puzzle is now fully understood and appropriately used. Getting to know commercial real estate investing is the same concept. You have quite a few things to master, but it isn't rocket science. Real estate, like the rest of life, does have risks. If it didn't, it probably wouldn't be as fun. And it surely wouldn't pay off with the incredibly strong rates of return that it does.

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Commercial Real Estate Due Diligence

Article / Updated 03-26-2016

Due diligence is the process of "doing your homework" on the property that you're thinking about buying as an investment. It's the process of checking, double-checking, and confirming any important information that was used to determine whether the property is a good, average, or bad deal. Due diligence can be broken up into three main specialized parts: physical, financial, and legal. Physical inspection For the physical part of due diligence, where you actually walk around and inspect outside and inside the property, you should hire a professional inspection company. We believe that the physical part is the most important of the three because these types of mistakes are the most costly to correct and are the most damaging to the property's long-term value. The best way to find a property inspection specialist is through a referral by an individual or a company that has experience with this part of due diligence. You can also ask your local commercial real estate broker for a referral. If you have no luck there, try entering the key word "commercial property inspection" into your favorite search engine. A handful of sites is bound to pop up. Financial investigation When it comes to the financial part of due diligence, hire an accountant who has real estate investment experience. Accountants aren't all created equal. Qualify your accountant by verifying that he or she has commercial real estate accounting experience, not just single-family residence accounting experience or general business experience. In some cases, the investment you're considering may be one of your largest. Would you trust the advice of an accountant with little experience in one of your largest financial endeavors ever? By far, the best way to find a qualified accountant is by referral. Call on one of your investment buddies and check out who they're using. And again, make sure that referral has commercial real estate accounting experience. Here's a tip to stand on: Don't believe any financial information or books and records given to you by the seller. Double-check everything. Turn things inside out and hold each financial statement up to the light for proof. We recommend that you get deeply involved in the financial aspect of due diligence. Verify each dollar of income reportedly coming in and verify every dollar reportedly spent on the property by reviewing actual billing receipts. Legal inquiries The legal side of due diligence is most often done by an attorney and aided by a reputable title/escrow company. These folks look at things such as the following: Defects on the title and survey Any potential environmental problems Proper and improper special uses and encroachments that affect the property These are all potential deal killers. Be sure to have tenant leases thoroughly reviewed and audited. After all, when you buy a commercial property, you're essentially buying the leases and the property comes for free. Contracts imposed on the property, such as employment contracts, service contracts, and warranties, all need to be scoured over with a fine-toothed comb. All attorneys are not created equal. Attorneys specialize in areas of law. Please don't have a family law attorney represent you when purchasing a large shopping center. That's like having a foot doctor give you an eye examination. Instead, hire a real estate attorney. The real estate attorney that you hire doesn't have to be local, but needs to be familiar with laws in the state in which the property is located. As for selecting a title/escrow company, that's a little easier than selecting an attorney. Title and escrow companies, by law, are neutral parties; they can neither favor the buyer nor the seller (nor the real estate agent). If you enter the key words "commercial title companies" into your favorite search engine, you'll get a few to start with. We find it advantageous, however, to work with an office that's local and is familiar with closing practices of that city or state.

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Ways to Mitigate Risk in Commercial Real Estate Investments

Article / Updated 03-26-2016

Is commercial real estate risky? You bet it is, but risk is a facet of doing business — any business. You can't avoid it. But here's the good news: Risks can be managed to levels of great certainty. Being successful in commercial real estate nearly always means taking calculated risks. You may have thought that risk-proofing was impossible, but you'd be surprised at what a little knowledge can do to your investment portfolio. Do proper due diligence. Due diligence is the process you go through when verifying the financial documents of the property, performing a physical inspection, and checking out the legal pieces of the property, such as the title. Ninety percent of all deals die during due diligence. So, if you don't do a thorough job, the consequences can be costly. You may end up buying a property that's a money pit. However, when done properly, due diligence can actually help you make your sweet deal even sweeter. Don't overpay. Overpaying is common among new investors. Don't be the investor in a deal where the agent sets a record price on selling a property! If you're buying apartments, make sure that you're aware of what price you're paying per unit. If you're buying a shopping center, make sure you know how much you're paying per square foot. In both cases, see what the recent market closings value your property at. Paying too much will lock up the property's cash flow for a long time. Have expert market knowledge. Knowing your market like the back of your hand sets you up for success. Before you close on your deal, make sure you know the following: How competitive your rents are with other similar local properties When and if there's a "slow season" for rentals so you can plan ahead Whether there's rent control in your city, which would inhibit you from raising rents as you thought you could It's also a good idea to inquire on crime statistics on the property in question by calling the local police department. Hold your goals loosely. You should keep your investment's exit strategy flexible at all times. In fact, have several exit strategies ready at any given time. Market conditions change. Your personal circumstances can change rapidly as well. So, don't get wrapped up in executing just one exit strategy, because it may no longer apply. Know where you are in the real estate cycle. There are four parts to any real estate cycle: expansion, contraction, recession, and recovery. Each part of the cycle demands that you pay detailed attention to your investment decisions. Understanding real estate cycles helps you take the correct actions with the best timing. There's nothing like timing the market like a pro.

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