Jun 12, 2013
David Morgan
Comments Off on Property Management|Hire Out or Do It Yourself

Property Management|Hire Out or Do It Yourself

As the owner of investment property, you have the choice of hiring a professional property management company or managing the property yourself.

As an investor, you can do retail property management yourself; however, your property’s success will never go beyond your own personal development. So, educate yourself on how to successfully manage a property and improve your knowledge and skills.

When managing your own property, keep the following things in mind:

1. Don’t be friends with your Tenants – Establish a friendly business relationship with them, but don’t become best of friends. It’s difficult to evict your best friend.
2. Understand that people, not your property, cause problems – People pay late, damage properties and vacate properties, so make it a point to lease to good tenants and good companies.
3. Make sure everything is in writing – A good lease agreement is worth its weight in gold. If you’re to do something for the tenant, write it down and vice versa, if the tenant is supposed to do something, write it down and give them notices.
4. Have an in-depth understanding of your market – Knowing what your competitors are doing is a must in retail property management to make sure that your rents and your property overall meet the standards in the market or exceed the standards.
5. Don’t put anything in your name – Protect yourself and your personal assets from lawsuits by having your properties and businesses legally detached from you personally. You should form an LLC or another type of legal entity to hold your property, based on conversations with your attorney and tax advisor. Do not commingle your personal funds and the property funds.
Also, by having the property in an LLC, it allows you to tell your tenants that you’re only the property manager or managing partner and that decisions are made based on what is best for the ownership.
6. People handling skills are a must if you’re going to do retail property management youself – You not only have to manage your tenants, but you also need to handle vendors, contractors, employees, city or county government people, etc. You need to have tact and patience to succeed.
7. Understand your lease(s) inside and out – When you buy a property you’re really buying the lease(s) and getting the buildings for free. In other words, if your lease(s) is weak, then your investment is weak.
8. Always write a business plan for the property – Setting goals and understanding what needs to be done to keep the property on track is a must. A good and well thought out business plan helps you when making everyday decisions on the property. A business plan should include a property summary, a market analysis, a sales and marketing plan, a management summary and a financial plan.
9. Understand your own strengths and weaknesses – Take on those tasks that you do well and that give you joy, and hire out those functions that you don’t do well or don’t like to do.
10. Do things right the first time – Hire good help, and focus on quality, thoroughness and attention to detail.
11. In order to manage a property yourself, you need to have a basic business system that includes an accounting system, a sales and marketing system, an operations system and a maintenance system.

If you’re considering hiring a professional, there are several things you’ll want to evaluate including qualifications, duties they’ll be expected to perform, and management fees.

Here’s some additional information from the REI Club about whether you should or shouldn’t manage your own property.

Here are some reasons why you may make the decision to hire a property management company instead of doing it yourself:
1. The property is too far away – If the property is too far away it can be difficult to oversee maintenance and repairs, handle evictions, take care of emergencies and pick up rent checks.
2. The property is too big – A large property has a large amount of decisions to be made on a daily basis.
3. You want to have a life of your own – Managing property profitably takes time. Is this the best utilization of your time? Do you spend enough time on the other parts of your life?  Your management company can do your business plan, then you only have to review and approve it.
4. You simply aren’t good at managing your property – Due to your lack of skills, you may be leaving money on the table each month.
5. You don’t have any systems in place to properly manage your property – Without an accounting system, a sales and marketing system, an operations system and a maintenance system, managing properties can be a nightmare.

As I have said before, if you have any questions or I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Jun 11, 2013
David Morgan
Comments Off on Conventional Loans to Buy Commercial Real Estate

Conventional Loans to Buy Commercial Real Estate

A conventional loan is a loan obtained from a conventional lender. Conventional lenders include commercial banks, savings and loan banks, mortgage brokers, mortgage bankers, insurance companies and pension funds.

Commercial Banks – They tend to lend locally and are usually very conservative in their lending practices. Very often they ask for higher down payments, give shorter loan terms and have stricter guidelines.

Savings & Loan Banks – They also tend to lend locally, but are usually a little more aggressive than a commercial bank. The items that they can most often do for you is less down payment, lower out of pocket costs because they do everything in-house, lower interest rates because they lend from customer deposits and they tend to be a little more flexible and make exceptions to get a deal done.

Mortgage Brokers – They act as middlemen and shop your loan to their many financing sources which include banks, insurance companies, pension funds and mortgage bankers. They can generally save you time and money and expose you to the most flexible programs such as interest only loans, no document loans and low debt coverage ratio loans. They also work on a commission only basis, meaning they only get paid if you close the loan, whereas other lenders get paid whether you close a loan with them or not.

Mortgage Bankers – They are usually a part of a large financial institution and loan on a national basis using favorable interest rates and sell wholesale to mortgage brokers.

Insurance Companies and Pension Funds – They tend to lend on larger projects requiring bigger loans at very low rates. These lenders typically take a long time to approve and close the loan. If you have a large requirement they can be your best source of funding.

There are many types of conventional loans for commercial properties that are available. Here are the most common types:

Long Term Loans – These loans are up to 10 years in length, are fixed rate loans, usually have a prepayment penalty and are typically amortized over 30 years.

Short Term Loans – These loans are typically up to 3 years in length, have lower interest rates than long term loans and are typically amortized for less than 30 years. This loan may suit you if you plan on selling the property within a short period of time and overall would cost you less because it doesn’t have a prepayment penalty.

Conduit Loans – These loans usually have low interest rates, with long amortization periods and can be nonrecourse loans. Nonrecourse means that you are not personally liable for the loan. These are good for properties that are stable with credit tenants.

Small Business Administration (SBA) Loans – These loans are insured by the SBA, given through SBA approved lenders and they have some of the most favorable terms such as low down payments, lengthier loan terms, as much as 40 year amortizations and low interest rates. Most of these loans are given to owners who occupy at least 51% of the property and can be used as a construction loan if you occupy at least 60% of the building.

Construction Loans – These loans are taken out to fund the construction of a project to completion or leasing to a certain percentage. These loans are usually done on a draw basis where the lender funds as the project is being built, have interest only payments and are usually for one to three years in length. Usually, they require a take-out loan commitment at the end of the term.

Mezzanine Loans – Most of these loans go with a permanent or construction loan, as lenders won’t exceed 80 percent loan-to-value. These loans stack on top of the other loan to get you up to a 90 percent loan-to-value. These are usually done on larger projects and they are typically not secured by a mortgage or deed of trust, but they are secured by a security agreement against the ownership’s stock in the LLC.

This will give you a clear understanding of a mezzanine loan:

Bridge Loans – These loans are short term financing used to bridge the gap between finding a permanent loan and closing the permanent financing. They help to fund deals quickly.

Stated Income/No Documentation Loans – This type of loan doesn’t require borrowers to show proof of monthly income or income tax returns. This typically requires that you have good credit, the property must have solid cash flow and the property must be in excellent shape.

Hard Money Loans – These loans typically require a large down payment, have high interest rates and require you to pay three to ten points for the loan. These loans can usually close quickly and don’t require good credit. You might use this loan if you have found a really good deal and need money quickly.

As you can see there are many types of loans. It is important that you match the loan to you’re plan for the property. Using leverage or borrowing money on the property can be a good thing if used in the proper manner and matched to your goals. The wrong loan for the property can be a disaster waiting to happen.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Jun 10, 2013
David Morgan
Comments Off on Commercial Rental Rates and Expenses|Who Pays for What?

Commercial Rental Rates and Expenses|Who Pays for What?

There are a number of factors that comprise commercial rental rates and several customary ways to quote rents, which can make it difficult to understand what people mean when they are discussing leasing rates.

Normally, the rate quoted reflects the amount of rent you pay per square foot. Generally square foot prices are quoted on a monthly basis; however, there are markets such as San Francisco that are quoted on an annual basis. For example, a $36.00 per square foot annual rate is equal to $3.00 per square foot when expressed as a monthly rate. While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $3.00 per square foot and another as $36.00.

Urban office leasing is generally quoted as an annual rate, while industrial and retail rates are typically stated as monthly rates.

Also important to note is that real estate brokers commonly refer to annual square footage rates while tenants frequently prefer to look at rates on a monthly basis. This difference may occur because each uses the rate differently. Tenants commonly look at their expenses from a monthly expense perspective, while agents deal in leasing agreements in annual terms.

Another thing to note is how square footage is defined. It can be quoted to you on a rentable or useable basis. If you see it on a useable basis that means that the square footage is the actual square footage in your space. If you see it on a rentable basis, it usually means that there is a load factor involved and your square footage includes your portion of the load factor.

The load factor is the multiplier applied to a tenant’s useable space that accounts for the tenant’s proportionate share of the common areas (restrooms, lobbies, stairwells, mechanical rooms, etc.). Rentable basis is useable square footage plus the load factor. You may also see the load factor referred to as the add-on factor.

Aside from different rental rate terms, there are key attributes associated with each square footage rate.

These attributes are most commonly referred to as: Full Service Gross, Industrial Gross (or Single Net), Double Net and Triple Net (or Absolute Net).

All of these except the Full Service Gross rent may have Common Area Maintenance (CAM) charges added on.

On property fact sheets you may see these written as; FSG, IG, N, NN, NNN, CAM. These traits determine who pays the utilities, janitorial and other building services (elevators, common hall lights, etc.) and are key factors in determining the true asking rate.

A Triple Net Lease (NNN) means that the tenant pays for all expenses on the property. The three nets (NNN) refer to Real Estate Taxes, Insurance and Common Area Maintenance. In addition to the NNN costs, the tenant pays for his own utilities and janitorial. The Landlord is not responsible for any costs associated with the property, except for possibly some structural and original construction issues.

A Double Net Lease (NN) means that the tenant pays for the real estate taxes and insurance on the property and the Landlord pays for the common area maintenance. Utilities and janitorial are negotiated items with the lease being your guide. The Landlord typically is responsible for structural and original construction issues.

A Net Lease (N) means that the tenant pays for the real estate taxes and the Landlord pays for the insurance and common area maintenance. The other costs are the responsibilities of the parties similar to the NN lease.

Another lease that you might run into is where the tenant pays the increase in expenses over a base year. The expenses can be all of the expenses of the property or may be some of the expenses of the property. The lease will spell out the responsibilities of the parties.

Retail tenants may also be subject to a percentage rent that requires the tenant to pay a percentage of the gross sales after deducting the minimum rent. The formula is gross sales times percentage rate less minimum rent equals the amount of percentage rent due. Example – Gross Sales are $1,000,000, Percentage Rate is 7% and minimum rent is $60,000 per year. $1,000,000 times 7% equals $70,000, minus minimum rent of $60,000 equals percentage rent owed of $10,000 ($70,000 minus $60,000). You may also see this quoted as 7% of sales over a natural break even point. To calculate the break even point you divide the minimum rent ($60,000) by the percentage rate of 7% giving you a break even point of $857,143. This means that if you do a gross volume less than $857,143 you will not owe any percentage rent, but if you do a volume greater than $857,143 you will owe some percentage rent equal to 7% of any amount over the break even point.

Rental rates, in essence, are affected by countless elements, including:

• lease term (duration)
• size of the property
• storage
• views
• proximity to certain locations
• current market/economy.

Typically, items that will help to lower your rental rate include longer lease terms, good credit history, previous experience, larger size property, inferior location within a market or a particular property, lower level of a high rise building and a down real estate market. Typically, things that will increase a rental rate include improving market conditions, short term leases, bad credit, little or no experience, smaller properties, superior locations in the market or a particular property and higher floors of a high rise building.

Once a lease is executed, the rental rate is fixed for the lease term, however be sure to take into account the increases in the expenses that you are responsible for paying.

As you can see there are several factors you need to take into account prior to looking for a location in the market. If you have any questions or I may be of assistance in any way please feel free to contact me. Always remember that my way of giving back is to give away my knowledge. Thank you for reviewing this article.

Jun 10, 2013
David Morgan
Comments Off on Creative Financing to Buy Commercial Real Estate

Creative Financing to Buy Commercial Real Estate

Creative financing is any type of financing other than getting a conventional loan with a standard down payment. Creative financing techniques and the benefits of each include the following:

Master Lease Technique – You master lease the property by paying the owner a set amount each month, and you manage the property as if you own it. You also negotiate an option to buy, usually at a price at or near the current market value of the property. Your goal is to increase the income and create cash flow as well as increasing the value over the leased period of time, usually a three to five year period. This method is used mostly when an owner doesn’t want to pay taxes on his gain at the present time, but is tired of owning and managing the property.

Seller Financed Firsts – The seller carries back a first loan on the property. The benefit to the seller is that they only have to pay taxes on their capital gain based on the principal amount paid back each month. A good thing about this financing is that you not only don’t have to qualify with a lender, but the interest rate is negotiable. You can often negotiate a very low interest rate for two to five years.

Seller Financed Seconds – This can work in a couple of ways: One way is that the seller carries back a second mortgage on the property. In this situation, you are usually assuming the first, so that you don’t have to go out and get a new loan.

In another scenario, you’re getting a new loan and the seller agrees to carry back part of the purchase price as a second mortgage. This method is especially viable if the seller doesn’t want all cash when he sells the property. By carrying a second, he can get his money at any time that the two of you can agree upon. This can be in the form of a balloon payment at some future date, principal only payments, interest only payments, low interest rates, etc.

Secondary Financing By Other Sources – A conventional lender or a private lender provides you with the funds for your second mortgage. In these transactions, you can expect to pay points, fees and generally a higher interest rate. This method is good if you need quick cash to close a good deal ahead of your competition. The negative on this financing is that you may over leverage yourself in the property and have a negative cash flow, a situation you always want to avoid.

Wraparound Mortgages – The seller gets one payment from you every month to pay the amount due on the first mortgage and to pay the second mortgage due him. This gives the seller assurances that the first mortgage is being paid if they are still named on the loan and gives them the right to foreclose or take back the property if you default on the payments.

Options – An agreement with a seller that gives you the right to buy the property at a set price for a certain period of time. Typically, sellers will give you this for an upfront payment, ongoing payments to cover certain expenses or as a throw in to another property that you bought from them.

Blanket Mortgages – You offer the seller or the lender the added security of the equity you have in other properties as collateral for this loan. You use this method when you don’t have a solid track record for a lender or seller to look at. Be careful when doing this, because you are putting the other property at risk.

Funding With IRAs – You can set up a self-directed IRA account from which you can invest in real estate. Note that there are strict rules regarding what you can and can’t do when using these funds.

Remember that creative financing is typically a negotiated item.  Most property owners do not typically offer this financing upfront.  Establish rapport with the broker or seller and approach them understanding their wants and needs.  Sometimes you are presenting them with a solution to a problem they didn’t realize they had or realized it, but didn’t see the solution.  Never be afraid to ask, because if you don’t ask, you don’t receive.  Life and real estate are a negotiation.  Good luck in creatively financing your deals.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Jun 9, 2013
David Morgan
Comments Off on Commercial Real Estate Financing

Commercial Real Estate Financing

Financing sources for commercial real estate include mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and private investors.

Commercial real estate financing can take on very different terms, and the way deals are structured is based on a number of factors, including:

•    Anticipated use of the property
•    Anticipated returns from the property
•    Geography
•    Type of real estate
•    Size of real estate
•    Perceived risk to lender
•    Market conditions

Each of these areas must be examined by the buyer prior to seeking commercial real estate financing.  Buyers then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth.  Unlike obtaining financing for residential real estate where the transaction is based on the value of the home at the time of the sale, commercial real estate financing will be based – in part – on the value of the business in the future.

While some lenders specialize in specific types of commercial ventures, such as retail operations, warehouses, or apartment complexes, others provide across-the-board financing to a wide variety of commercial ventures.

For the potential borrower, the key to starting the process is to have the necessary paperwork in order.  Despite the many types of financing and types of commercial real estate, lenders remain primarily concerned with the level of risk they’ll be taking.  Therefore, they must see the following documentation:

•    Income and expense statement for the property demonstrating a solid income stream
•    Financial statements on all principals involved as owners of the property
•    Profiles of the management team
•    Property appraisal
•    Financial statements on the borrowing entity
•    Plans, including construction blueprints (if available) for the use of the property.

Here is an example of submission requirements for a mid-size income-producing property (amount of loan $200,000 – $5,000,000):

•    Completed Loan Application
•    Credit Report
•    Three year historical Property Income and Expense Statements
•    Current Rent Roll.  Rent Roll should include tenant names, square feet, start and end dates of leases, reimbursements, monthly rents and vacancies
•    Current Financial Statements for each principal/guarantor
•    Purchase Contract
•    Most recent two years corporate and personal Tax Returns

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Jun 8, 2013
David Morgan
Comments Off on How To Get Started Investing In Commercial Real Estate

How To Get Started Investing In Commercial Real Estate

If you want to invest in commercial real estate and build significant wealth, it’s going to require that you take the time to think things through. It requires planning, patience and persistence – or, in other words, it requires you to develop a strategy or business plan. Think of this as your road map.

Mission Statement

Your first step in buying commercial real estate should include a mission statement. This is where you clearly define your purpose and should include some benefits that will be derived. Don’t spend a lot of time here at first, just put together some general concepts.

Goals

Secondly, you should set some goals. This step is the why am I doing this. Do you want to quit your current job or do you want to retire early or set up a way to pay for your kids college education or do you just want some extra spending money for that new car, dream vacation, etc. Set these out and refer to them often. I like to set short and long term goals. Short goals so that I can achieve them and have some immediate gratification and long term goals so that I always have something to look forward to. Your goals should also include how many properties you are going to buy or that you want to make $5,000 per month if that is your goal. The key thing in goals is to write them down and adjust or update them as you achieve them.

Time Frames

The next thing to do is to set out time frames within which you want to achieve your goals. Be realistic in this aspect, but also stretch yourself. State when you are going to buy those properties or when you are going to be making the money that you want or when you will take that vacation.

Strategy

The next item to tackle would be to think about your strategy. There are many, many ways to make money in commercial real estate. If you want to buy a property a year, write that down. If you want to flip a property every 3 months, write that down. Your strategy is how you will be using real estate to accomplish your goals. Note that this can be an evolution over time, but you need to start somewhere. The key thing is to write down a strategy, then adjust if you need to as you go along. In the beginning you may think that you want to buy and hold apartment buildings, but you may find out that your preference is to buy apartments, fix them up, then flip them. The key thing is to work within a specific niche such as apartments or nnn properties or office buildings or shopping centers, etc. It’s best to start out in a particular niche, because you will have a learning curve to go through. It’s easier to learn about one particular type of real estate than to try to tackle all of them in the beginning.

Market Area

Your next step is to define your market area. Most beginning investors start in their own backyard, because you already have some knowledge about that area and you can easily drive it to find properties or locate brokers to call, etc. Once you have completed a couple of deals you will find that you can expand your area and look into other cities around you and then other areas of the state and so on.

Establish Criteria

To me this is the most important thing that you can do for your investing business. Sometimes the best deals are the ones that you walk away from. In this step you are establishing the return on your time and money. Setting your financial parameters as well as establishing the type of property you want to buy are the keys to setting up your success in this business. The financial items that you will want to consider are maximum purchase price, cash flow requirement, return on investment, loan to value ratio, maximum cash outlay, max rehab costs and time frames. Deviating from your criteria can be disastrous for you. By having clearly defined criteria you will be able to recognize your deal faster and let others know exactly what you are looking to buy. If you are not finding deals you can look at other markets or adjust your strategy. Always ask yourself “What is this property worth to me?”, not “What is this property worth?”. Also, remember that you want make your money when you buy the property. If you’ve bought outside of your criteria you didn’t make money when you bought the property, you have already put yourself behind.

Financing

Here is the point where you need to consider how you are going to finance your deal. You are not looking for specifics here, you are looking for concepts such as will you be using conventional financing, private money financing, seller carryback financing, hard money financing, using a lease option, using partners or some other type of creative financing. In my opinion, if you want to purchase several properties you will need to seek out private money financing so that you will have a never ending supply of cash available, however you typically need to establish yourself with a couple of deals first.

Marketing Yourself

This is where you need to state how you plan on attracting deals. How are you going to find the best sellers which are motivated sellers? Will you be using brokers or newspapers ads or direct mail or doing online searching through companies like LoopNet or just driving around or all of the above. Once you have established how you are going to find the deals, then you will want to clearly define your purchasing process. This should include submittal of the offer, acceptance of the proposal, putting up the earnest money deposit, submitting loan documents, commencing due diligence, review title, agreement to all terms and conditions and closing the deal. During this thought process you will want to define your team. Will you need an attorney, a construction or maintenance person, an accountant, an insurance agent, etc. You don’t need to know or state any particular people, but you do need to know your own strengths and weaknesses and how people on your team can help make your deals go smoothly.

Exit Strategy/Strategies

Another very important step is to define your exit strategy. Beginning investors should have more than one exit strategy. If you want to buy and hold, define the number of years that you want to hold and the return that you are seeking. While your preferred choice is to buy and hold, you may want to consider flipping the deal or wholesaling deal if you get into trouble with it. There are many ways to exit a deal other than just selling it. Some of them include 1031 exchanges, sell it on a note, sell the entity holding title or doing a lease option. Having back up plans is a must in the real estate game.

Personal Financials

Prepare a current personal financial statement and then project it into the future for five or ten years based upon the goals and strategies that you have plotted out above. You are going to want to update this as often as needed, but at least once per year. This is the fun part, projecting your wealth as you grow your portfolio.

Always remember that this business plan is a guide, not a hard and fast rule. You have set this up to guide and motivate you. If you fail to plan, you plan to fail.

As I have said before, if I may be of assistance with your real estate questions please contact me. I truly want to help.  My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Jun 7, 2013
David Morgan
Comments Off on Why Now is a Good Time To Buy Commercial Properties

Why Now is a Good Time To Buy Commercial Properties

In the current market, all commercial properties are on sale, because either cap rates have increased and/or vacancies have increased.

Increasing cap rates example:
Assume Net Operating Income is $120,000 per year and cap rates have increased from 6% to 8%

At 6% your purchase price would have been $2,000,000.
At 8% your purchase price would be $1,500,000.
You would receive a $500,000 discount, just due to the change in cap rates.
If you are a long term holder, you know that cap rates will go down again, so even if NOI does not increase, the value of the property will increase.

Vacancy increase example:
Assume a property at 100% occupancy has a Net Operating Income of $120,000 and it was previously leased at 95% occupancy which would produce a NOI of $114,000, but now it is leased at 85% occupancy, which would place the NOI at $102,000. This $12,000 decrease in NOI at a 6% cap rate means a $200,000 discount.

If you have any questions, feel free to leave a comment and I’ll respond.

Jun 6, 2013
David Morgan
Comments Off on 5 Common Mistakes of a Commercial Real Estate Investor

5 Common Mistakes of a Commercial Real Estate Investor

We’ve all done it; we all make mistakes in real estate investing. The 5 mistakes that I see commonly made in commercial real estate investing are poor due diligence, insufficient market knowledge, not running your property like a business, not having an exit strategy and having too much debt.

  1. Performing poor due diligence. Not paying close attention to the property condition or cutting corners while inspecting the property is a license for disaster. Look closely at the physical items such as building systems, environmental matters and structural components as well as the intangible items such as title, survey, zoning and land use regulations. If you don’t know an answer, find an expert who does have an answer. Get accurate estimates from professionals. Analyzing these inspections can save you thousands of dollars.
  2. Having insufficient market knowledge. To avoid costly mistakes, do thorough research. Analyzing the demographic trends of population growth, income and employment in the local market, will give you a feel for where opportunity lies. With commercial real estate, it’s mostly about being in the path of progress or going into a marketplace that’s ready for major growth. Know that a great property in a poor market can be a loser and a poor property in a great market can be a big winner. Review the market information, then listen to what it tells you about how, when and where to invest.
  3. Forgetting to run your properties like a business. You need to make sure that you maintain a nice property appearance, that tenants are satisfied, that the budget is being adhered to, that you know what your competition is doing and manage your cash flow. Being passive with your investments can be dangerous. Don’t think that you can buy an investment and kick back and watch the checks roll in. You should be receiving your payments within the time frames that are called for in your leases. Keep a friendly, but business like rapport with your tenants. Let them know that this is your business. Some people find it easier to tell the tenant that they are the manager and that they are only carrying out the owners wishes.
  4. Failing to have an exit strategy. Don’t focus on one exit strategy, have multiple exit strategies. An investment plan incorporates all of the due diligence findings and lays out all of the possible outcomes that includes best case and worst case scenarios. Failing to plan is a plan to fail. Your plan should include how to get out if things go wrong, the amount of money you expect to make and how long it will take, the improvements that are needed for the property and their costs and how you will manage the property. The plan will reveal the strengths and weaknesses of the property and should show you how to maximize value in the least amount of time. Make sure that your business plan is updated at least once per year to make sure that you are adjusting your exit strategy as things change in the property, your life and in the overall economy.
  5. You have too much debt. Over leveraging by putting too much debt can be lethal. Highly leveraged deals do happen, however it needs to be backed up by a solid plan with sufficient capital or cash reserves. Every property should be evaluated to understand the break-even ratio. The break-even ratio is the operating expenses plus the debt service divided by the gross potential income. Typically, anything greater than 80% is an accident waiting to happen. Debt can be a good thing. Let it work for you, not against you. Properties with a high upside where you can substantially increase rents in a short period of time are the properties that can handle a high debt ratio.

In some of these areas you may need help. A local commercial broker can assist you with market knowledge, a contractor or general maintenance person can assist you with due diligence, a mentor may be able to help you get into a business mindset and help you with a business plan and a mortgage broker can probably help you with debt and financing concepts. Having people that you can trust is always a good thing. You probably don’t need them on a daily basis, but having them available when an issue arises can help you immensely and boost your confidence when needed. I believe in being pro active so that you can try to stay in front of problems.

As always, if I can help or be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reading this article.

Jun 5, 2013
David Morgan
Comments Off on Triple Net Properties: A Great Investment

Triple Net Properties: A Great Investment

A highly popular type of commercial property investment is the NNN leased property.

This is typically a retail property leased to a single tenant with a high credit rating using a triple net lease (NNN lease) which means that the tenant is responsible for paying real estate taxes, insurance and maintenance costs.

KFC

Examples of commonly recognized NNN properties are:

• Banks
• Drug stores like Walgreen’s, CVS or Rite-Aid
• Drive-through restaurants like KFC, Carl’s Jr., or Burger King
• Convenience stores like 7-11 or Circle K.

My belief is that these investments are solid investments because they are typically new or nearly new, they have a quality tenant on a long term lease, you can get attractive financing, there is minimal or no management responsibilities, it has stable cash flow, exit strategies are usually easy to implement and there are numerous tax benefits that only real estate can provide for you.

However, you need to know that these investments are not “risk free” and require a certain level of understanding.

Things to be aware of include:
the tenant’s credit rating – always a major factor – also is it going up or going down?
the overall stability of the tenant – Are they opening locations or are they closing locations? – How long have they been in business in general and this location? – Are sales of the company and this particular location increasing or decreasing?
the location of the property – Is it on a corner or a prominent location? – Is there a traffic signal? – Is there easy ingress and egress? – Is it a part of a shopping center?
traffic counts – What are they? – Compare it to other areas of the City – Are they going up or going down?
demographics – Same questions as traffic counts – Does the area match the tenant (If you don’t know ask your tenant about his customer) – ie, if it is a McDonald’s, are there families and houses around? – If it’s a Bank, are there a lot of businesses around it as well as houses?
local market conditions – Are the conditions improving or going down? – Is it a growth market or stabilized market? – Are houses being built or being torn down? – Is there room for growth?

Questions to ask:

Is the property a single purpose building or is it easy to renovate for another use? – If the existing tenant goes out, can you reuse the building or is it a tear down? – If it is a tear down, is the market now mature enough that you could do a ground lease for the same rent and let the new tenant construct the building or is the property big enough that you could possibly put two tenants on the property or can you get a higher and better use for the property? – Having the existing tenant vacate is not always a bad thing.
What is the overall quality of the building? – Was it well built or cheaply built? – Review the type of materials, the electrical and the plumbing.
Are there deferred maintenance items that may require cash outlay in the near future? – Review the roof and the parking lot very carefully to determine the remaining life and make sure that you take these costs into account when you look at the return that you are expecting – These are costs that you can expect, just make sure that you take them into account when purchasing.
What are the specifics of the lease terms? – Review carefully the existing lease term, the options, your responsibilities, payment history and all of the terms of the lease.
Is there upside potential to the property? – As stated earlier, it is not always a bad thing that you may need to replace the existing tenant now or in the near future.
What is my exit strategy, which should include how long I plan on holding onto the property, if times get tough, how can I exit the property if I absolutely need to and when is my break even point.

If you don’t know the market well or are still a little shaky concerning your real estate knowledge I always suggest getting help from a local commercial real estate broker or try to find a mentor. Also, I always suggest that you have a team which should include a person knowledgeable about construction, maintenance and repair, an attorney and an accountant. These people can help you to understand all of the issues so that your deals can be solid assets and so that you can be well positioned to build wealth over the long term. Always remember that this is still real estate and the fundamentals really do apply.

As I have said before, if you have any questions or I may be of assistance in your real estate needs please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this article.

Jun 4, 2013
David Morgan
Comments Off on Investing in Commercial Real Estate

Investing in Commercial Real Estate

Investing in commercial real estate can be extremely lucrative and rewarding. And in the current economic conditions, it can provide more security than investing in the stock market.

The stock market is currently on shaky ground, surviving in large part due to government bailouts. Continuing market corrections are inevitable. At the same time, most companies aren’t paying much in dividends.

On the other hand, commercial properties, purchased correctly and with the right tenants in place, can provide security through income, tax benefits, equity, appreciation and leverage.

But investing in commercial real estate, like any other kind of investment, requires preparation, diligence and perseverance.

1. The first step is to understand the types of product available to invest in and the major differences between them. Each property category has its own unique characteristics and requires specific knowledge to own. The types of commercial properties are:

• Apartments ranging from 5 units to hundreds of units, from a single level to a high rise building.

• Hotels ranging from a small bed and breakfast to a motel to a large multi-story hotel.

• Office properties can range from a single building to a campus of buildings to a high rise building.

• Industrial properties can go from a small building with one tenant to a large building with one tenant to a large building with multiple tenants.

• Retail properties consist of single buildings, neighborhood shopping centers, power centers, regional malls and lifestyle centers.

Of course, you can also have multi-use properties where you have any combination of apartments, hotels, offices and/or retail stores. You don’t need specific knowledge in order to invest in any one category; get the help of an expert in that product type to guide you until you gain this knowledge.

2. Next, determine the amount of money you are able to invest and what return you need to generate from the investment to make the investment worthwhile. This number is purely subjective and can vary from instance to instance.

Typically, you have two types of investments, value driven investments and value added investments.

Value driven investments are secure investments backed by stable leases with periodic rent increases which will generate a return in the 6% to 14% range depending on the marketplace, demographics, tenants’ credit, age of property, etc. These properties will typically become more competitive the larger they are as institutions will compete for the larger ones (over 100,000 square feet). Since institutional investors require a lesser return, they will drive the price up to a point where it’s no longer worthwhile for a smaller investor. I would suggest looking for properties which can generate over a 10% return so that both you and the investors can make money.

Value added investments will offer larger returns, especially in the long run, since the risk is typically higher. Typical value added properties generate a 12% to 25% return on investment depending on how long it will take to maximize the value.

3. Now that you have a number of how much you have to invest and the return you require, you are ready to start looking for a property. There are several places to look for properties such as online services like LoopNet, CoStar, and Catalyst, but I suggest that you utilize a commercial real estate broker who specializes in the type of property you want to purchase. You can find these brokers on the internet or by driving around your area and getting names from the signs at different properties. Speak with 3 or 4 brokers to get a feel for which one can best assist you with your particular needs.

4. If you find a property that meets your requirements and you need a loan, submit it to a bank or a mortgage broker who will shop it around and get you some quotes. This is important as they will issue you a letter of intent stating the terms upon which they will be able to lend to you.

At this stage you can determine how much you need to invest, how much your monthly mortgage payments will be, and what your cash on cash return will be. This will help you make an educated decision on whether or not you want to buy the property.

Understanding real estate leverage is important whenever investing in commercial real estate. I suggest that on value driven investments you utilize no more than 70% leverage, but in value added investments, I feel that you can go as high as 100% leverage depending on how quickly you can do the things which will add the value.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

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