Tag Archives: commercial real estate investing

Property Management|Hire Out or Do It Yourself

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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.

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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.

Why Now is a Good Time To Buy Commercial Properties

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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.

5 Common Mistakes of a Commercial Real Estate Investor

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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.

Investing in Commercial Real Estate

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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.