Why Invest In Commercial Real Estate?

“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.” -Donald Trump

Let me ask you a very simple, yet profound question: Why would you invest in real estate? Understanding the answer or answers to this question will help you along your investment career.

The following are a few common answers I have picked up on when I see this question asked:

Top 5 Financial Reasons to Invest in Real Estate

Let’s first look at the top 5 reasons to invest in real estate from strictly an investment standpoint:

1. Cash Flow – whether you buy with all cash or use today’s favorable financing with a low mortgage payment, positive monthly cash flow will occur when the monthly rent is greater than the monthly expenses. This gives you a monthly income from your real estate investment.

2. Appreciation – Appreciation is the increase in the property’s value, which generally occurs over time and can also be increased by an investor who adds value to the property through repairs and/or enhancements. This is also a great way to create equity in the property.

3. Depreciation – Even with an increase in the property’s value, the government allows owners a tax deduction on their property after they’ve owned the property for at least a year. This annual deduction is called depreciation which when added to the equation, protects the cash flow so that you receive some or all of it tax free. If you are an investor with an income from other sources such as a regular job, it can protect all or some of that income from state and/or federal income taxes. If you really want to understand how great this is, talk to an accountant.

4. Tax Benefits – In addition to depreciation, an investor can usually claim the interest portion of his monthly mortgage payment as a tax deduction.

5. Leverage – Leverage is a very powerful reason for investing in real estate. If an investor used 100% cash to acquire a house worth $100,000, and the house increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 80% financing, only $20,000 cash would be required at the closing table, and a bank or other lender would loan the remaining $80,000 to acquire the property. Assuming the same $5,000 increase in value, the investor’s cash contribution of $20,000 would yield a 25% return on investment ($5,000 increase in value divided by the $20,000 investment) in the same one year period of time.

With the above example, if the investor is able to bring in even a conservative amount of cash flow per month of $200, this will result in an additional $2,400 per year added to the increased appreciation. Your return for the year would now be $7,400 ($5,000 appreciation plus $2,400 cash flow) and your return on investment would now be 37% ($7,400 divided by $20,000). Even if the property value stayed stable with no appreciation, you would still see a positive return on your investment of the $2,400 in cash flow with a return on investment of 12%.

Adding to these benefits the low interest rates for financing and you can see how easy it is to accumulate wealth and become a successful investor.

Major Personal Reasons People Invest in Real Estate

Frankly, this is why most people start investing in real estate. They get star struck with the idea of riches that would give them the freedom to stop working for someone else. They may have a great job that they absolutely love that pays the bills but they still want to achieve long-term freedom. Or they may want extra money to eventually travel and do the things they want to do. And, if you buy and hold cash flow properties over time, sacrificing and delaying gratification, in five, ten or twenty years, you should have a pile of monthly cash flow and be able to attain that desired freedom.

Some investors I speak with want real estate to give them some level of control over their financial lives because, let’s face it, we have zero control in financial investments outside of real estate investing. If you invest in the stock market or money market funds, you don’t have any control over the return you may make on them. With real estate, there are things that you can do to control your return on investment as shown above.

For some investors, real estate is nothing more than a portion of their overall investment portfolio. Perhaps you have divided your portfolio to include mutual funds, stocks, and real estate investment, etc. Or maybe you’re looking to achieve higher returns out of your cash through active management.

Career, Job, or Escape:
A few investors look at real estate investing as a career or a chance to own their own company. Others look at real estate as a means to eventually replace the job or career they may currently hate. And I’ve also seen many dive in head first, as if they’re running away from something versus running towards something.

Creating Value or Thrill of Hunt:
Many investors love the thrill of the deal and love telling you about the thrill of chasing a deal down or their last remodel. They pursue that addictive feeling and are always looking for the next rush or opportunity to turn another ugly duckling into a beautiful swan.

After many years of real estate investing, I have come to realize that in the end people love investing in real estate because it has given them so many more options. They have the options of continuing to work their current job, buying real estate as a full time career, and/or traveling, etc. The more they invest the more option doors open.

The Real Reason to Invest in Real Estate

People fall hard for the sexy pitch of earning freedom. Frankly, freedom is good but I think what people are really after is options. I believe that is why they keep working so hard to find the next deal, to find the next investor, and to keep building their growing portfolio.

Some might think freedom and options are the same things. But to me, freedom really means that they can stop doing something while options mean they can do other things. Having lived through this realization, I can tell you firsthand that having options is even better than having freedom. I would say you get freedom first, and then you build or acquire options.

As you read this, I hope you will be honest and figure out what Real Estate Investing means to you. I suspect that no matter why you think you are investing, if you peel back the onion, you are really looking to create options for you and your family.

Good luck in your investing, no matter your reasons!

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 visiting my blog.

Selling Commercial Property|Preparing a Real Estate Marketing Plan

Commercial real estate marketing involves the disposition of your property. And if you have invested wisely, worked smart, and created value – and inflation and appreciation have played their roles – then it’s time to sell your commercial property and harvest the wealth you have built through property equity.

You must now make the decision of what you want to do with the profits. You can take the money, pay your taxes and run. You can exchange the property to push the taxes to a later date. You can offer financing on the property so that you receive an income without worrying about managing the property. Or, if you have your business in the property and you need cash, you might want to consider a sale leaseback.

Whatever you want to do with that equity, your next step is to create a sales promotion that attracts buyers who will pay the price you want. You can develop the strategy on your own or you can work with a commercial real estate broker to come up with a commercial real estate marketing strategy. Either way, you need to be involved in the strategy decisions so that your property stands out and attracts buyers.

The first thing that you must do is to offer your property at a price that your target market will pay and at a price that provides you a profit. You shouldn’t stroll down the path that others go on by marketing your property at a price that accomplishes neither a buyer’s goals nor your goals. Rather, design a value proposition that attracts, persuades and closes the perfect buyer.

This value proposition integrates four essential elements:

(1) the investor; (2) your competitors; (3) the benefits that you will be offering; (4) your pricing and terms.

The Investor

Which investors should you appeal to? A few types of investors include:
• no cash buyers
• no credit buyers
• first time investors
• lease-option purchasers
• professional investors
• specific product investors
• conversion specialists

Your Competitors

Who are your potential competitors? Competitors can include:
• foreclosures
• new buildings
• distressed sellers
• sellers who carry financing

You need to understand your competitors’ locations, their features and benefits, and their pricing and terms.

Benefits Offered

What benefits and features should you emphasize and offer for effective commercial real estate marketing? Examples include:
• special landscaping
• unique architecture
• ability to expand the property
• special touches
• interior improvements
• seller financing
• strong appreciation potential
• positive cash flow
• low cash requirement
• minimal management
• tenant pays all expenses

Pricing and Terms

Here you need to compile your information and then compare and contrast, mix and match the different types of potential benefits, potential investors and potential competitors to arrive at a price and terms that provide the targeted buyer a great competitive value and provide you the profit you seek.

How you answer these questions will determine how successful you will be in selling your property at a realistic price to a targeted investor in a reasonable period of time. You achieve these results by asking players in the market, inspecting, comparing and contrasting properties, discovering the properties that sell fastest and at the best prices, reading articles on property renovation and thinking about what features/benefits/contract clauses will provide you a competitive edge against the other properties and a cooperative edge with your buyer segment.

As you can see, selling your property is not just about putting up a “for sale” sign and taking the calls if you plan to get the maximum for your property in the shortest amount of time. It’s about developing a commercial real estate marketing plan for your specific property. Knowing your property and your market are the keys to success.

Once you have identified potential buyers for your property, gained an understanding of your competition, defined the benefits of your property and determined the pricing and terms that you want, it’s time to develop a real estate marketing plan.

Here are the next steps in the selling process that you need to do to get the maximum price and the quickest close:

Staging the property
Stage the property keeping your potential buyer in mind. If you’re selling a luxury property, then make sure that your property is fixed up to match that buyer. If, on the other hand, you’re selling a lower end property, clean the property up so that it shows well, but don’t go overboard.

At a minimum, the property should be safe to show and cleaned up. Most retail spaces should be put into a “vanilla shell” condition for showings. Office spaces should have the carpets and windows cleaned and the walls repaired. Industrial spaces should be made safe and clean throughout. Landscaping should be free of litter, pruned and spruced up.

Advertising the property
• Signs on the property – Signs should be done professionally and the contact numbers (telephone and email) should be clearly spelled out. Some of your best prospects come from sign calls, so make sure that you return all calls promptly.
• Fliers describing the property, including its features and benefits – Fliers should be printed or designed for internet marketing, and the strong selling points about the property should be emphasized.
• Local advertising – Local advertising can include newspapers and other local publications.
• Internet advertising – Internet advertising as part of the real estate marketing plan can be done through such companies as LoopNet, CoStar, Catalyst, eProperty and a host of other sites for selling commercial property.
• Mailers to potential buyers and brokers – Mailers can include fliers mailed and/or emailed to all potential buyers and brokers in the market.

You can also attend local, regional and national conventions and meetings where you will find opportunities to market your property. Another resource is broker and/or investor meetings which are held monthly in almost every local area.

While you don’t need a loan to close the property, it’s wise to have a couple of lenders review the property to give you an idea of lending programs that might be available for potential purchasers so you can refer them and possibly close the sale faster. Prequalifying the property is always a good idea as part of the real estate marketing plan.

Due Diligence
Put all of the information together that will be needed for the buyer’s due diligence. Having this ready to go once you have signed the purchase contract can save you time in getting the property closed and keep things running smoothly.

Pre-Qualify Buyers
Have a system in place so you can pre-qualify the buyer prior to getting into contract. Understand their motivations, their ability to finance the property, and their history of closings.

Doing the above items should help you to maximize your sales price and to have a smooth closing.

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.

Introduction to 1031 Exchanges

What is an IRC 1031 Tax Deferred Exchange?

Simply put, an IRC 1031 tax deferred exchange allows owners of real or personal property to defer the recognition of a capital gains tax when they have sold their property.

They have been around in one form or another since 1921 and in its current form since 1986.

An exchange is structured just like any other sale or any other purchase, but with the inclusion of a qualified intermediary to structure the transaction as an exchange. It is very important to involve the qualified intermediary before you start your transaction.

Exchanging allows you to reinvest money into a new business or an investment property that you otherwise would have had to pay in taxes to the government.

If you prefer a video on 1031 Exchanges, please look at this one from the REI Club. Below the video is additional important information about the 1031 Exchange.

What types of properties may be exchanged?

Exchanges can involve real property or personal property. Property to be exchanged must be held for business or investment purposes and not primarily for resale purposes or personal use.

The properties that are exchanged must be “like kind” to each other. Concerning real estate exchanges, the properties do not have to be the same type. As long as they are both held for business or investment purposes they are considered like kind. Personal property like kind rules are generally more restrictive.

As an exchanger you have the opportunity to purchase replacement property of any type. As an example, you can sell vacant land and purchase a strip mall; or sell an apartment building and buy an industrial complex. Although 1031 exchanges are governed by federal law, it is state law that determines what is and what is not real property. Exchanges of real estate interests such as air rights, easements, timber, conservation easements and development rights may be possible. Thus, all property held for business or investment purposes is like kind to all other property held for business or investment purposes.

How long do I have to identify property?

When completing an exchange, an exchanger has 45 days from the date of the sale of the first relinquished property to identify potential replacement property or properties; and a total of 180 days from the original sale date to purchase the replacement property or properties.

Identification rules make it easy for exchangers to pick multiple properties that they might purchase, but the fact is that once the 45 days are up, the exchanger’s choices on that list are set in stone. The identification is a written letter or form which is signed and dated by the taxpayer, and contains an unambiguous description of the property. A property which is identified is not required to be under contract or in escrow to qualify. Exchangers acquiring an undivided percentage interest (“fractional interest”) in a property should identify the specific percentage that will be acquired.

However, there are restrictions on the number or value of the properties an exchanger can identify. To qualify for the exchange, the exchanger must comply with the following identification options:

1)  The Three Property Rule; The three property rule allows an exchanger to identify up to three replacement properties. There is no value limitation placed upon the prospective replacement properties and the exchanger can acquire one or more of the three properties as part of the exchange transaction. The three property rule is the most commonly used identification option, allowing an exchanger to identify fall back properties in the event the preferred replacement property cannot be acquired.
2)  The 200% Rule; The exchanger can identify an unlimited number of properties, provided that the total value of the properties identified does not exceed 200% of the value of all relinquished properties. There is no limitation on the total number of potential replacement properties identified under this rule, only a limitation on the total fair market value of the identified properties. In other words, if an exchanger sold relinquished property for $1,000,000 under the 200% rule, the exchanger would be able to identify as many replacement properties as desired, provided the aggregate fair market value of all of the identified properties does not exceed $2,000,000 (200% of the $1,000,000 sales price of the relinquished property).
3)  The 95% Exception Rule; The exchanger may identify an unlimited number of replacement properties exceeding the 200% fair market value rule, however the exchanger must acquire at least 95% of the fair market value of the properties identified. This rule is utilized in limited circumstances as there is a much higher risk of the transaction failing. In other words, assume an exchanger identifies ten properties of equal value. In order to satisfy the rule, the exchanger would be required to acquire all ten identified properties within the exchange period to complete a successful exchange. If one of the properties fell through, the entire 1031 exchange would be disqualified because the exchanger did not acquire 95% of the fair market value identified. This rule should only be utilized in situations where there is a high level of certainty pertaining to the acquisition of the identified properties and the other two rules do not meet the exchanger’s objectives.

In addition, to obtain a complete deferral of the capital gains tax, the taxpayer must acquire replacement property of equal or greater value, obtain equal or greater debt on the replacement property, reinvest all the net proceeds realized from the sale of the relinquished property and acquire only like-kind property.

What is the structure of a delayed exchange?

In the case of a simultaneous or delayed exchange, the exchanger first enters into a contract to sell the relinquished property or properties. Contrary to popular belief, there is no “exchange contract” for a delayed exchange. The exchanger enters into a contract that they would normally use if they were not structuring the transaction as an exchange. However, the addition of an exchange cooperation clause is recommended to secure the cooperation of the buyer or seller of the relinquished property or replacement property. A person or entity that is not a disqualified party, usually a Qualified Intermediary, thereafter assigns into the rights, but not the obligations of the contract. This assignment creates the legal fiction that the Qualified Intermediary is actually swapping one property for another. In reality, the exchanger sells the relinquished property and purchases the replacement property from whomever he wishes in an arms length transaction.

In addition to the assignment of contract, there must be an exchange agreement entered into prior to the closing of the first property to be exchanged. The exchange agreement sets forth the rights and responsibilities of the exchanger and the entity acting as a qualified intermediary, and classifies the transaction as an exchange rather than a sale and subsequent purchase. In addition, the exchange agreement must limit the exchanger’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period. In other words, the exchanger may only use the exchange funds to purchase new property and to pay most of the expenses related to the sale and purchase of the properties.

Once the exchange agreement and assignment of contract are executed, the exchanger sells the property; however instead of collecting the proceeds at the closing, they are sent directly to the Qualified Intermediary. When the replacement property or properties are located, the exchanger enters into a contract to purchase same, and thereafter uses the exchange funds to complete the purchase. This, in a very basic form, is the structure of a delayed tax deferred exchange.

What should I look for in a Qualified Intermediary?

When choosing a Qualified Intermediary it is important to look for the following items:

1)  What is the experience of the person who you are speaking with? How long have they been in the industry? Are they a tax or legal professional such as an attorney or CPA? Remember, the person on the other end of the phone may be from a big company but they may only have a few months experience. It is important to ask.
2)  Does the Qualified Intermediary segregate the exchange funds into separate Qualified Escrow Accounts as provided in the Treasury Regulations or do they co-mingle the exchange funds? A Qualified Intermediary that uses internal “memorandum accounts” is not providing you with the maximum protection that the Safe Harbors of the Treasury Regulations allow.
3)  Have you received a copy of the Fidelity Bond and Errors and Omissions coverage before you have started your exchange? Is the amount of coverage for each transaction greater than the cash proceeds that you will be sending? Have you verified the Fidelity Bond and Errors and Omissions coverage are in full force and effect? Does the Fidelity Bond provide for principal liability? Many fidelity bonds only provide protection from employee malfeasance but leave the exchanger uninsured in the case of malfeasance of a principal.

It goes without saying that service is an extremely important part of an IRC 1031 tax deferred exchange and that exchanges are subject to strict guidelines and requirements. Having a financially strong, experienced and capable Qualified Intermediary is an important step in getting you through the tax deferred exchange process.

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.

Analyzing Commercial Real Estate|Crucial to Successful Buying

To do a proper commercial real estate analysis, you must understand its market value. Long term successful investors make money when they buy, not just when they sell. You reduce risk and increase your chance for great returns when you buy properties at or (preferably) below their market values.

3 Techniques to Value Properties

Investors, lenders and appraisers rely on three techniques to value properties.

1. Cost approach:

  • Calculate how much it would cost to build a subject property at today’s prices;
  • Subtract accrued depreciation;
  • Add the depreciated cost figure to the current value of the lot.

2. Comparable sales approach:

  • Compare a subject property with other similar (comp) properties that have recently sold;
  • Adjust the prices for each positive or negative feature and/or differences of the comps relative to the subject property. Note:  It is best to have three or four properties to compare.

3. Income approach:

  • Estimate the rents you expect a property to produce;
  • Convert net rents after expenses (net operating income) into a capital (market) value amount. In other words you divide the net operating income of the property by a market cap rate for that particular type of product in the marketplace.

You evaluate a property from these three perspectives to check the value estimates of each against the others. Multiple estimates and techniques enhance the probability that your estimate reflects reality. If your three value estimates don’t reasonably match up, either your calculations err, the figures you’re working with are inaccurate, or the market is acting “crazy” and property prices are about to head up (or down).

3 Factors of Income Approach

Concerning commercial real estate analysis, the approach I put the most emphasis on is the Income approach. The three factors of the Income approach are Effective Gross Income, Operating Expenses, and Capitalization rates (Cap rates).

When looking at effective gross income and operating expenses, be careful that you’re looking at the actual numbers – not the “pro forma” numbers. Pro forma numbers are projections and you want to be dealing with actuals. Cap rates are derived from the comparable sales of comparable properties in the immediate market area and/or by the rate of return that you want on your money. If you talk about a 6 cap, then you are saying that you want a 6% return on the existing net operating income of the investment.

4 Things to Determine a Good Buy

When I analyze a property, I calculate the following four things to determine if I want to buy the property:

1.  Net operating income (NOI):   Net operating income = effective gross income – operating expenses.

2.  Annual cash flow:   Annual cash flow = net operating income – debt service

3.  Cash-on-cash return:   Cash-on-cash return = annual cash flow divided by down payment

4.  Cap rate:   Cap rate = net operating income divided by sales price

Other Important Factors

Also note that other important factors in your commercial real estate analysis are the use of/or zoning of the property, the location of the property, the credit worthiness of the tenant(s), the leases in place, the condition of the property, the contracts on the property and any possible environmental problems with the property.

1.  Use of/or zoning of the property – Make sure the current use matches the zoning of the property.

2.  Location of the property – Is it in a growth area, are there complimentary users around, is there easy ingress and egress, do the demographics match the use, what are the traffic counts around the site, what is the vacancy factor in the marketplace – These are all questions that verify a good or bad location for the property.

3.  The Lease(s) – Is it or are they NNN, NN, N, Gross, how much term left, if there isn’t much term left, what is the likelihood of renewal, are there any hidden Landlord costs, what is the entity on the lease and is it guaranteed, is it a standard lease for the marketplace or is it unusual for the area, is it assignable, does it have options, review all amendments – These are some of the things that you need to be reviewing in the lease to make sure you understand just what you are buying – Some people believe they are buying a building while others believe they are buying a lease or leases.

4.  Condition of the property – Do a thorough inspection of the property to include the roof, the mechanical systems, the structure, the electrical, the plumbing, the parking lot and all of its fixtures – Estimate the life span of each of these things and make sure that you put this into your financial picture of the property.

5.  Contracts on the property – Make sure that you review all existing contracts and the vendors so that you know your obligations and whether they go with the sale – These contracts are also an indication of whether the property has been consistently maintained – If there are no contracts, then you need to take this into consideration so that you can paint an accurate financial picture.

6.  Environmental – Are there any obvious environmental issues that need looking into and have there been any environmental notifications sent to the current owner or to any of the tenants – You should also check with the local environmental agency to not only learn about your building, but the area in general.

With careful analysis you can take away some of the risk when purchasing the property.

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 article.

Owning Commercial Property|The Property Manager’s Role

As an owner of commercial property, the property manager is an agent acting as a trustee on your behalf.  The property manager’s primary objective is to oversee the maintenance of rental property, rent to suitable tenants, collect rent and account to the owner.

Management Qualifications
Qualifications a property manager should have:
• Prior experience handling and reporting trust account activities;
• An adequate computer system to record and track activities on properties
• A competent staff to perform office and field duties and to quickly respond to both the landlord’s and the tenants’ needs.

Management Duties
• Handling and accounting for all income and expenses produced by the property
• Contracting for services, repairs and maintenance on the property
• Monitoring utility services provided by the landlord
• Responding in a timely manner to the needs of the tenants
• Evaluating rental and lease agreements periodically
• Serving notices on tenants and filing unlawful detainer (UD) actions as needed
• Performing regular periodic property inspections
• Keeping secure any personal property

In addition, the property manager must also:

• Confirm or obtain general liability and workers’ compensation insurance sufficient to protect the landlord, naming himself as an additionally insured
• Obligate the landlord to only authorized agreements
• Maintain the property’s earning power, called goodwill
• Hire and fire on-site employees as needed
• Comply with all applicable codes affecting the property
• Notify the landlord of any potentially hazardous conditions or criminal activities affecting the health and safety of individuals on or about the property

The “Prudent Investor” Standard
A property manager must employ a higher standard of conduct regarding the operation of a property than a typical investor might apply. This standard in commercial real estate management is called the prudent investor standard. A prudent investor is a person who has the knowledge and expertise to determine the wisest conduct for reasonably managing his property. The prudent investor standard of conduct is the minimum level of competency which can be expected of a property manager by a landlord, whether or not the landlord would apply the standard or even know about it.

A landlord’s primary business reason for hiring a commercial real estate management company is to have the property manager maintain the condition of his investment and income.

Decisions regarding the care of a property should be made by the property manager based on the need to generate a reasonable income from the property and incur expenses necessary to preserve the habitability of the property, provide a safe and secure environment for persons on the property and maintain the property’s condition so it will support the rent charged.

Management Fee
Commercial real estate management companies structure management fee schedules in several different ways:

1. A percentage of the rents collected.
The property manager is entitled to charge a set percentage of the rents collected as a fee (customarily between 5% to 10%), usually payable monthly. The percentage fee is not paid on security deposits since deposits are not rents.
2. Fixed fee
The property manager and landlord agree in advance to a set dollar amount to be charged monthly for the management services.
The amount stays constant whether or not the units are rented. This method, however, lacks the motivational incentive to induce the property manager to generate maximum rental income.
3. A percentage of the first month’s rent.
4. A front-end fee paid to the property manager is called a leasing or origination fee. If the landlord agrees, a fee can be charged for exercise of an option to renew or extend, or when a new lease is entered into with an existing tenant.

Accounting to the Landlord
All landlords are entitled to a statement of accounting no less than at the end of each calendar quarter. Most landlords will require monthly accounting in their commercial real estate management agreements.

Property Inspections by the Manager
Inspections determine the physical condition of the property, availability of habitable units or commercials spaces and the use of the leased premises by existing tenants.

Several key moments when a property manager should make an inspection include:

1. When the property manager and landlord enter into a property management agreement.
Any deferred maintenance or defects which would interfere with the renting of the property should be discussed with the landlord.
2. When space is leased to a new tenant.
A walk-through should be conducted with a new tenant prior to giving them occupancy. The property’s condition should be noted on a condition of premises addendum form and signed by the tenant.
3. During the term of the lease.
While the tenant is in possession, the property should be periodically inspected by the property manager to make sure it is being properly maintained.
4. When the tenant vacates.
The property’s condition should be compared against its condition when first occupied by the tenant. Based on differences in the property’s condition as documented by the property manager, the reasonable amount of deductions from the tenant’s security deposit for corrective repairs can be documented when accounting for the return of the deposit.
5. When the property manager returns management of the property back to the landlord or over to another management firm.
This inspection helps to avoid disputes with the landlord or tenants regarding just what the condition of the property was when management was transferred to and from the property owner.

Maintenance and Repairs
Obtaining the highest rents available requires constant maintenance and repair of the property. The property manager is responsible for all the maintenance and repairs on the property.

The property manager’s knowledge of the property’s condition prior to entering into a commercial real estate management agreement is a must in order to properly ascertain what maintenance and repairs need to be made or will be deferred.

The responsibility for maintenance includes:
• Determining necessary repairs and replacements
• Contracting for repairs and replacements
• Confirming completion of repairs and replacements
• Paying for completed repairs and replacements
• Advising the landlord about the status of repairs and replacements in the monthly report.

Usually, landlord set a ceiling on the dollar amount of repairs and maintenance the property manager has authority to incur on behalf of the landlord. If maintenance or repair work is done by the property manager’s staff or he stands to additionally benefit financially by the materials purchased or services performed, the property manager must disclose his financial involvement to the landlord.

As I have said before, 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 article.

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.

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.

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.

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.