Most people think of commercial real estate as everything about renting apartments. While residential properties represent a large portion of commercial real estate investment, other types of properties also offer great investment opportunities. For example, commercial real estate comprises offices and warehouses, retail centers, and even undeveloped land.
We define commercial real estate as any property that is larger than a home on a lot. So, even if people live on the property, it is always commercial if it is larger than a single house.
Some people would say that a small property like a duplex or four units is not commercially available. That’s okay. We love to keep our definitions straightforward. Five or more dwellings in a residential building are considered commercial, but who counts? We describe each type of business ownership in the following sections.
Commercial properties that fall into the housing category include everything, from small apartments to enormous apartment construction projects that span several blocks of the city. You drive by thousands of commercial properties like this every day. Each building you see is the property of a business investor who is in the game to earn money.
The great thing about investing in apartments is that they're easy to find, the banks love lending them, and they generate great cash flow. The advantage of starting with home ownership is that it's a great way to jump into the exciting world of commercial real estate investment. For most people, the beginning is the most difficult part. However, after beginning to invest in commercial property, you will have trouble getting back to the old rat race routine in which so many others find themselves trapped.
Once you get itchy about investing in commercial real estate, you'll never walk into an office building again without thinking, "Someone owns this building. Why couldn’t it be me?” As our population grows, an increasing number of office buildings are being built. The offices are perfect for investment because they have what we call net triple leases.
This type of lease is a lease in which the tenants of the property pay you the rental plus they pay for the following:
· All maintenance and repairs
· The insurance on the property
· The real estate taxes
This is referred to as passive income for some reason. Once you have rented your office building, you can sit back and watch the cash flow happen. You can even hire a land management company to rent it for you. Then all you need to do is sit on the beach.
Triple net rents are said to be due to tenants in your office building paying for all three categories of expenses. Tenants pay for these three costs, so the rent they receive is a net amount from which they do not have to pay the expenses. So, after the tenants have paid all the expenses and you have paid the mortgage, the remainder goes into your pocket. That's typical for a five- to twenty-year net triple lease with rent increases every two or three years. But it can also be a disadvantage, and here's why: Let's say that the lease is for ten years. If your neighborhood is experiencing explosive growth in the next three or five years, you won't be able to charge higher rents or capitalize on what's going on because you're under a 10-year lease. But for the most part, investments in triple leases are highly sought after.
Malls are at the heart of most cities in our country. These are places where people go shopping, dine, and meet friends. And retail centers are one of the kinds of business real estate assets you can invest in. Most investors like shopping centers because, like desks and warehouses, many retail buildings are leased over the long term under a net triple lease with tenants covering all expenses. The advantage, as an investor, is that your rates of return will not decline over time as taxes and expenses increase. With rents going up over time, your returns continue to improve. As with most triple leases, rent increases are incorporated into the tenant agreement.
Office and retail buildings have undergone massive changes in response to the COVID-19 pandemic. Thousands of office workers have been fortunate enough to become remote workers and find that they (mostly anyway) enjoy working from home. Large national companies have closed their shops in malls, and some have closed their doors completely. Other stores have transitioned to many of their online operations. This is an opportunity for us as investors. Office buildings are transformed into apartments. Some apartment buildings now have separate "work from home" zones. Department stores have become warehouses for online businesses that ship their products.
Warehouses or industrial properties
With the advent and growth of online shopping or e-commerce, businesses that ship to us need somewhere to store their products. These buildings, called warehouses, are simple: big structures, four walls, and multiple doors, and they are located downtown for shipping purposes. Warehouses tend to be relatively poorly maintained, with a greater emphasis on warehousing than on aesthetics. In addition, tenant bureaucracies may be more likely to sign longer-term leases in the years ahead as e-commerce grows.
Just as everyone needs a place to sleep at night, almost everyone needs a place to store their stuff—the old stuff, the recently bought stuff, and the personal stuff they care about.
Why is it so popular amongst investors? Compelling reasons include
· Low cost of operations
· Low building costs
· Operations can be automated
· Low down-payment loans
The different types of self-storage installations should be considered.
· Cold storage
· Climate-controlled storage
· Vehicle storage (including RVs, boats, and cars)
For you, the average investor, we recommend you start your acquisition search for the Mom 'n Pop self-storage installations. Avoid "big boys", such as U-Haul and public storage, and all other kinds of deductibles, because they are too expensive for the starting investor.
One of the most important considerations is where your facility is located. Ideally, it should be situated where there is a request for storage, where it's easy to drive, and where there's a lot of visibility. If there are many small homes in a city, this is a good sign that there is a possibility of investing in self-storage. Small houses mean that a high percentage of people in this city need additional storage space for their businesses.
Hotels and resorts
This kind of asset is not our recommendation as a starting point, but many experienced investors found it fun and highly cost-effective. Of course, other investors have also lost their shirts, so make sure you know what you're doing before you jump in. Most of the cases we encountered were small hotels or motels rather than the biggest national brand, or as they are called, "Flagged" hotels.
One of our commercial customers used a primary commercial lease, a form of creative financing to obtain a 40-unit motel outside. They changed the name of the motel, hired more employees, and modernized the units. Six months later, they sold it nearly twice as expensive, for nearly $500,000. One of the students has a 135-unit hotel under contract to convert into an apartment.
The success of any hotel or resort is composed of two parts, the property itself and the enterprise of marketing, management, and operation of the property. If you want to invest in that space, we suggest you invest in ownership and rent it to some other company that will operate the hotel or complex.
What is the secret ingredient that helps a person succeed in commercial real estate? If we told you, how long would it take you to jump out the door and get to your first trade agreement? Well, you're on the verge of knowing, so put on your running shoes.
If you are genuinely motivated, you can find a solution. But now that you know the secret, you must always become familiar with the tools, techniques, and advice that will help you along the way. These are explained in the subsequent sections Investing in commercial property requires some skills. You don't have to understand differential equations or figure out how to reconstruct a transmission.
Nevertheless, the skills described in the following sections are indispensable. Easy to meet people and make new friends. If you connect easily with people and enjoy meeting new friends, you will manage well to create a reserve of contacts.
It is important to network with the people who will invest in your commercial real estate business because they own the "golden pot." The people you meet will end up being your advisors, investors, and partners, and they will send you offers and connect you to wealth-building resources.
If you want to succeed as a commercial real estate investor, you will have to progressively emerge from your shell. You will need to be able to view the property information online, correctly enter the figures in a simple spreadsheet, and use a calculator. These skills help you figure out the value of a commercial property, what you should pay for it, and what your payday will be. If you need some tips and advice when it comes to numbers, a business mathematics class is sure to update you.
Accounting and collecting
We think that if you're a businessman, you will need to feel comfortable asking others to pay you any money they owe you in rent. The interesting part is that you can hire a property management firm to make all the collections for you. And, if you start small, you should have a good grasp of accounting and other company essentials. Why? Because all through this book, we stress that investing in commercial real estate is like investing in a real business where you must pay bills, hire employees, deal with contractors, and read straightforward financial reports.
As with all complicated cases, commercial real estate investment has its share of myths and issues. Knowing this information brings a few precious truths which will save you from the pitfalls of confusion.
Here are some common misconceptions regarding commercial real estate investment:
· You need to begin in residential real estate to access commercial real estate.
· It's not true that you must be wealthy to get involved in commercial real estate investment.
· You can be as creative in your fundraising here as you can be when you invest in houses.
· This game is only for major players in commercial real estate, it does not matter where you begin, and it doesn't matter if you just want to spend some time doing that. It is not important to have a full-time job or to be a single parent.
· You must have a real estate license. A lot of investors don't have a home license, and they often wonder if that's not the case.
· Commercial real estate is too complicated for the average person.
· Real estate, like everything else in life, is risky.
Find out if Hold or Bottom-Fish should be bought.
Housing cycles are like signal lights. The trick is knowing when you are dealing with green, yellow, or red lights. Examples include but are not limited to:
· A green light in commercial real estate investment can be spotted when you notice the impending job growth due to an expansion of the plant. Or when construction demand is greater than the supply of available properties. Most likely, you will also see plenty of activity selling undeveloped land.
· Yellow light can be indicated by suddenly rising interest rates that cause you to examine your borrowing costs. Or it could be when you see vacant jobs and "rental promotions" increase. What happens if your feed shows many struggling companies in one area? There's an amber light everywhere.
· Red light can be revealed by stopping a new construction that can be caused by excessive construction in the area. An increase in seizures and a decline in property values is a guaranteed red light. To make big money in commercial real estate, you must manage the risks. Understanding and knowing property cycles helps you reduce your risk. Even if predicting real estate cycles is largely a game of chance, it becomes downright dangerous if you don't know anything about the trends of the market, you're investing in. Here's a sneak peek into the typical commercial real estate cycle. This cycle can help you decide the best time to buy, sell, or go ground fishing.
· Expansion phase. During this phase, the population increases, incomes increase, employment is good, vacant positions decrease and rents increase. New buildings are slated for construction. Human emotion here is excitation.
· State-of-the-art phase. It's time to sell for maximum profit. It's a selling market, and in this phase, you see new construction projects going up and investor-to-investor bidding wars. Advertisements are available for a short period. The human feeling here is pure trust.
· Contraction phase. Most probably, you will see a lot of new projects on the market now, and you can see signs of excessive construction. Inflation is on the rise, interest rates are on the rise, vacancy rates are starting to rise, and prices are starting to stabilize. Foreclosures generally grow during this time. The human emotion here ranges from mere concern and denial to utter shock.
· Recession phase. Real estate in this phase becomes increasingly difficult to sell, and thus properties remain on the market for longer periods. Property values decrease, interest rates are high, and landlords are competing for tenants because of overbuilding. Foreclosures are generally endemic. Human emotion here is full-blown panic.
· Background phase. This is the best moment to buy. But this is the most frightening phase: unemployment and inflation are high, and housing demand is declining. This phase separates men from boys, women from girls, and the actual investor of the scholarship refugee. Human emotion here is just a breakdown for most people. Recuperation phase This phase is a blast of fresh air. The local economy shows signs of life, job offers decrease, rents stabilize and begin to increase, speculation begins again, and money begins to flow into the market. The human emotion here is hubris because you waited for the storm.
If you can recognize the cycles of your local economy, three clear questions come to mind that will determine whether you are a successful investor:
· What is the best time to purchase? The real response is that it depends. If you are a smart investor, you should buy at the end or halfway through the expansion cycle. This way, you buy on trends and track the marketplace and other investors. You're probably going to feel safe because you're following what everybody else is doing.
· When should the sale take place? The best time to sell is at the peak stage, all the way up the market. And the biggest problem with marketing here is knowing exactly where the summit is. Here are two hints we haven't missed yet: Look at rents and vacancy rates separately. After rents stabilize and become flat for three or more consecutive months, you hit a peak. Or for one more indication that you have reached the peak: After the vacancy rates are at one. Three to five years below, you're at your peak. It’s that simple.
· When's the Best Time to Go Bottom Fishing? If you're not a fearless risk-taker, you may find this advice uncomfortable. And economic and demographic trends are your true friends when it comes to commercial property investment. Most importantly, these trends are neither complex nor hard to identify.
The following three trends are fundamental to investing in commercial real estate:
· Employment growth. This trend makes a lot of sense: Where there are jobs, there are individuals. And where the people are, there is a demand for apartments, offices, and consumer goods. Employment growth is a strong indicator of the health of the housing market. The best place to start in research on employment growth is to contact your local economic development department or chamber of commerce and request historical and current data on employment growth.
· Development. This pattern is a matter of supply and demand. After all, if a shortage of office space or apartments is obvious, there is a demand for new developments. On the other hand, if you see that the city is building too much, that's an indication that you must wait and re-evaluate.