Commercial Property Investing: A Team Sport?

Sometimes adults act just like little kids. The pathetic part is occasionally that time is when we are investing in real estate. Maybe we feel we have read enough books and know exactly how to do it. Maybe, you heard how your neighbor had a great purchase on a small residential purchase. Maybe, we are convinced that Donald Trump is really not that smart… maybe he was just at the right place at the right time. Or, maybe, just maybe guys are absolutely positive about how to do it and they tell their wives or friends and then refuse to back off when they should.

I was one of those guys, I knew everything and if I didn’t I could hire someone who could. Yep, I was an absolute genius, with a full wallet. I told my wife and my friends how I had it all figured out. My wife just nodded like she does when I’m driving and refuse to use the GPS or ask someone for directions, even when I’m completely lost. My close friends were polite but strongly suggested I rethink what I was doing.

However, even an absolute genius, with a full wallet, a plan and pride the size of Texas was not going to back off and lose face. I knew how easy it was, buy a small rental house, fix it up and lease option it. A piece of cake.

I will leave out all the horrible details that follow as life seems better without dredging them up too often, besides the headaches and nightmares have finally gone away. Let’s just say that I lost my shirt when the market tanked, when the tenant got angry and trashed the house and fled in the night and when month after month of maintenance, utilities and taxes were eating away at that pride of ownership while sucking into my savings. That was real Genius.

Coincidentally, I was receiving checks twice a year from the group investment on a medical office building that I got into a few years before the crash. I was and still do earn a tidy 12% cash on cash return per annum. Due to slowly rising rents built into the leases from day one, strong tenants, premium location and amortization of the underlying mortgage the value of the building has gone up over time. So, simply put my principal is safe, I earn actual real dollars every year and the overall investment has gone up in value.

The office building purchase was a group of physicians who got together and built a building. We all became tenants and brought a few more non owners in to increase the cash flow. We all considered the risks as a group and the group was committed to the success of the building.

Now, if you have the cash on hand you could go and buy a nice class A office building or medical office building yourself. Since, YOU are a genius and have a full wallet. However, my advice from the trenches is to STOP right now! It takes some work and effort to manage the building and real expertise when things go wrong. If you have a group behind you those decisions are not solely yours and some of your partners might actually have good ways to solve those problems. In addition, by putting less into the investment you have reduced your risk and allowed the group to buy perhaps a bigger and better property.

Obviously, things can go wrong with group investing on real estate. I am not saying they can’t. But, with a group your risk is mitigated, you have people you can turn to when there is a problem and you can as a group buy a piece of real estate of substantial quality and value that you could never accomplish alone. Remember, one of the icons of American real estate The Empire State Building was built by a group of investors, not one man who refused to ask for directions when lost. That is real genius.

Apartment Building Investing – Find Motivated Sellers

As the creator of the “Buy Your First Apartment Building E-Course” I have many potential students and beginning investors ask me, “How do I find motivated apartment building sellers?”

There are many ways that investors use to find motivated sellers, however, what I see happening many times with beginners is that they start looking for properties to purchase before they thoroughly understand how to identify a truly profitable opportunity. Here are my recommendations for how to begin learning about multifamily investing and then how to find motivated sellers.

Begin by learning what makes mult-family property profitable by taking these steps:

  1. Study and learn about what makes an apartment building profitable.
  2. Read as many books about real estate investment and apartment building investment as possible. It is a lot easier to learn from other people’s mistakes. There is no need to reinvent to the wheel.
  3. Find a reputable real estate investment club in your geographic area and meet with the commercial investor members. These “old hands” are a valuable source of market information.

After the aspiring multi-family property buyer has received a thorough education by reading books, industry magazines and networking with other commercial real estate investors then he or she is ready to begin the process of searching for an actual property to purchase.

Contacting Commercial Realtors

A great reference source for finding well educated commercial real estate agents is the CCIM website. The CCIM is a professional designation that qualifies a commercial real estate professional as capable and knowledgeable in the field. You can also find commercial real estate agents using a simple search on the web.

When searching for a commercial real estate agent take these steps:

  1. Speak to a number of commercial realtors in the area and ask about “pocket listings”. Pockets listings are apartment building owners that the experienced realtor might know who are serious about selling their building but they have not listed the property yet.
  2. Find a commercial realtor who specializes in multi-family investments. A good commercial realtor who specializes in multifamily properties should have a great knowledge of what apartment buildings have sold for recently.

Alternative Strategies for Finding Apartment Building Deals:

  1. Place an ad on Craigslist stating what you are looking for:
  2. “Looking To Sell Your Apartment Building? I am a commercial real estate investor interested in buying multi-family property in Philadelphia between 5 and 100 units. I am looking for owner financing over five years with 5% down or will buy with a 20% down payment and a bank loan.”

    Or, here is an ad that I copied directly from Craigslist this morning:

    I BUY MULTI-FAMILY PROPERTIES W/SELLER FINANCING OR QUICK CASH. Need to sell?
    Moving? tax benefits run out? call me for a offer.

  3. You can also place the same ad in the commercial real estate section of your local newspaper but be prepared to pay a handsome sum for the ad and also be ready for unsolicited calls for real estate agents. Newspaper ads do work but you are better off using free or more direct methods like direct mail.
  4. Another strategy is to contact the owners of commercial real estate directly. This can be done in a number of ways. Multi-family owners can be located by researching the tax records of a metropolitan area. Usually, the owner of record will be listed along with his or her or contact information. The next step is to write a letter that explains who you are and what you are trying to accomplish. The purpose of letter to have many interested apartment building owners contact you. You should leave your phone number, mailing address and email address for sellers to contact you. You should make it very easy for the sellers to get a hold of you. Remember, you will need to look at dozens of deals and sellers before you find the one that fits your investment criteria. You can also contact owners directly by telephone. Keep in mind that multifamily property owners are usually very busy so you might want to write a script or have talking points written down so you are able to get right to the point and get your message across accurately.

Guide to Investing Out of State for Commercial Real Estate Investors in Los Angeles, California

Isn’t real estate supposedly one of the best categories of investment classes in the world? People always need a place to live right? Then why does it seem almost impossible to invest in real estate in California, which is known next to New York and Florida, as one of the top places in the world to invest in real estate, unless you have a few million dollars? It is because they are densely populated and in the case of Los Angeles have already risen dramatically not only in the last six years by 40% but have quadrupled, 400%, over the last 30 years. (S&P Index LA) Those are great returns for an asset that is considered to be safe and moderately growing. So what should a person do nowadays if they live and grew up in Los Angeles, and want to invest in real estate but don’t have a million dollars to invest? The solution is simple, invest out of state!

A lot of people think it is hard to invest in a state such as Texas. You have to manage the property, collect rent, and make the right investment decisions for the long term in a state that at this point in time you are only somewhat familiar with, right? Well allow me to explain to you why it is great for someone to think otherwise, and how a great agent can acquire property for you in another state in a deal which the tenants, the ones using the property space, are managing the property for you and even paying your property taxes! Not only that, but these are institutional companies who guarantee you the money you are promised for periods of up to 10-15+ years, per contract. This is only the beginning of me explaining how investing outside of your comfort zone with the proper advice can benefit you and your family.

How about the safety of these investments? I don’t want to lose my hard earned dollars. Neither do you. So why would you invest in anything outside of the Los Angeles, or the California region? A region that has proven itself for decades and showing promising signs of growth in certain areas. These are definitely valid points in the eyes of an avid investor, but maybe it’s time to reconsider. I already mentioned that property prices in Los Angeles are expensive, that being one of the main reasons to invest elsewhere.

Haven’t you noticed a lot of people who have been living in California are moving to the surrounding states where it is a lot cheaper to live and in places where new and old business industries are beginning to thrive? I personally know a few people who have moved away. Texas alone has added over 5 million people to its population in the last thirteen years according to Texas Department of State Health Services, and it is still growing. With that in mind, doesn’t it seem like a great deal to acquire a commercial property in a state where you can buy commercial real estate for around $150,000-$300,000 down? You couldn’t dream of that in Los Angeles unless you wanted to buy an old run down building.

Are you starting to understand how easy it can be to invest outside of your state, and why it is more lucrative? If you do, that’s great, if not here is another way to understand it in a situational scenario with numerical figures.

My friend Jack has $500,000 right now that he wants to invest.

This is what would happen if Jack invested in a Los Angeles Commercial Property from 2015-2020.

Let us say Jack doesn’t take out a Loan and buys a Fee Simple Commercial Estate.

$500,000 x 4% Interest Yearly = $20,000 Income / Year (Before Taxes) x 5 years = $100,000

Over this period of time the value of the property goes to $600,000 by 2020, and Jack sells his property to Jenner. That makes for a profit of $200,000 before Capital Gains, and Income Taxes.

Now, let us say Jack went outside his comfort zone and decided to get a property in Texas.

$500,000 x 8% = 40,000 Income / Year (Before Taxes) x 5 Years = $200,000

Over this period of time the value of the property goes up to $750,000 and Jack now shows Jenner how much easier it was to invest out of state because of the structure of this deal. He told Jenner that since Starbucks was managing his property and paying him on time without question every month, this made it much easier for him as an investment. Now, Jenner wants to buy this investment off Jack, because he sees the benefit and Starbucks wants to sign again for an additional 10 years with a rent increase!

Jack just made another $250,000, on the increase of the value of the property.

In total, Jack has now accumulated $450,000 before taxes over the last 5 years investing in Texas. Get it?! Do you understand the benefits and the financial rewards? Not to say you cannot have these structured deals in Los Angeles, but remember they offer half as much interest in a market that has already gone up 40% in the last six years.

Jack has made $450,000 investing in Texas vs. $200,000 investing in California with the same amount of money. That’s an extra 125% increase in profit, which will make you an even astonishingly larger amount of money on your next big investment!

How to Get Ahead Financially By Investing in Commercial Property

Think of all the investment commercials you have heard and seen that admonish/encourage you to start saving money early in your working life. Messages like, “Take advantage of your company’s 401k program,” and “Start an IRA program,” are like investment mantras and there is a great deal of wisdom in those messages. But what also can be important is expanding your mindset to additional investment opportunities like investing in property.

Risk and challenge

Property investing is often described as “high-risk, high-reward.” It may not be the ideal investment plan for the faint of heart. But it can be a good match for the investor who:

• Likes a challenge.

• Has an enormous amount of patience.

• Can commit to a hands-on approach to managing the investment.

• Is willing to learn the business of investing in commercial real estate.

Reducing risk

The first “risk” to reduce is a lack of knowledge in commercial property investment:

• Learn all you can about the subject.

• Find a mentor to further your education.

• Consider partnering with a successful commercial property investor.

• Start conservatively.

Next, don’t try to invest without help from a commercial estate specialist. The person you work with should be a fiduciary (one who will be working in your best interest). Industry writers recommend that your broker should be a member of the National Association of Realtors and adhere to its code of ethics. Most important of all, your broker/realtor should represent only you – not the seller, or not you and the seller.

Making money on your investment

Getting ahead in commercial property investing is accomplished in several basic ways. Your investment can grow through income and appreciation/selling.

• Income generally comes from rent. It also can be generated if your tenants are required to pay fees for contractual options (like right of first refusal on an adjacent space).

• Appreciation is another investment/money-making option. This is where the adage, “Buy low, sell high,” applies. Experienced property investors will buy the property at a low price, put a finite amount of rehab work into the property, possibly redefine the property to a more marketable purpose, and sell at a higher price. These investors make their money on flipping the commercial property, not on rental income.

Types of commercial estates and income potential

The type of commercial property in which you choose to invest can affect your earning potential. Consider the income opportunities in these properties:

• Motels/hotels located in tourist or major business travel areas.

• New commercial construction can be highly profitable but requires serious knowledge of the industry (and significant financial backing).

• Small commercial properties like strip malls and small office buildings often have long-term tenants.

• Industrial properties include manufacturing sites, distribution centers, and warehouses. A financial plus here is that these tenants are usually responsible for most repairs and maintenance.

• NNN leases are often found in larger businesses and with stable tenant companies that lease long-term (like 30 years at a time). These tenants are responsible for all expenses, including property taxes and insurance.

There is money to be made for the commercial property investor who is willing to start slowly, become knowledgeable, be focused, act conservatively, exercise patience, and work hard.

Rarely will commercial property investment be your get-rich-quick ticket. But over time, it can significantly augment your retirement fund or provide you with the financial resources to fulfill other dreams and plans.