commercial real estate investing for beginners the basics of commercial real estate investing introduction this is the story of how I got to where I am today I was born and raised in Northern California graduated with a degree in applied physics and went to work as an engineer in Silicon Valley with my good credit and reasonable savings I began buying single family homes one day while renovating one of my houses to get it ready for renting and dog tired from all the hard work I had an aha moment I thought to myself wouldn't it be great if I could combine all of my houses to be Under One Roof as my portfolio grew the bills piled up on my desk and I dreaded the day to have to cut all those Separate Checks I also had been traveling from one rental to the other dealing with many tenant and many tenants and their issues I wondered what if all my rentals were in the same place then it dawned on me that there was such a property an apartment building the thought of owning an apartment building was frightening though where would I get all the money to finance to purchase how do I manage something that large converting my single family home portfolio into an apartment building seemed to be the best way to increase my Holdings without the headaches but I was concerned about all the unknowns of owning commercial real estate about that time I received a huge wake-up call one day at the engineering firm where I worked for when my boss was laid off without him actually knowing they wanted to replace him with someone younger and at a much lower salary the person they wanted to fill his position was me even though that had been my dream job since first joining The Firm I didn't take it I couldn't I reasoned that if they were willing to do that to my boss they could easily do that to me too I needed to create Financial Security for myself that no one could take away from me they say that when the student is ready the teacher arrives about that time I had joined a mastermind led by Robert Kiyosaki who wrote what became one of the best-selling books of all time Rich Dad Poor Dad during one late night Mastermind session with a group of us Robert LED Robert was leading us in a game of Liar's poker it lasted for several hours and it got pretty intense the game of liars poker is designed to bring out the real you which happens to be when you're facing adversity and once we finish the last game and I lost horribly Robert gave us a Stern debriefing what he did shocked me but in hindsight completely changed my life he looked down at me and gave me the dreaded loser symbol you know the L-shaped thumb and finger on the forehead that's right he called me a loser my mentor and it shocked me to the Core my mentor the man I looked up to my my hero Robert Kiyosaki called me a loser to my face he said that games reflect behavior in real life and I was playing it too safe not willing to play big and and I thought I could stay the same uh mediocre person and end up with an average life and that was what happened if I didn't wake up and see what I was doing he was right absolutely right that night I went back to my room and I broke down realized realizing that if I was going to achieve all the goals and dreams I had for my life then I better start taking action and begin to play the big game that I knew I could play so when I returned home I put it for sale two of my most profitable rental homes was the intent of buying apartments with the proceeds that took some deep prayer and courage but two things motivated me first I wanted to prove to myself that I wasn't going to play it too safe in my life any longer and second I no longer want it to depend on my engineering job for my Financial Security I'm sure some of you can relate to that well once my two rental homes sold ideally began searching for the right apartment deal after scanning through nearly 70 available properties I found a 45 Union apartment building about a block away from a major university that seemed to fit my goals the asking price was 775 000 and I end up with a final price of 720 000 after two weeks of negotiating along with a forty five thousand dollar credit for renovations the real estate broker that listed the property introduced me to several local banks but since I was a first-time commercial estate borrower in that City I was declined by several of them it was quite frustrating but I eventually secured financing with a 20 down payment persistence and a nice looking suit paid off the down payment requirement of one hundred and forty four thousand dollars empty my bank accounts but the property still needed some fix up so I asked the seller for cash rather than a forty five thousand dollar credit at closing and I was able to get the work done for only fifteen thousand dollars so that left me with thirty thousand dollars as cash Reserves as I discovered the location was ideal even though it was a block away from a major university it was situated along a street that was more fitting for graduate students and University workers than undergrad students which I considered animals right therefore I wasn't renting to students which which have a reputation of being management nightmares as my mentors made so clear to me location is critical in commercial real estate investings investing you can fix a property but you can't fix a location the location of this property was terrific because of the jobs in in the immediate area choosing the right management company will solve very important to me because I didn't want to be a professional landlord and I would only be visiting a property every few months due to its proximity to me I chose a mid-size management firm to handle the management responsibilities the mom-and-pop management companies were only proficient proficient with managing single-family homes and a large management companies were too expensive to use Kiyosaki taught me to figure out my rat race number which was calculated as the bare minimum amount of money I need monthly to survive on including paying rent mortgage insurance food gas taxes kit School Etc this amount did not include Vacations or any other discretionary spending but just a Bare Bones number this was a number that I shopped for as a goal to meet once I hit and once I hit it on a monthly basis I would be out of the rat race I actually taped a piece of paper with the amount on my refrigerator as a daily reminder that what I needed to focus on that's how focused I was that's how bad I wanted it the two rental homes I sold cash flow to combined of 1200 to 1400 per month the new apartment building I purchased once the renovations were done and the vacancies vacancy rates were decreased it cashed out about sixty five hundred dollars a month I officially declare myself out of the Rat Race done finished you can't imagine a feeling I got when this happened I felt I felt so empowered I was a single father at the time and from now on when I picked up Junior from school I had a sense of security and confidence that even if I lost quit or or got laid off from my engineering job we'd be more than fined financially again what I accomplished goes back to one decision I made it seems that everything I wanted in life came down to one decision to go forth to take that leap of faith to defy my culture and to not settle but go after the desires of my heart with no regrets the single biggest bonus I received from escaping the rat race was surprisingly not money related let me explain ever since my son's mom left us my friends helped to help me get him to school and back each day especially when I worked later I traveled overnight I often wondered how much I owe them and how could I ever repay them well to make a long story short now that I didn't have to go to an office every day I was able to drive my son and his friends to school every day until high school started the joke amongst all the all of us parents uh was why is Mr Harris me so happy every morning and smiling when he picks up our kids every day in his pajamas he was always in his pajamas they would say little did they know right well I then saw off my other single family homes and purchased two more uh small apartment buildings then I ran out of down payment money and for more properties and along with advice my mentors I began raising private money so that I could acquire even more property and I've been on this amazing journey ever since and it seems to get better every single year after getting out of the Rat Race I helped a friend purchase his first four Plex and Office Space after his experience he suggested Peter you should start teaching people how to invest I brushed it off as a as a simple as simply as a kind word of thanks then I helped a fellow engineer buy two smaller apartment comp apartment complexes these two Investments gave him the courage and cash flow to lead the company I used to work for and start his own engineering firm he also encouraged me to start coaching and mentioning others on Commercial Real Estate and then that's when it dawned on me that I may have a talent for teaching others on this subject a true passion of mine I discovered is teaching people how to be successful investors even as a child I love helping the underdog and washing them beat the odds and do what others said couldn't be done eventually I was teaching people all over the U.S and one of my students who work for the marketing department of Donald Trump told him about the success I had or he had working with me and that's how I got to co-author uh a product with Donald Trump himself a few years later a major book publisher saw the type of commercial deals we were putting together with our students and asked me to write a book for beginning commercial listed investors that's how I got the opportunity to author commercial real estate investing for dummies a best seller now that's why mentoring people is so much fun for me I get to see people grow from owning zero investment real estate to all of a sudden owning several Acres of income producing real estate and what industrialized financially retirement wise and personally is very very rewarding it is so fulfilling for me and I believe that's what I'm called to do in my life serve people teach people help people get ahead that's my passion one such Mentor one such person I mentioned today is Jill he was an account manager for an advertising company in Manhattan in the heart of New York City he needed a way to replace his income since his firm was soon to be downsized he had dabbled in single-family home rentals but after three years he knew he needed something with more potential through my tutelage Joe found a motivated apartment owner of a 168 unit apartment complex who was in his mid 70s and ready to sell and moved back to his homecoming home country of Greece Joe had several obstacles to overcome namely he had only fifty thousand dollars in savings and had no previous commercial investing experience in a few weeks I coached him how to raise a down payment needed which is 1.3 million he raised the entire 1.3 million in about 60 days he structured the deal with a mass release agreement since it works for buyers with no experience with the lack of down payment and where nor banks are involved the Master Lease was structured for four years and after four years he'll have to refinance the current loan into his own company name Joe's out-of-pocket expense were for property inspections appraisal attorney fees and travel costs about thirty two thousand dollars Joe closed on the deal and left his job the property was appraised for seven million dollars immediately after closing giving him four hundred thousand dollars in Instant Equity I also had Joe negotiate that he will be credited for his debt for his pay down of his Mortgage Balance which will be approximately eight hundred thousand dollars over the next four years Joel saw the wealth building power of commercial real estate right before his eyes although there were many great things about Jill's deal the best in my opinion is that it only took one Deal One commercial deal in order for Joe's life to never be the same the second best part of this whole deal was from start to finish is that Joe could have been anyone including you uh Jill now uh has time to work on his next commercial deal which is a 9 million dollar commercial building that he's building from the ground up and my story continues today I have the awesome privilege of coaching and mentoring people from all walks of life in in just about every state through the Protege program found that our company commercial property advisors.com Engineers salespeople post office workers small business owners Physicians chiropractors route drivers stay-at-home moms airline pilots real estate agents insurance agents police officers stock brokers school teachers attorneys home builders and the list goes on as to the incredible people I have helped buy commercial real estate successfully this book is dedicated to those who want more and are now ready to go get it to those who were told you can't do that to those who know deep down inside they can do better than what they're doing now and and to those who dare to believe that their best is yet to come no matter what age race gender or family you are from let's do this chapter 1 definition of commercial real estate the term commercial real estate is a very broad term It generally refers to any property other than a single-family home or a residential lot in a neighborhood if real estate makes money is rented out is for Investments or falls into a number of other categories other than being a private residence it can be considered commercial real estate commercial real estate can also be defined as the following the term commercial property also called income or investment property refers to buildings or land intended to generate a profit either from rental income or capital gain it can also be the business of selling or buying properties such as office complexes industrial properties apartment complexes and Retail properties any property any real property except a property with only one to four units uh one to four dwelling units for residential use along with any property that's mixed with both residential and Commercial is considered commercial lastly it can be real estate used in the operation of a business commercial real estate can be leased or owned and may include a wide variety of property types such as apartment buildings that are five units and greater Office Buildings retail space and Industrial facilities here's a quick list of typical commercial real estate types that you'll see every day Office Buildings apartment buildings with five units and greater are considered commercial retail centers shopping centers op Medical Offices self-storage facilities industrial complexes warehouses mobile home parks hotels motels Resorts and the list goes on is basically where businesses are conducted over a people live together commercial real estate is everywhere understanding commercial real estate is essential since there may be different rules that apply to commercial versus residential real estate here's an example qualifying for a commercial mortgage is different from qualifying for personal mortgage since in many cases your ability your ability to get a personal mortgage is based solely on your income while your ability to get a commercial mortgage may be based on the income that's generated or expected to be generated by the property there also may be different tax rules for commercial property versus personal property such as and such properties may be treated differently in the event of bankruptcy commercial real estate is also the following commercial real estate is also a way of generating real long-term work wealth that pays you every month and potentially increases every year as an investor you can create a Perpetual means of passive income for yourself tax advantaged income that could last for the rest of your life and your kids lives we know of no better investment strategy than commercial real estate to help you get out of the Rat Race and stay out while creating generational wealth chapter 2 reasons to invest in commercial real estate Warren Buffett arguably the greatest investor of all time has given us a model for how to invest and why we invest in commercial real estate publish books from his past partners and family members all have a common theme to Warren's number one rule which is only invest in things you have an understanding of his advice is quite simple and an easy recipe to follow when bar when Warren understands something and then invests in it he achieves two major critical objectives number one predictability and number two control and control actually has six controls which will go over briefly Warren studies his Investments so well that he can very well predict what's going to happen that is actually his key to success and massive wealth Warren's intimate knowledge of an investment allows him to know when to wait when to buy when to hold when to partner and when to sell you'll soon learn in commercials in commercialist investing that you can do the same also when Warren buys a buys a company he negotiate and gets control of the company he gets control over six parts of a company there are the life and blood of every successful company they are income expense acid the debt management and insurance commercial real estate investing offers you these same six controls as well number one you control the income by raising rents number two you control the expense because you're calling to shots number three you control the asset because you can sell it or refinance it whenever you want number four you control the debt because you're the one who arranged the financing number five you control the management because you hire and fire the management company number six you can control the insurance by choosing the type and level of insurance desired so having predictability and six controls are true benefits in commercial real estate investing your first deal Let's Pretend This Is You you're in your mid-50s you have retirement savings but surely not enough to retire on you inherited a single-family home several years ago your stepsister had lived in it since but now has remarried and is ready to move on to live with her husband you put the property up for sale the real estate agent lists the house for 360 000 you now have to decide what to do with your sales profits put it in the savings CD stocks and mutual funds buy a business or invested in real estate after a few weeks of pondering those questions you decide to invest it in an income producing property to make a long story short you end up purchasing a 32 unit apartment complex not too far from your own home you hire a professional property management company to oversee the property the investment brings in about what you earn in a year from your day job by next fall you plan on working on a part-time basis to pursue more real estate investing end of story thus far now let's examine the benefits of of which commercialist investing brought you from this previous story probably the most important benefit for you for you is that now you have options by creating a castling business the commercial property that your boss has no control over if you were laid off or fired income you now have income to pay your living expenses that still exists next you can force the appreciation you have some control over the appreciation level of your property as you raise the rents the value of the commercial building goes up since the net operating income the noi has increased as well uh you have automatic Equity buildup as the mortgage is paid down thanks to your attendance and Rental payments your your equity and your property grows automatically next you have a good hedge against economic volatility if the real estate market has a downturn you can lower rents to keep the building full winning economy turns around you can raise the rents and ride your wave to higher cash flows next you have an excellent tax shelter rental income from Real Estate is extremely tax advantaged the main reason is due to a wonderful piece of IRS real estate IRS code called depreciation it is not an out-of-pot expense but still a deduction against your net income on your taxes this allows you to pay much less in taxes than your ordinary income from your day job next is leverage and velocity two very powerful wealth building words would you rather own 50 homes or a 50 unit apartment building with 50 homes you'll need to obtain 50 loans 50 appraisals 50 closings take care of 50 roofs mold 50 Lawns get the picture with 50 units you'll have one loan one appraisal one Closing one roof and one lawn to deal with which do you think will be easier and quicker to sell 50 homes or 50 or 50 in an apartment building from the management point of view is it more efficient to manage 50 separate homes or 50 homes Under One Roof I think you know the answer to that one lastly you have no day-to-day Management on your part wouldn't it be great if you could reap all the benefits of ownership cash flow appreciation and tax advantages without having to do any work well if you hire a good property manager or good manager that's what can happen let's move on to create instant wealth with forced appreciation and equity now I want to talk about forcing your property to be worth more by doing the following increasing the rents on your tenants one of the main ways that commercial property value is determined is by its net operating income or noi therefore the higher the noi the net operating income the higher your property value is it's that simple so raising rents and and Leasing and lease rates is by far the simplest way to do so to increase your property's value you can also decrease property operating expenses think of a commercial property as a business that sells products if you can reduce the cost of the product you sell while maintaining the same price then your profit is greater right the same applies to the value of your commercial property if you can reduce the cost of operating operating it but maintain the same rent and lease rates then you're more profitable right typical operating expenses that can that can reduce that can be reduced are the following employee expenses contractor usage utility usage repairs and maintenance office expenses property tax assessment Etc you can also give the property a facelift inside and out to create to increase the property value making improvements to your property cosmetically or by rehabbing it will not only increase their property's perceived value but handsome properties can charge higher rents and lease rates giving your office complex a brand new facade and remodeling the lobby will give your tenants a boost of prestige this will allow you to raise your rents on your new tents coming in and set you up for higher events when lease renewals come up next on increasing your property values your your vet your property's worth you can also change their properties high in best use my friend Linda inherited a large Warehouse that we used that was used as a plastic garbage can Distribution Center the business closed up shop and an empty building was all that was left it sat near The Wharf behind a tour Savvy shopping center Linda went to the city Plant City Planters office and sure enough it was the city's desire that the warehouse land be used for more retail shopping she saw the potential and approached a few shopping center developers in short order Linda had the zoning chains from industrial to commercial retail and soon began working on converting her Warehouse to a glass ceiling indoor mini mall while keeping the unique unique industrial Warehouse look it was a pretty cool building after two years since the plastic business closed doors Linda is now majority owner of a bustling mini mall sporting over 30 stores and opened 364 days of the year she kept one space to herself and opened a store dedicated to the development and Improvement of self-image and self-esteem of young girls and women that was the desire of her heart so changing their property use not only significantly changed the value of the property and made Linden Millions over but is going to significantly impact a great number of young women's lives as well that's a win-win you can also add amenities and anthem smartly many of the large apartments that we've been involved with have swimming pools so adding a swimming pool is no big deal and it may be more of a hassle than what value it brings in some cases WE Network with other property owners and share best practices with each other to learn what the latest n is what the latest in thing is to to do to while our our tenants throughout the years this is what we learned to increase our property values or our our our attendance property values or our clients property values and the neighborhood property values we've added a business center with computers bolted down of course right a fax machine a copier a cop resume the whole meetings of fitness centers with with available Trainers for hire free Wi-Fi especially near universities uh a coffee bar you know in this case we we copied a Starbucks theme or you can offer concierge services now obviously not every property uh can have or have these amenities but these items take money because these items take money and time to plan out and construct we constantly look at the costs and benefits of each as they are used and not use in some cases so the goal here is of the goal here of course is to provide our tenants with a unique experience and well thought out service that they could not get anywhere else at least in our neighborhood as a as as for a direct cash flowing amenity consider putting in uh a coin operated laundry facility under the property it was near College campus accessible and while marketing it can be a cash flowing Factory for you for Office Buildings consider charging for parking or valet parking for self-storage there are plenty of cash generators that can that you can add to enhance experience of your visitors and tenants Chapter 3 The Seven Habits of Highly Successful commercial investors I really believe it is a smart thing to study others who are successful in the field you desire to be successful in don't you with that said I have observed experienced and gathered seven wealth building habits for Commercial Real Estate Investors pay close attention to some of them as some of them are counter-intuitive to traditional real estate training and investing habit number one only invest in one asset at a time the power of focus the best and brightest shopping center owners are they are the best and brightest at one thing investing and operating shopping centers the same goals for the best apartment operators that that are at the top of their game they Don't Stray far from their specialty but rather focus on one asset at a time they don't try to be the Jack of all trades and master of none neither should you if you want to be one of the best and brightest Focus Focus plus follow through brings Quantum results focus focus focus here's habit number two they don't over leverage debt heavy debt is a cash flow killer even though debt is pretty much the norm on most deals be smart about it having high debt is a trap that snares cash flow and equity an easy way of measuring your debt safety level is to figure out your break even occupancy percentage to do this quickly simply add up all of your annual operating expenses that's annual plus all of your debt annual debt then divide that number by your potential gross income you'll find that your operating expenses will typically not very much but that your debt can have a huge impact on your break-even point in occupancy the higher the debt load the higher the break-even point in occupancy needed for example if your break even occupancy point is calculated to be 60 percent then after that it's on cash flow but if a calculation comes out to be 90 percent that spells trouble you have no room for error and you must keep your property at least 90 occupied just to pay the bills having 50 to 60 percent debt or what we sometimes call 50 to 60 percent LTV or loan to value on your property is ideal and not easy to achieve but it will keep you out of trouble and allow you to enjoy greater cash flow and less risk habit number three their properties are managed effectively and professionally having top-of-the-line Property Management whether you do it yourself or hire a company to do it for you is a major key to success in this business in a nutshell a top management company's ultimate goal is to maximize potential rental income reduce operating costs strengthen tenant retention and relations enhance visually appeal to property and increase the property value if they can do all of this you have a winner commercial properties that have the best reputation in the community have the highest rents the lowest turnover and have solid very solid Property Management in place good Property Management has well-oiled systems of accountability for what I call the four amps the four M's are money marketing maintenance and managing the staff four M's habit number four they patiently acquire and have tolerance for mistakes Rome was not built in a day building a good sized and Wealthy portfolio requires years to build and is built in one property at a time successful commercial property owners take their time and strategically plan out their Acquisitions over a period of years not months but years the real estate cycle and market conditions have to be just right in order to make the best buying and selling decisions time and timing of the keys the average real estate cycle is 10 years in length so give yourself at least that to build your room have you noticed that life tends to be built have you noticed that life tends sorry to have a built-in provision for the mistakes we make the most successful commercial property owners who I'm whom I personally know made huge mistakes Yours Truly in the past that have brought them literally to the knees but the most successful ones right here bounce back to do even bigger deals the moral of the story is it's human to make mistakes but it is also human nature to be an overcomer allow yourself room and Grace to make mistakes it is the highest form of learning there is habit number five they effectively partner throughout history no one has achieved impossible Dreams or built amazing companies without effectively partnering and or getting outside advice when you really think about it there is no such thing as a self-made millionaire somebody somewhere at some point helped or advised that person remember that the commercial investment business can be very Dynamic with lots of moving parts to it don't be average over a lot and massive Mastery of none do what you do best and hire out the rest to the best successful commercial property owners know the value of relationships success is a relationship based business you will always hear me say that finding the best deals solving the biggest problems and finding money for your deals come via relationships now to learn how to effectively partner with me with us please go to our website commercial property advisors.com habit number six all of their business systems are accountable well-run and profitable commercial Investments seem to go under the radar but what you will hear more of are the properties that are failing or are in deep trouble upon deep inspection you'll find that the troubled properties have a key component to their operation that has stopped working or has never worked and that failed component has calls or will cause other facets of the operation to fail down the line soon nonetheless a profitable commercial investment business has nearly every business component running at good or satisfactory levels remember that successful commercial property owners have excellent excellent internal Communications and accurate financial and operational reporting reporting is the key their systems allow them to to hold their business systems uh accountable to those responsible here is just a brief sampling of typical commercial property Business Systems accounting Revenue reporting internal controls property Staffing Marketing Systems maintenance of the property and the actual Marketplace all of those are separate systems that every successful commercial product and business has going for itself habit number seven they are well insured and their entities are set up for maximum protection privacy and tax strategy planned for the worst and be happy if it doesn't happen is the attitude and and habit of the most successful commercial property owners their goals their goals are to build a legal Fortress where strategic and intelligent insurance coverage and with the use of well-thought-out entities such as Locs llps Corporation tics trusts Etc a poorly protected investor may not may not only lose his or her properties to a real or frivolous lawsuit but personal property as well there are over 1 million attorneys in the U.S all wanting to deploy their skills maybe on your property if it's unprotected before doing any of this on your own consult an asset protection attorney and tax strategists first let's move on to the seven commercial investing myths here is myth number one you need to be a millionaire and have good credit to get started here's the truth Master lease agreement techniques is one of the many ways of buying commercial real estate with a reasonable down payment but not involving a bank or nor credit uh required Mass release agreements so look that up here's myth number two analyzing the deal analyzing the numbers is too difficult what's the truth can you add up rents can you add up expenses can you use a mortgage calculator if so that's all you need to calculate the most important figures in commercial real estate here's myth number three property management is the key to success you want the truth yes that is a myth that's right property management is the key to success is a myth a very important word was left out that would turn this myth into a truth effective the word effective effective property management is the key to success not just Property Management not just any old property manager will work right learn you'll learn that 9 out of 10 profit managers are actually no good and and will ruin your business unfortunately and and how to find them and and keep them in a business keep the best in your business is the key to this truth myth number four it's a good idea to park your money in a down Market here's the truth first of all if you are not a student of investing then it is wise to park your money in a down Market never invest in anything you have no knowledge of but if you have been in the investing investing game you know that the best opportunities are around when the market is mostly down as Warren Buffett quotes by winners blood in the streets actually there is no bad time to invest if you're skilled enough like us you'll have great deals to buy all the time up Market down Market sideways Market you discovered that the business of commercial real estate is a relationship business and as long as there are people good people you have good deals myth number five all the good deals are gone here's the truth as long as people believe in this myth that leaves more deals for you and I that's the truth myth number six investing in commercial is too risky here's the truth never invest in anything you don't understand your next investment is only as risky as your level of understanding in whatever you're investing in if you have no knowledge of something you want to invest in then it is risky go get the knowledge go get help get coaching get mentorship why would you make the biggest dollar investment in your life without any trusted mentors advisors to guide you why would you do that myth number seven I can't invest in commercial while having a full-time job here's the truth we recommend for you to have a full-time job when you get started right so that your cash flow to pay for living expenses is there as your portfolio grows you'll find that your job will start to get in the way of your investing that's exactly what happened to me although you won't find a perfect time to leave your job you'll know you'll know when it's time to leave do the smart thing have your passive income from your Investments at least match your take-home pay before planning on leaving your job and get help from people who have already been there and done that chapter four 10 opportunities to invest in commercial real estate let's start off with apartment complexes and as I mentioned before the commercial category for apartment complexes are when apartment classes are five units and greater so five units and greater is considered commercial anything below that is considered residential so this commercial category apartment complex is five minutes and greater includes everything from small apartment complexes to large apartment complexes that can span several city blocks you drive by these types of properties every day every apartment building you drive by is owned by some type of commercial investor who's in it to make money just like us what we find great about investing in apartments is that they're easy to find everyone needs a place to live and Banks love to lend on them let alone there are great cash flow generators the advantage of starting off with apartment properties is that they're a great way to jump into the exciting world of commercial is investing most commercial investors we know start off by investing in small to medium-sized apartment properties here are a few great reasons to invest in apartments they include everyone needs a place to live you have tremendous cash flow potential there are many apartments to choose from to invest in apartments are the bank's favorite to lend money on it's the easiest to sell compared to other types of commercial estate and finally it's an excellent asset to invest in when the economy is most volatile next let's discuss what's driving the demand for apartments Echo Boomers also known as Generation Y or Generation X are driving the demand to keep Apartments full for years to come now these Echo Boomers as as I just called them generation wide Generation X all the same names they're defined as people born between 1982 and 2002. the National Association of housing builders believe that 83 million Echo boomers are entering the market over the next decade that's going to provide a positive demographic trend for the apartment rental business this train is going to drive the long-term Improvement in apartment fundamentals basically uh in in summary the Generation Y the echo boomers are going to Drive Apartment demand for years to come and they're affecting the housing and uh well let me just say this the the Generation Y the echo Boomers were affected by the housing and financial crisis crisis and recession the last recession and they are now biased towards renting uh over uh home ownership and which are making the apartment rentals apartment property is very valuable for us they actually prefer the life of a tenant the life of a renter uh compared to home ownership again making it better for us so that's what's driving the demand for apartments as we see today let's move on to the office building the office building you're sitting in right now if you are is owned by a person just like you and I as time goes by you and your as time go by and your city grows more and more office buildings are being built one of the most enticing methods of investing in Office Buildings is by way of triple net leases this type of lease is one where the tenants in the property pay you the rent plus they also pay for the following expenses they pay for their property managements the upkeep the repairs the roof the structure and but they also pay for the property's insurance and taxes so three huge things all of the maintenance all the property taxes and all the insurance this is the true meaning of passive income in most cases you're high you'll hire a property management firm to keep the building full of tenants handle all tenant issues and pay the bills plus sending your check every month triple net leases are so-called because all three categories expenses are paid for by the tenant you know the repairs the taxes and insurance uh tenants pay for all three of those calls so that the rent you get is a net amount that you don't have to pay expenses out of so after the attendants pay for all the expenses and pay for the mortgage the rest goes into your pocket lastly it's quite typical for a triple net lease to be 5 to 20 years in duration with rent increases every few years but that could be a disadvantage as well and here's why let's say the lease is for 10 years if your neighborhood experiences explosive growth over the next three to five years you won't be able to charge higher rents or capitalize on what's happening because you're locked into a 10-year lease agreement so but but overall triple net lease Investments are very very much sought after let's move on to the retail or the shopping center retail centers shopping centers or malls as we call them are at the center of most towns and cities in our country these are the places where people come to shop to eat and to meet with friends most investors like retail centers because like office properties many retail properties are leased out on the long-term sometimes triple net leases whether again attendants pay for all of the expenses the upside to this is that an investor the upside to this as an investor is that your your Roi your rate of of event your your return on investment won't go down over time as the taxes and expenses go up because the tenants pay for them in fact as events go up over time your returns just keep getting better and better and in most cases in in the case of triple net lease agreements rent increases are built into the agreement with a tenant over time now let's quickly explore the different types of retail and shopping centers that exist and some of these are you from you're already familiar with the first term is an anchor tenant what is that well usually the first and the leading tenant in the shopping center when you drive up who do you see first you probably see the anchor tenant they have the most prominent place in the mall and uh their their prestigious they have name recognition and the benefit is they attract other tenants and hopefully Shoppers so they're known as the anchor tenant next is called Next it's uh the next term is called a power center this is an uh unenclosed shopping center with with the leasable era that usually contains three or more big box retailers right these are the big guys and various small retailers usually located in strip malls with a common parking area among the retailers okay so that's what a power center is now a big box retailer that's the next term what is that it's a physically large retail establishment usually part of a chain right examples include Walmart Target Home Depot though that's a big box retailer okay remember there are integral parts of the power center now what is a strip center a strip center is a shopping area made of made up of a row a retail stores traditionally anchored by a supermarket most times the next term you probably hear of is a credit tenant these are tenants that are usually publicly traded you know on the stock market are large private companies with a strong credit rating rating now what is a mom-and-pop tenant the the and the saying says it all these are the small businesses and small square footage these are Mom and Pop the hair salons right the the uh they fix computers right so these are the small mom and pop stores the other term term you're probably going to hear a lot is pad site this is a freestanding retail site often adjacent to a mall or large shopping center an example will be the photo kiosk a burger stand a little coffee kiosk or a drive-through gourmet coffee shop as we say all right that's the pad site all right so let's turn our Focus to self-storage facilities very exciting popular topic today well always has been very popular so let's face it Americans keep a lot of stuff and they need somewhere to keep their stuff when their stuff outgrows their homes and businesses they turn to self storage facilities and according to the substorage association Self Storage has grown into a 220 billion dollar industry huge now a slowsing a slow housing market can actually help storage facilities did you know that this is according to Industry analysts and local operators as the housing market slows down or slumps people tend to downsize their their houses and they need their place to store the extra stuff many self-service facilities uh uh you know many use selfless storage self-service facilities to store things such as you know their RVs or campers the boats classic cars snowmobiles any extra things they no longer have room for right now even businesses use them as storehouses too so today's typical storage facility May comprise of one or two-story buildings on two to six acres of land or even a multi-story building containing a carefully designed unit mix of spaces and the units typically range in sizes of five by five feet ten by thirty feet with 30 to 120 000 of total rentable square footage of space so they can be quite large here are a few typical Self Storage investor perks the first one is you have no tenants to deal with on a daily basis right no tallest effects also you have minimum income collection issues that because the tenant payments are automated and non-paying tenants are locked out next is you have multiple profit centers Under One Roof sales of boxes moving supplies locks billboard leases and a list goes on and lastly I believe is low risk because no single tenant move out will greatly affect your cash flow let's turn our attention to Industrial properties these asset types usually fall into three categories manufacturing light manufacturing and assembly and distribution Warehouse commercial condos distribution centers assembly plants office slash workspaces art studios workshops showrooms are all examples of industrial real estate very popular category these days experts predict that we'll see less and less Warehouse as time goes on and Technology can use to grow by heaps and Bounds with the development are barcoding Amazon right inventory control systems improved stacking and warehousing equipment industrial space has become very expensive to maintain as it is to be used so the question often often asked is is the land or the space a lot more valuable when used for another purpose or we call it highest and best use what happens if I'm on the same land as the 20 000 square foot Warehouse stands you built a 36 unit apartment complex uh so which one will possibly make you more money it's up to you but probably the 36 year apartment complex however let me just say this industrial real estate opportunities will always be in almost every uh metropolitan area concentrating in major transportation hubs so they'll always be around and with these areas the the major transportation hubs it is critical to be as close as possible to Transportation facilities since shipping times means money and the ability to get Goods in and out of storage is often critical between them both shipper and the receiver right so enough said about industrial properties so there will always be a need at one point we thought industrial was headed you know down downward spiral and then comes along guess who Amazon change the whole energy change the whole industry so it probably will never go away all right let's move on to something you're probably familiar with as well and that is hotels and motels hotels and motels are a different animal let me explain this once you buy a hotel motel you buy their property and they 24 hours a day 365 day a year business so this business requires hard work and marketing skills to keep the rooms constantly filled so it's not very passive so the rooms are worthless if they are vacant and the business tends to be a seasonal business and maybe affected me immediately by the economic downturn in political events so many of the businesses are family-run juice is very Dynamic and intense management requirements so uh so hotels and motels are not the easiest place to get started but many experienced investors have found it to be a highly profitable Niche so that's your Niche go for it all right let's talk about mobile home parks mobile home parks trailer parks manufactured homes it's all the same look at these commercial Investments as two pieces one the land and two the home that sits on it wouldn't it be great to own the land and just rent out the spaces you know we call them pads right for the mobile home park guys uh so wouldn't it be great to own the land and just run out the spaces the paths to the owners of the mobile homes that way you have no roofs no toilets no utilities to mess with that's as passive as you can get you basically just renting out the dirt most mobile home parks are owned and operated by Mom and Pop investors and these Investments are usually a combination of the land and the mobile homes themselves although the banks will readily lend on the land rarely do they want anything to do with lending on the mobile homes therefore typical typical typical therefore typically Sellers mobile homes offer seller financing or creative financing in order to help a new buyer with funding the purchase most mobile home park investors provide a very sizable down payment to the seller and then use Banks use bank and seller financing to fund the rest of the purchase although some people snub their nose at this type of commercial property type because they're not pretty it's a very good opportunity it's a very Niche opportunity and it has in my opinion uh these three great advantages right to only mobile home parks they are mobile home parks can range from 10 to 20 acres and as a result the land becomes valuable that eventually those homes are replaced by retail or residential real estate but in the meantime mobile home park is creating an incredible cash flow because in essence you're renting the dirt that the mo that the mobile homes sit on so you're leasing the land to people which makes it a very attractive investment Advantage number two there is a minimum amount of maintenance required by leasing the land to Residents you have very little maintenance needed right you just what do you have to do to maintain the uh to dirt uh Advantage number three there is also the possibility for many profit centers for example there is an option to bring in homes to provide tenants with a lease option so you're not only leasing the land but you're selling mobile homes on terms as well right so this is not a long-term proposition you are they are renting a home to purchase from you so basically by the time the those mobile homes get old and need work they're they're already owner and you're not got it all right um next let's talk about what I call special purchase properties uh these are uh special purpose properties are commercial real estate designed for specific purpose in mind they include restaurants gas stations you know for example brand names like McDonald's and Burger King are single tenant properties with long-term triple net leases which often require no management responsibilities from you the investor so here's how it works the restaurant operators sell their property not the business to investors and Lease back the property for 20 years they in turn use the sales proceeds to expand their business by building more restaurants you as investor or the landlord can expand with them buying and owning a property while being paid handsomely with zero restaurant business opportunities got it all right next let's talk about something you see every day and that's gas stations when you buy a gas station you buy both the property and the gas station business most gas stations also have convenience stores and sometimes several car repair base their profit margins for gas is fixed at roughly 10 to 20 cents per gallon if that right so this is considered an owner occupied property which qualifies you for an SBA loan with as little as 10 down right so look into that if this is your Niche if you don't plan to get involved in renting a gas station auto repair or convenience store business you may want to stay away from gas stations as gasoline is a chemical that will contaminate the soil once uh if there's a leak and a contaminants environment it takes years and lots of money to clean up the soil so be careful you may be even you you may even be liable for damages from owners of adjacent properties as contamination May spread out to their properties it's almost impossible to sell your properties as no lenders want to loan the buyers the money to buy it so buyers beware so these are very difficult to to finance these gas stations all right let's turn to commercial uh reos REO stands for Real Estate owned right so these are what I call bank owned properties right uh so uh so our commercial reels are commercial properties that banks have foreclosed upon now owner and now available for you to purchase and and sometimes and to be acquired at large discounts uh banks are not in the land loaning business and they don't want to be so by selling off their REO properties the banks free up cash to lend on other higher performing properties although commercial reals are not a property type they're they are very much commercial opportunities you should pay attention to as the economy changes it is not unlikely to purchase uh REO commercial property for opinions on the dollar for example I have seen fully occupied two million dollar retail strips sell for seven hundred fifty thousand dollars now that's how you build significant wealth the ideal way to get to get to get the best deal to purchase commercial REO from Banks is to come prepared to pay all cash right so that's how the game is played next let's talk about the commercial short sales commercial short sales work very much like residential short sales the short sale occurs when the amount owed on the property or the loan is more than the current value of the property the bank that holds a loan has to agreed to let the current owner of the property sell the property for a steep discount to a new buyer thereby quote unquote shorting the loan this is done to keep their property from going into a foreclosure you know the saying another man's trash is another man's treasure right well this is how you make significant profits using short sales as a strategy the property a a property that is right for throat selling will be in the what I call the distress category therefore you as a new owner will have to overcome potential issues such as catching up on repairs perhaps low occupancy poor Property Management those type of things the upside potential a more on most short sale commercial opportunities can be huge if Done Right There Are No Limit there are no limits on the amount of uh on the amount a commercial property can be short sold nor are there any limits on the type of commercial property that that can be so the sky is the limit here now our last category let's talk about REITs for a second for any for many people investing in real estate uh particularly commercial real estate is simply Auto reach financially but what if you could pull your resources with other small investors and invest in large-scale commercial real estate as a group REITs r-e-i-t okay just how you they've spelled Reit pronounced REITs allow you to just do that so reitstamp for Real Estate Investment Trust and it's sometimes called real estate stock essentially REITs are corporations that own and operate a portfolio of real estate properties and mortgages anyone can buy shares in a publicly traded Reit they offer the benefits of real estate ownership without the headaches or expense of being a landlord investing in some and sometimes reads also provides the important advantage of liquidity and diversity unlike unlike actual real estate property these shares can be quick can be quickly sold right and because you're investing in a portfolio properties rather than a single building you face less Financial Risk Reese became uh came about in in 1960 when Congress decided that smaller investors should be able to invest in large-scale commercial real estate it determined that the best way to do this was to follow the model of investing in other Industries the purchase of equity here's how it works accompany the Reit must distribute at least 90 percent of their taxable income to its shareholders to qualify as a rate so most REITs pay out 100 of their taxable income so in order to main the this status as a pass-through entity a Reit deducts those these dividends from his from his corporate taxable income a pass-through entity does not have to pay corporate federal or state income tax it it passed the responsibility of paying for these taxes onto its shareholders so REITs cannot pass tax losses through to investors however right so I mean be careful of that all right so here's how to oh the other requirement is as at least 95 percent of REITs gross income must come from financial investments in other words it must pass in 95 Income Tax test or 95 income test these include rents dividends interests and capital gains in addition at least 75 percent of the income must come from certain real estate sources we call this this 75 percent income test including rents from Real Property gains from a sale or other disposition of real property and income and gain derived from foreclosure of the property next let's have a look at the different types of REITs let's start with the three Reit categories we have an equity read a mortgage rate and a hybrid rate excuse me let's start off with Equity REITs Equity rates purchase and own and manage income producing real estate properties such as Apartments shopping malls and Office Buildings Equity reads are different from typical real estate developers because they purchase or develop real estate to operate as part of their portfolio instead of in developing it for resale Equity reads are considered Superior for the long-term investing because they earn dividends for rental income as well as capital gains from the seller properties rather than investing in properties the mortgage rates loan money for it for mortgages to real estate owners or or purchase existing mortgages or mortgage-backed securities their revenue is generated primarily by the interest that they earn on their mortgage loans mortgage rates react more quickly to change in interest rates than than Equity rates can because their dividends come from interest payments so today there are there are close to 40 mortgage rates available of these 25 invests in Residential Mortgage Securities and arrest and Commercial mortgages let's move on to as the name suggests uh the hybrid reads they are a combination of equity and mortgage rates they both own property and make loans to real estate owners and and operators hybrid reads earn money through accommodation rents and interests all right now although some REITs have uh have a broad focus and invest in a variety of property types in a range of locations many REITs Focus their Investments uh either geographically or by property type an individual Reit May hold properties only and specific only in a specific region state or metropolitan area or it may hold properties that may hold properties across broader geographical areas but focus on things such as health care facilities apartments or industrial facilities uh if you want more information you can go on to the National Association of Real Estate Investment Trust we call that the n-a-r-e-i-t so you can go there and do additional research on there there are nearly 200 publicly traded REITs uh you know register with what what what the SEC plenty to choose from and there are also 20 REITs that are that are not traded that you can possibly participate in all right lastly um or maybe not lastly but I want to talk to you about uh ticks or tics are a way to own commercial real estate without physically managing it while getting pretty much fixed return on your investment basically what you're doing is buying a piece of the property along with other investors on the other investors and it will be managed by the TIC Company the company is sponsoring the investment so tic stands for tenancy in common that's why we call them ticks or tic Investments they're now a booming industry in the U.S and have grown in recent years um so a tendency in common investment or you know we call them ticks is an investment by the taxpayer in real estate which is co-owned with other investors right since the taxpayer holds a deed to real estate as a tenant in common the investor qualifies under the like kind rules of a 1031 exchange so you can actually 1031 exchange your your ticks into other Investments so take some ticks tick Investments are typically made in projects such as apartment houses shopping centers Office Buildings Etc and tick sponsors right are also known as the tech companies arrange syndications uh with the IRS uh and and it and there's a minimum if they do rev procedure 2002-22 which limits its number of investors to 35. so so do your research on ticks and you'll be very surprised at what they can do there all right so um so tick Investments are are commonly structured in one of the following ways either it could be a single tenant property with an established credit rating you could have multiple tenants subject to a Master Lease with the tick sponsor who sub leases attendance you can have multiple attendants each with separate leases managed by professional management and taxpayers considering a tick investment should be prepared for an investment which may last for several years with limited liquidity that means your money may be trapped in for a while until they're sick until the tick decides to dissolve or sell their property so as with any other real estate investment such as a tick you can be subject to various business risks right so so you should consult the track record of the sponsors or the management company before you invest with them um if you wanted to learn more about ticks or tics you could go to the tenants in common Association or Tica or a tic Tica ssoc.org okay or tickles.org all right so lastly I'm going to talk very shortly about real estate crowdfunding a very very exciting topic today Title II of the jobs Act of 2012 inclusive provision allowing companies that could be you to sell Securities right that's raising Capital through open platforms such as the internet and it has lifted a ban on General solicitation and advertising and specific kinds of private placements of Securities meaning that this this Title II of jobs acts has made it easier for you to raise money for your real estate opportunities the this gives rise to a brand new commercial asset investing opportunity for accredited investors called real estate crowdfunding so in a very short amount of time there has been an absolute explosion and the number of companies offering these Investments and currently we are still today in the infancy of this investing opportunity with real estate crowd funding you are buying shares of an investment property and proponents of this new type of commercialist Investments argue that investors have much greater understanding of where their investment dollar is going than in REITs because it is specific to one particular property okay but the drawback as everything has right would be that you have to be an accredited investor to participate depending on what extra strategy the crowdfunding manager is your funds can remain tied to the investment for a significant period of time further as with industry as with any industry in its infancy proceed with caution since virtually since because it's new no company has a long track record and even today right as I as I taught today that you must be accredited investor today there are allowing non-accredited investors to invest in these type of Investments so buyer beware be careful and do your research chapter 5 getting started in commercial real estate tools you need to get started in commercial investing here are a few desire desire is Numero Uno a great mentor of mine shared with me that to achieve anything great and worthy it's not going to be easy you you gotta have a strong desire in you unquote so a strong desire outdoes in my opinion talent and Gifts any day of the week when it comes to real estate investing next you're going to need a computer with internet access thankfully technology allows us to search and research commercial properties and owners of commercial properties nationally without leaving the comfort of our homes next you'll need a cell phone or telephone with voicemail you'll have to call up real estate agents sellers property managers set up appointments and perform simple due diligence tasks next you need a simple calculator get one nothing fancy is required or you can even use online calculators or perhaps the your your cell phone app calculators next you'll need to start in your own backyard I suggest starting your market research and having an intention intention on investing in your own City first it is by far the easiest and most efficient way to begin investing out of state for the first timer should be should be your last resort and should be done with the help and guidance of a skilled advisor by starting locally you'll be able to drive around meet people in person check up on the property easily and learn the business faster lastly you'll need a minimum of two to four hours per week of dedicated time that's dedicated time Focus time to work on this endeavor now obviously the more hours you put into your goals the quicker they will come to reality here are tools not required to get started in commercial investing so you don't need these tools number one is you don't need a real estate license to buy commercial real estate secondly you don't need to have started in residential real estate first to go into commercial real estate thirdly you don't need to have business MBA to understand everything in commercial real estate and lastly you don't need to be a millionaire to do your first deal although a little bit of a little bit of money can go a long way now let's talk about how to become a commercial real estate investor Insider to become a commercial real estate investor Insider it is pertinent that you are up to par and even an expert in your comfort zone these things listed here are how you are constantly informed and a step ahead of other real estate people uh as as well as your own Market besides doing these things religiously and always analyzing the data that you collect there are a few other specific tools that will allow you to see into your commercial real estate future and identify opportunities that others will miss the first is a city's future land use master plan or map right so I'll repeat that the first is the city's future land use master plan or map that shows the future zoning and use for all the land within the city's limits some cities may not have one if they are too small and and not looking to grow however most cities do have Master use plans that are used to dictate the entire future of a city's economic makeup the map is used to plan for growth so that all elements of a city are controlled zoning and use may change for operating properties Others May Others May remain the same there is a possibility of a law rant of raw land to be annexed into the city having a specific use offering huge opportunity opportunities to the commercial asset investor there may be a need to tear down or renovate old properties and develop them for different use the possibilities of of what a future land use map holds is gold in the eyes of an investor and extremely important to all those working in commercial real estate so refer to this map and actually visit the locations of where there is change to identify opportunities as area as every area is different you will be amazed as to what opportunities will unveil themselves when you when you bring to it a little vision creativity and Insider information regarding the zoning and use of a property another tool to see into the future is the economic forecasts for your area but looking at the past and future per capita income population growth rates housing costs and other such data that can be found through the census and local Chamber of Commerce you can see the overall economic environment of your city and how it is performing perhaps a continuing decrease in population means people are moving out of the city telling you not to invest in new homes or apartment or or do a apartment development in that area or the growth that has been so extreme that the city is in desperate need of commercial property in order to support the influx of people you can definitely plan on how you're going to move in the market with this information by your side the final tool I urge you to utilize when predicting your commercial real estate future is already approved infrastructural changes within your city this will require you to attend city meetings regarding zoning Planning Development Etc there could be discussions of a of a new development a year or more before it actually occurs and once you hear about it you can start putting your own ideas into place as I am sure you have already know large influential infrastructural changes can greatly increase the land values of properties that surround them here's an example a large strip mall being developed will increase the value of all the land surrounding it as well as possibly call for a greater demand of residential units and an increase in the lot and rental prices that can be charged according to the new market let's say that you hear two years in advance at a strip mall that will begin after uh that will begin development after it is approved you are then going to get a jump on all the competition look at the site the land surrounding it and the opportunities it may offer can you purchase the now extremely cheap land adjacent to the site or perhaps the poor performing apartment complex in anticipation of this new development so that you may benefit from the price increase as major infrastructure change is going to cause absolutely you can these things happen all the time and I urge you to be a Visionary and look to the Future after all this is where a majority of commercial estate profits are made by creating something that that either wasn't there or improving upon what is there so as you can see you may not have a crystal ball that does all the work for you but I promise that if you use these tools and follow these guidelines you will be preparing yourself for great opportunities that others quite simply will overlook it will take some effort of course and constant dedication however the results that that you yield will be more than worth it actually it is much easier to be the what I call the first mover rather than Suffering The increased land prices and and changes after development is already in place or even underway so realize your power to predict the future and plan your goals accordingly you'll be successful with these tools so Implement them today many people may not realize you can literally become a commercial real estate Insider just by working in your own local community there is a wealth of opportunity for those who are motivated and wanting to make a difference not only in their own lives but in the lives of people in the community as well you do not have to travel across the U.S or around the world to find money making properties that will financially take care of you for the rest of your life it simply takes two things in order in order to become a real estate Insider number one knowledge of your communities real estate opportunities and secondly a steady increase in your own education now let's discuss what makes a commercial real estate Insider what is that a commercial real estate Insider knows the ins and outs of the real estate market and his or her own area of Interest this interest could be in office complexes large apartment complexes strip malls medical buildings and various other income reducing properties the commercial real estate Insider recognizes Trends the value of the property changes in values before they happen all zoning laws and regulations and infrastructural changes that can drastically affect the values of lands on around the new development the commercial real estate Insider also knows the city decision makers he or she knows with whom to speak with in order to get information advice notice regarding changes in the zoning laws or regulations and to stay ahead of their real estate market so the question is how do you become a commercial real estate Insider well to start you should understand that a large part of commercial real estate is dealing with the officials and decision makers of the city or county because they are the ones who decide zoning and use for every piece of property within the city or County's boundaries they plan for future growth and attempt to create a balance among residential and Commercial properties so that the community does not grow too too quickly or become unbalanced now due to the fact that the city officials are so important to your ability to develop renovate and otherwise do what you want to do to a property it is crucial that you get to know these people and create a rapport you also need to know what is occurring in your community regarding real estate at all times zoning often changes there may be new regulations or calls regarding the zoning or the intended use can be limited to only a few uses that will hinder your intended project all the above all these things can greatly affect your dealings with with a specific property and how you pick and choose opportunities a good way to uh in my opinion to meet these officials as well as learn about the real estate market in your community is to attend zoning and planning meetings at your local Chamber of Commerce or Courthouse it is there that you can meet face to face that people who will influence your future as a commercial real estate Insider introduce yourself as a real estate investor and give them your card ask intelligent questions regarding real estate in your community eventually after building a rapport with these influential people ask if you can meet with them to discuss a certain project or something in which in which you could use more information or advice you should always come to these meetings prepared with your questions so that you stay on task and topic and not waste their time so that you appreciate their time of course and and as well as our knowledge and expertise it is a great idea to ask for a few more introductions to people they know who may be able to help you don't forget that always send a thank you note that's big I'm I'm big on think you know so always in a thank you note and briefly uh that briefly reviews your discussion uh what advice you use and how how it will uh or how it has helped you okay so uh people love to be recognized and when they show appreciation for their advice they are more likely to help you in the future or share information of which others may not be proving and you will begin to make excellent contacts and learn key elements regarding your specific Market guaranteed this is how you become a commercial real estate Insider also Beyond meeting the people who make the big decisions regarding the use of the property in your community you must know the laws and regulations regarding the various types of zoning zoning labels May differ from City to city as do building criteria the size of lots building and fire codes and limitations all the above you must study these rules and regulations so you so that you know that you can or or cannot do what you can or cannot do to a property as these rules and regulations often change it is important that you listen and take silent notes at all zoning and planning meetings and other important real estate related meetings you might attend your goal is to know your Market inside and out so that you can make decisions based upon the changes in the market before anyone even knows they are coming you do this by recognizing certain points such as an increase in vacancies or commercial property or an increase in medium home prices or how the new plot how the new mall plan to be developed in one year is going to greatly affect the land values around it all right so in addition to understanding your own Market you should be reading the newspaper you really should trade journals commercial estate articles many of them online commercial real estate books uh 10 seminars speaking with others in the area this is commercial real estate is such a a relationship based business it really is um so basically uh you want to increase your knowledge all around and it is with this constant training that you will learn strategy how to finance things information about private information about private lending and lenders how to find deals right that's really important how to present offers what makes markets hot new opportunities in the area that others are not aware of and many other tools and strategies that will keep you ahead of the rest all right so to be a commercial real estate Insider you must always be on your game make those contacts ask pertinent questions learn everything you can about your business and act on this information you would discover that you find opportunities that you didn't did not know existed and you will become a commercial real estate Insider sooner than you would think chapter 6 a simple way to analyze commercial real estate to get straight to the point once you find a commercial deal to evaluate you'll need to find the answer to this all-important question rather quickly how much is the cash flow in evaluating any commercial deal or any income producing property for that matter there are three steps to figure out cash flow the three steps are step one get the income per year step two get the expenses per year in step 3 get The Debt Service per year and Debt Service is defined as your monthly mortgage times 12. so your mortgage payments per year so again step one get the income per year step two get the expenses per year and step three get your debt service per year this is all you need to initially evaluate any commercial deal got it it's pretty simple and after you do this all that's left is step one right income minus step two expenses minus step three your mortgage and that equals your cash flow so so another way uh said is your income minus your income per year let me start over your income per year minus your expenses per year minus your debt service per year equals your cash flow all right so I'm gonna I will do a quick uh summary for you step one is to find out what the total rents are per month so add them all up and then get the yearly amount by multiplying by 12 12 months okay so 12 step one step one is your your income per year step two is to find out what the operating expenses are on the monthly basis for the property the operating expenses do not include your mortgage okay or depreciation But it includes it but includes typical items like taxes Insurance utilities repairs maintenance Property Management costs salaries Landscaping admin cost advertising and supplies okay so you notice I left out uh mortgage mortgage costs and depreciation okay I'm strictly speaking about operational costs that's step two step three is to find out what the monthly mortgage would be if you bought the property and then multiply that amount by 12 to get an annual mortgage amount that's step three we call this your annual Debt Service okay all right so let's do a quick and easy deal evaluation of an eight unit building I'll try to keep it as simple as possible okay so we have eight units they're all two bedroom one baths and the rents are 600 per month okay and the total expenses uh for the whole year which includes the taxes Insurance repairs utilities management costs marketing supplies that seventeen thousand dollars per year all right so the the rents you we have eight eight two bedrooms and the rents are six hundred dollars per month okay I may have said per year before but 600 per month for each of the eight now so let's talk about step one the income is six hundred dollars per month per unit times eight units okay that's forty eight hundred dollars per month I multiply that by 12 months I get fifty seven thousand six hundred per year okay so Step One is done Step One is the rents uh per year are or the income per year is fifty seven thousand six hundred that's done let's go to step two step two if I add up all the expenses I mentioned before seventeen thousand dollars per year let's go to step three step three the annual Debt Service let's figure out um it you're purchasing it for two hundred fifty thousand dollars you're putting down twenty percent all right so you're gonna do two hundred fifty thousand minus twenty percent which is fifty thousand so your mortgage amount your principal is going to be two hundred thousand dollars okay just like buying a house now to figure out the monthly payment I'm going to use seven percent interest rate Thirty Year amortization that payments come out to be one thousand three hundred thirty one per month I take that number and I multiply it by 12 to get the annual Debt Service so 1331 times 12 is 15972. all right so now I've I've completed step one step two and step three we have all three things to do so uh the the uh the cash flow therefore is step one minus step two minus step three that equals the cash flow so fifty seven thousand six hundred of income minus seventeen thousand dollars in expenses minus fifteen thousand nine seven two and an annual Debt Service equals a cash flow of twenty four thousand six twenty eight per year got it was that too difficult no it wasn't right what you just did can be used for any type of income reducing uh commercial real estate an office building an apartment building shopping center Self Storage Mobile Home Park and the list goes on all right so now you know how to do that let's move on to a different subject and that is how to get Mastery of property evaluation specifically commercial property evaluation what does it take to have Mastery in anything first of all Mastery is earned not born with Masters deliberately practice their field and concentrate their efforts on improving their skills and if you'd like to have Mastery in evaluating commercial deals you'll need to do three specific things number one no one understand fundamental investment terminology which is in his book number two put it to use on a regular basis we'll do an example in this book that we just did one and three practice practice practice and practice again uh one to build uh Do you want to build instant Rapport and credibility with Brokers and and sellers and and Property Owners then start using some of the terms you're going to learn here in your conversations with agents with Brokers and owners when I was new to investing I noticed that when I use such words as operating expenses expenses per unit cap rate and Debt Service they paid more attention to me it seemed that it seemed that using those words brought me inside their world they no longer saw me as a newbie or as a single family home person wasting their time it gave me instant credibility even though I hadn't even purchased one property yet so I want you to try it and you'll you'll see what a difference it makes all right so the following 10 uh the following are our 10 most basic and key commercial real estate investment terms that are must uh to become familiar with these 10 are the bare minimum I say you must know to become successful let's go through them the first one is gross income gross income is defined as rents uh laundry vending machine income you know whatever it takes uh to to you know whatever whatever income the property is producing you have to know what the income is vacancy a unit that is uh left um unoccupied is not producing income is a vacancy all right so uh so know the word vacancy uh next is vacancy rate vacancy rate is a percentage it's it's uh the number of vacancies uh divided by the number of units is is how you get the vacancy rate the next word is effective gross income effective grossing income basically is your gross income minus your vacancy okay that's your effective gross income next operating expenses as I mentioned in the previous example annual operating expenses of a property typically include taxes Insurance utilities management fees Landscaping Maintenance and repairs and advertising again this does not include mortgage payments or or Finance interests or or any depreciation okay only operational expenses next net operating income also known as noi very very important number so if anything you remember remember the noi net operating income which is basically your effective gross income minus your expenses all right so this is your net income your net operating income remember that term uh next is Debt Service Debt Service again is your monthly mortgage payment multiplied by 12 months so you get a and you get a an annual Debt Service okay next is cash flow cash flow is your net operating income minus your debt service so your your net minus your annual mortgage payments is your cash flow right and um and then if you take the annual cash loan divided by 12 months you end up with the monthly cash flow if you want to do that next is Cash on cash return it's a percentage cash and cash return is another word for it is return on investment it's a percentage and that can be that is defined as your annual cash flow remember annual cash flow divided by your down payment that equals you do that math and it equals your cash and cash return next one and last one equally as important as the noi is the capitalization rate that's all also a percentage uh and that's defined as your your net operating income divided by the sales price this is also known as the cap rate so get used to hearing that so it is a measure of profitability of an investment cap rate tells you how much you will make on investment if you paid all cash for it right so therefore financing and Taxation are not included in the cap rate okay so cap rate again is your noi divided by your sales price all right um all right um so the next thing to do is uh is to understand how these terms are used in Everyday deals that you're going to see now and in the future we do that by using all of them in examples or in practice deals there's no need to memorize the terms at this point no need for that but what you'll discover is that these 10 terms will start to sink in your head as you go through more and more practice deals and examples guaranteed chapter 7. four guiding principles of commercial investing establishing your four guiding principles of investment what types of commercial property should I consider making offers on and buying that's a very good question and on what basis do I make my buying decisions what is a good cash flow what is an acceptable return on investment what's a decent cap rate how and when do I use gross rent multiplier these are all good questions that you or anyone contemplating investing in real estate should be asking first of all you'll need a working knowledge of the following cash flow cash and cash return cap rate and gross rent multiplier you'll need to know the definition and know how to calculate them secondly you'll need to know how cash flow cash or cash return cap rate and gross rent multiplier affect your investment we'll learn this in a second I'm assuming that by now you can Define and calculate cash flow cash and cash return cap rate and grossip multiplier so what is to learn is how each of your each of these investment terms affects your Investments and decision making the following investment terms are now your guiding principles of investment terms they are number one cash flow number two cash on cash return number three cap rate and number four gross rent multiplier let's discuss cash flow first your first guiding principle cash flow positive cash flow will be the main goal and it will be one of our primary objectives positive cash flow creates and maintains your Investments momentum what puts you in a good mood positive cash flow or negative cash flow when purchasing commercial property A bank's base is for Lending uh is the building's cash flow abilities and property condition a building with poor cash flow will almost appraise much lower than its comparables or its competition for the area so your first guiding principle is positive cash flow guiding principle number one positive cash flow let's talk about the second guiding principle it is Cash on cash return again it's a percentage this is the velocity of your money in other words cash and cash return defines how long does it take for your money your down payment to come back to you if your down payment was twenty thousand dollars how soon does your cash flow add up to twenty thousand dollars if your cash flow added up to twenty thousand dollars in one year then your cash on cash return is one hundred percent if it takes two years then your cash and cash is 50 if it takes three years then it is 33 percent and so on you got it real estate can potentially produce phenomenal returns cash and cash returns of over 100 percent are not uncommon now if you were to go to your local bank and deposit that same twenty thousand dollars into their most aggressive CD or certificate of deposit for one to three years what type of cash or cash term would you expect probably less than one percent so we need to put an emphasis on cash on cash return When you invest simply because you need to know how fast can you get your down payment back so that you can invest it again and again so your second guiding principle is a cash and cash return of 10 percent or greater got it the first guiding principle is positive cash flow the second guiding principle is Cash on cash return of 10 or greater let's move on to your third guiding principle which is capitalization rate or cap rate a cap rate is used as a measure of a building's performance without considering the mortgage financing if you paid all cash with investment how much money does it make what's the return that's what a cap rate is cap rate is a is a standard that's used industry-wide it's used in many different ways and I want to share with you a few ways in which to use it a high cap rate usually typifies a higher risk investment and a low sales price all right so the correlation High cap rate equals high risk and low sales price High Capri Investments are typically found in poor or low-income neighborhoods however a low cap rate usually typifies a lower risk but a high sales price again a low cap rate is lower risk but a high sales price so completely opposite in the high cap rate right so low cap rates are typically found in middle class to Upper income neighborhoods the nicer neighborhoods therefore in neighborhoods within cities have stamped on them their cap rates right so we call these market cap rates with that said if you know what the noi is and you know the given cap rate then you can calculate the cat what the sales price should be right because sales price equals noi divided by the cap rate all right enough with that uh let me give you the uh the the guiding principle for the cap rate is eight percent or higher okay so the first guiding principle is positive cash flow the second guiding principle is double digit cash and cash return or ten percent or greater and the third guiding principle is a cap rate of eight percent or higher let's move on to the fourth guiding principle which is the gross rent multiplier not C the girls multiply used much these days but I think it's useful to know so let's go over it grosser multipliers are used as a measure to compare income properties in one area or a neighborhood let's say there are three rented apartment complexes in a neighborhood one of them goes up for sale if you know the girls room multiplier for the neighborhood then you can gauge if it is comparable to the other two properties right so if the gross or multiplier of one of the complex is being sold is higher than the other two then you may be paying too much if the gross multiplier of the complex being sold is lower than the other two then you may be getting a property under market price grocer multiplier is also a good indicator of the investment's ability or potential to cash flow as as the gross or multiplier lowers your cash flow increases in most cases and the opposite is true as it grows from multiplier increases your cash flow typically decreases therefore let me give you the fourth guiding principle is you want a gross or multiplier of nine or lower right nine or lower the definition of of gross where multiplier is your purchase price divided by your annual income and that number is nine or lower your your guiding principle is met you can proceed got it all right so that's your first gun that's your fourth guiding principle now here's an important note um when you are looking at income properties and and analyzing them analyzing them it is absolutely necessary to have your four guiding principles investment uh so as I listed them above we have established your starting guiding principles without them you you will just wander aimlessly in this real estate investment game and if you have no goals you have a very weak game got it so so uh your established guiding principles of investment are your standards if an income property does not match up to your guiding principles then the property must be passed on go on to the next property and search of the one that matches the one exception you'll make occurs when you are analyzing a value add opportunity and then uh the The Guiding principles May pertain to how it performs after the repairs okay after the the value has been added all right so in summary here are your four guiding principle principles of investment the first one the first guiding principle is positive cash flow the second Gandhi principle is is a cash and cash return a 10 or higher the third guiding principle is a cap rate of eight percent or higher and your fourth guiding principle is a gross rent multiplier nine or lower chapter eight three commercial analysis examples Mastery of real estate investment terms through property analysis the purpose of these three exercises is to measure your Readiness and understanding how property commercial property is analyzed by using the investment terms we just learned and mastering them as each property is analyzed each investment term will take on a more definite meaning the terms will begin to sink in and things will start to click guaranteed so these are three practice problem properties remember is practice it's okay to not know it's not okay to pretend you know take as much time you as you need in completing both exercises as I go through them by the end of the exercise our goal is to enable you to fundamentally analyze just about any commercial investment by knowing how to calculate three things cash flow cash on cash return and cap rate we will review each practice property in full in full detail and each of these properties has their own unique problem or twists so listen very carefully solving problems and spawning twists are keys to to to spotting poor average or great Investments you'll learn this example number one eight it's a 20 unit apartment building they're all two bedrooms built in 1972 asking price is 550 000 or about 27 500 per unit down payments twenty percent been on the market for 39 days we have a mortgage payment of two thousand seven eighty one per month and it's a Class C apartment building I'm going over this like it said like it's a listing now here are a few details you should pay attention to it's a well maintained 20 unit complex located in an up-and-coming area one block from City Hall the owner just spent over one hundred thousand dollars in rehab and upgrades in the last 12 months all new furnaces and air conditioning owner is retiring to Florida with his family Professional Property Management in place and managed very well the apartment manager who lives there gets free rent for services good rental history covered parking tenants pay electric and heat owner pays for water and garbage storage Galore solid investment so key details now now let's go over the income so we they're all two bedrooms all the rents are 525 dollars per month and you have 20 of them so you do the math so 20 times 525 25 per month equals a hundred and twenty six thousand dollars per year I'm going to take out a 10 vacancy factor and I have an effective gross income of 113 400. I have a slew of expenses operating expenses was totaled to be fifty seven thousand and that's about 50 percent of the uh effective gross income so I've been noi of fifty six thousand two thirty remember the noi is the effective gross rental income of 113 000 minus the expenses of fifty seven thousand gives me fifty six thousand to Thirty I have an annual Debt Service of thirty three thousand three seventy two then have a cash flow of twenty two thousand eight fifty eight or nineteen hundred dollars a month cash and cash return 21 and the cap raised 10 percent right so here's how to look at this deal here's what I see right away it appears to be well maintained in a stabilized investment on paper which wouldn't you agree there's also been lots of upgrade upgrades so uh so repair costs should be in check a cash flows well conservatively and it's a solid Class C property so that's kind of what I see right away now here's what to pay attention to now as I go over these things I want you to just listen very carefully because you're going to apply everything that I think about to all of the all of the deals that you look at moving forward and when you use these three examples to kind of open your eyes up to what to look at uh so here's what to pay attention to attention to on this deal so five units or more is considered commercial right and it requires at least twenty percent twenty twenty percent up to twenty five percent down payment number two the expenses are fifty percent of effective gross income that's rather high for a 20 unit apartment building it should be in the 35 to 40 percent range uh number three pay attention to the price per unit which is the sales price divided by numbered units pay attention to that figure it's an important indicator that all apartment experts use to gauge how much they are paying in terms of value for that neighborhood so us apartment experts talk price per unit rather than overall sales price it will help you determine if you're paying too high of a price or if you are buying Under the market next is who pays for what utilities on this property having attendants pay for their own electric and heat usage while the owner paying for water and garbage is ideal and typical so beware of properties that have mastered utilities for example one meter for for all for the for all the electric on the property and one meter for all the gas in the property right that means there's only one meter for the entire building and and the landlord pays for the whole bill that's not good it's not ideal next is don't miss out that the live-in apartment manager gives free rent did you do you remember that so did you run your analysis on 20 units or 19 units rented hmm and secondly do you plan on keeping him or using or just using a property management company and written his unit out so you have those choices as a new owner last but not least there's plenty of storage on the premises could this be a possible means of additional income I don't know but it's worth exploring all right so that is example number one let's move example number two which is a shopping center it's called Delaney Plaza it's at thirty thousand square foot shopping center strip mall the asking price is 3.1 million or 86 dollars per square foot again we're going to put down 20 percent and um we have a mortgage payment uh fifteen thousand six seventy five and it's a Class B property here are a few important details thirty six thousand square foot uh retail center it's a three acre lot so it's pretty big anchored by a major chain Sporting Goods store uh sent it's at the center of town right in the path of progress the retail Center is composed of eight stores of various types ranging from a coffee shop to a Regional Bank all leases are triple net with the owner charging attendance for a common area maintenance or we call that cam okay common area maintenance so the cam expense for the owners three thousand dollars per month and includes Landscaping parking lot hallways and restrooms and he again he gets to build that back to the tenant all right so uh the the uh again we have 36 000 uh square feet of of commercial space we have eight tenants and the yearly rent if I add up everything is 287 000 right so that's the yearly rent here's a note on the expenses for the expense breakdown because they are all triple net leases that tenants pay all of the property operating expenses remember that triple net lease so the landlord takes care of all common area maintenance expenses but bills um all the expenses back to the tenants divided among them therefore operating expenses are zero for the landlord that's the beauty of the triple net lease now what is the noi well because there are no expenses the income is the noi if you recall the income was 287 000 so my noi is 287 000 per year I have a Debt Service of 188 000 there therefore have a cash flow of ninety eight thousand dollars a year or 82 42 per month I have a 16 cash on cash return and a cap rate of 9.3 here's a few questions does this deal Meet The Guiding principles yes it does next question is this a deal you'd be interested interested in pursuing if so what qualities do you like minus quantity few right quite a few third question is what would you offer would you offer the full price or how much lower would you go so these are all things you have to think about when you look at deals like this all right now here's how I will look at this example a few points of discussion here number one this seems to be a pretty solid deal wouldn't you agree number two I would research the leases and make sure all of them don't expire soon or any of them expire soon if they do I'd attempt to renegotiate a lease extension to ensure my income for at least five years next point of discussion is I look at ways to profit from the from the acreage remember this is a three acre three acre parse of land and and a lot of it's not being utilized perhaps I can add a a concrete pad site and run it out to someone so I would look at those those uh those options next point of discussion is the mix of tenants is excellent right so there's quite a few different people there so I feel pretty good there and my my uh other point discussion is there is a comment above that mention we are right in the path of progress well that could concern me does this mean that the neighborhood could get worse if revitalization does not continue because remember in retail there's a saying you can fix a property but you can't fix a location therefore in retail location as is of the utmost importance now I want to talk about leases for a second I want to talk about the types of leases and the actual lease agreement because leases are the retailers number one priority as an investor now let me start here I I once had a large Mall owner share with me the following he said when you buy a commercial when you buy a shopping center what you buy and invest in are the leases and the building comes for free unquote of course that's not exactly true right but what that statement does is to illustrate how important leases are to the value of the investment a lease is a written legal agreement between the landlord and a tenant that establishes how much a tenant will pay in rent how loan attendant is legally committed to stay and any additional payments by the tenant made by the tenant for taxes insurance or maintenance also rate increases renewals and options and rights and Privileges and responsibilities of the tenant and landlord all of that is in the written legal the written lease okay so even though retail leases are long term say 5 to 15 to 20 years in length it's common for leases to have rental increases or we call them bumps before the during the leasing years you can have a written escalation or rent bump of five percent once every five years until the lease expires for instance now here are three types of leases that you'll most likely come across in retail Investments and each has its small differences so play pay close attention the first lease is called a gross lease in a gross list and landlord pays all operating expenses and charges the tenant a rent that's over and above and covers the operating expenses so the types of expenses covered are taxes Insurance management maintenance and any other costs associated with operating a property then we have the modified gross lease so it's it's slightly different from the gross lease in that some of the that some of the operating expenses such as maintenance Insurance utilities aren't paid for by the landlord and are passed on to the tenant that's why it's called a modified growth lease so these expenses are called pass-through expenses because they're passed through to the tenant and many type of Office Buildings use a modified gross lease and then we have the net lease all right so in the net lease the tenant pays the operating expenses of the property and the landlord gets to net a certain amount of rent every month by charging rent over and above the total operating expenses so this lease is favorable in many ways is favorable to the landlord because the landlord isn't responsible for you any additional expense of the property it's favorable to the tenant because the tenant gets to fix up uh his store his property as he sees fit and do his own maintenance and cleaning so net leases are typically customized to fit tenant needs this type of lease is mainly used for retailers right the the landlord takes care of the common area maintenance and the expense of that is spread among tenants and build back to them got it now net leases right so there are four different levels of net leases let's let's discuss the four different levels first we have this single net lease in a single net lease the tenant agrees to pay property taxes the landlord pays for all other expenses in the operation and then we have the double net lease and a double net lease to tenant grease a pay not only the taxes but also the insurance and then a landlord pays for all other expenses in the operation then we have the triple net lease and this type of lease is most favorable for landlords and is one of the most popular today the in this Arrangement the tenant agrees to pay the landlord rent plus all other property related expenses including taxes Insurance maintenance everything so the landlord gets a true net payment um Banks fast food restaurants and anchor tenants typically use triple net laces now in addition a great uh income generator for landlords is to have a clause called a percentage of cells built into the lease here the landlord gets an additional payment from the tenant if and when the tenant reaches a certain sales volume or profitability for example say a coffee shop is agreed to pay an additional four percent of its gross sales after it reaches a certain level of sales the landlord will be paid the four percent in addition to its normal lease payment so I want you to treat leases in every piece of language like treasure now let's let's let's talk more about understanding commercial leases since they are so important your lease is a contract between you and your landlord a lease can be for a short term like for a month or long term up to 15 years and it can be written or oral yes oral although at least for more than a year must be in writing to be legally enforceable some people some people use the phrase or rental agreement to describe a short or oral lease for rent which is typically paid once a month and the tendency can be can be terminated on a 30-day written notice to avoid confusion we're going to use the word lease okay we're not going to use the word rental agreement we use the word lease in in commercial property here's a bit of terminology I want you to that's important so sometimes a written lease talks about the lessor and the lessee right the lessor is the landlord and the let's see it's a tenant you will see this language in your in your lease agreement okay so lessor is a landlord and the lessee is a tenant is crucial to understand from the get-go that practically and legally speaking there are oceans of differences between commercial leases and residential leases commercial leases are not subject to most consumer protection laws that govern residential leases for example there are no caps right on deposits or rules protecting a tennis privacy right you would have that in your residential lease but not in the commercial lease also since a business will often need to modify the existing space you know you're going to add cubicles you may raise a ceiling or rewire something the terms of the commercial lease are usually subject to at least some negotiations now I'm going to give you a the following checklist that includes many items that are often addressed in a typical commercial lease right so get used to hearing about this you're going to the the checklist includes the rent right so that includes allowable increases and and how we compute the rent next is a security deposit and the conditions for the return of it the length of the lease you know we call that the lease term next is whether the rent you pay covers utilities taxes and maintenance Insurance remember this is called a gross lease right or whether you'll be charged for them separately I remember this is called a net lease if the tenant must cover these additional items it's called a triple net lease remember that next is whether there's an option to renew the lease and next if and how the lease may be terminated including notice requirements next thing is and and the list continues right what space is being rented including common areas such as hallways restrooms and elevators all that must be in the written lease next is specifications for signs including where they may be placed next is whether there will be improvements modifications or fixtures we call this build outs added to the space and who will pay for them and who will own them after the lease ends next is who will maintain a premises next is whether the lease may be assigned or sublet to another property we'll talk about this for an in a few seconds next is whether disputes must be mediated or arbitrated as an alternative to court so you can see a lease is a very legal document all right many leases will incorporate a use Clause to define the activity the tenant can engage in on the premises these Clauses are are in place to protect the property from damage and limit the liability of the property owner that's you so if possible ask for a broad uses Clause just in case the business expands into other activities next is an exclusivity Clause is an important clause for retail businesses renting space in a commercial complex and exclusivity Clause will prevent a landlord from renting space to a competitor next is ask the landlord for the right to sign the lease or sublet to space to another tenant this is an important term because the tenant is still responsible for paying the rent if the business fails or relocates but with an assignment or sublet clause in place the business can find someone else to cover their rent next is uh and and last but not least compliance with the Americans with Disabilities Act so that's the it's called the ADA compliance and under this act if a business is open to the public and has more than 15 employees the premises must be accessible to people with disabilities for example wheelchair ramps width of the door to allow people with wheelchairs in so the lease should determine who was responsible for making any necessary alterations to their property and who must pay for these changes all right so enough on leases would you agree all right so they are really important let's move on to the third example the third example is a distressed commercial property it's a it's an 80 unit apartment building that's distressed all right so we have um I use 80 units we have 31 bedrooms we have 34 two bedrooms and 16 three bedrooms so a good mix total square footage of 52 000 square feet the asking price is 2 million sixty thousand dollars or about twenty five thousand seven hundred dollars per per unit down payment will be twenty percent days on Market 91 days right mortgage payments of ten thousand per month and it's a Class C property here are a few important details it's an 80 unit complex overspread over five buildings we have huge acreage it's a great area absentee owner mismanagement and lack of capital make this a perfect project for rehabbers that's very very uh intriguing sentence there right 25 vacancy at present that's huge Partnerships putting up hmm good mix of one twos and three bedrooms yes owner motivated needs TLC no financials released until offer is made so I again I'm going over this because I want you to pay attention to what I just said because when you hear these phrases it it typifies something's wrong with this property so and remember opportunities like this could make you a lot of money or cause you a lot of headache all right so the uh the income of the property if I add up all the rents it comes out to be 456 000 I'm going to take away 25 percent of that as vacancy right so my effective gross income comes out to be 342 450. all right so the income drops significantly because of the vacancy I have my normal expenses expense table that comes out to be 187 000 which is 55 percent um expense ratio so that's rather high right but it is distressed all right my noi uh is a uh a poultry 155 thousand dollars I have a Debt Service 125 000 leaves me with a cash flow of thirty thousand dollars per year or twenty five hundred dollars per month cash and cash return is seven percent and cap rate is eight percent are these guiding principles met right are the guiding personals met here they are in a cap rate and positive cash flow right and um what do you think so if if the guiding principles are not met what errors would you would you address to to you know to to to meet The Guiding principles a lot of questions here second question is what areas could you improve on to increase the cash flow quite a few right the vacancy pops out at once at at first and then secondly the expenses are are a bit High uh next is what price would you offer that's a loaded question right so let's go through this more last question is does this deal excite you if it does how come if not why not right so that kind of tells us what you're looking for in a commercial investment personally now here's what I see right away that this is a distressed property in many ways for example why is it 25 vacant and what caused it I also see there's lots of room for improvement but at what cost right the unit mix is good I see that next is we need to find how motivated the owners are right even though they're they're the partnership is is breaking up also I see there's lots of upside potential in the income in this deal because of the vacancy but it's going to take a lot of work to realize it because of this the distressed level in this property now let's look at what needs to be addressing this property number one deferred maintenance usually when a property is distressed there's deferred maintenance so I would have a Keen Eye on looking at the apparent deferred maintenance for example a parking lot to not taken care of signing these painting a lot of things need to be need to be maintained because it's been deferred because they have no Capital right they have there's little cash flow to do these type of fixes typical things on a distressed property uh the other thing is to be addressed is a 25 vacancy so it is that means that it is 75 physically occupied but I wonder out of that 75 percent how many are actually paying tenants right uh and that are not delinquent in other words I wonder what the economic occupancy is again I have a a 75 people there I bet a majority of them are not even paying they're delinquent right so you need to figure that out too again typical for a distressed property the other thing that needs to be addressed is the partnership issues what are they right are are they going to be a roadblock to getting a deal done and waste our time or is it something we can work through professionally and make it a win-win right next is very important what's the cost going to be to fix up the property and how long will it take right so that remains to be uh to to be learned next is you need to find out the following once this is really important once the property is fixed up and stabilized what would it be worth then and what would the cash flow be if you could bring the vacancy down to from 25 to 7 right what would the cash flow be all right and um the other the last thing to think about is is the concern for getting a new loan on this property because it is distress because it is 75 occupied and not 90 it's a distressed property and lenders will look at it from a different way so also is the loan assumable and if so what are the balance and terms if it is assumable now because we may have loan issues perhaps we can explore creative financing strategies such as the master lease agreement or or land contract that way no banks are involved and none of your credit is involved and you can leverage yourself with small money now to get in a property like this so you need to learn those techniques all right here's a big question on this deal how much money over time could I make could I make with this property so to figure that out let's fast forward and make a few assumptions so we'll we'll assume the following things that we're able to get the vacancy down to eight percent that we were able to raise the rents 25 per unit after the rehab that's conservative and we were able to bring the percentage the expense principles down from 55 to 50 also being very conservative all right so therefore the income will go up um all the way to 100 to 480 000 right but I do have that's the gross income but I do have to subtract uh uh you know vacancy a soft subtract eight percent vacancy so I have a an effective gross income of 442 thousand dollars next is we were able to reduce the expenses down to 50 percent of the effective rules income so my my uh noi is going to jump up to 221 000 uh and that's an increase of six to six thousand dollars from when I first started right so that's huge because remember in a commercial property once the noi goes up cash flow goes up and the value of the property remember that okay now so what we do now that we have the noi of 221 thousand dollars I would divide it by an eight cap to get my new value so my new value is is I do two hundred twenty one thousand dollars divided by an eight cap I get 2.763 million dollars so if you pay the asking price the original asking price is 2 million sixty and now it's worth 2.7 you made seven hundred thousand dollars in profits now that's conservative right so that's not too bad for fixing up a few apartments over time so this shows that power of the noi so the nois key to commercial all right so in addition to getting a higher value and create enforcing the appreciation the cash flow now is ninety six thousand dollars per year so that's a that's a sixty six thousand dollar increase uh per year in the cash flow from when we first started so if this deal is the type of deal you like this deal is a keeper a parting word from the author me I have saved this last part to share with you some additional reasons why you should invest in commercial real estate in my humble opinion here are five compelling reasons to get started reason number one it's the most flexible way out of the rat race investing in commercial real estate is the greatest method to build cash flow to supplement your income and to build true wealth over time the cash flows generated are considered passive income while other income such as from your job or stock Investments is considered earned income which is highly taxed I personally don't believe in why diversification of Investments as it indicates investors don't understand what they are doing investing only in something you have understanding in focus focus focus you can actually diversify your real estate investing by investing in different types of apartment properties such as small apartments large communities A-Class Apartments C-Class B Class tics and the lists go on here's reason number two it's not about you it really isn't about you it's about your loved ones your kids your spouse and your family members it's about Charities Ministries and organizations you have always wanted to help but you didn't have enough resources to do what you really wanted to do it's about being abundantly wealthy which is defined as having more than enough so that you can turn around and be a blessing to others reason number three it gets you closer and closer to your big why what's your why why are you here on Earth what gifts and talents have you been have been put into you but you have not used to the fullest or at all perhaps what drives you what is your purpose a good friend of mine Ryan who grew up very poor went to a birthday party of a wall-to-do family and in the backyard they decide to play a game of find the money in the hidden bushes all the kids ran into the bushes and many yelled out that they found money lots of it Ryan couldn't find any but kept digging and digging and jumping into the bushes in short order he became dirty and just a sweaty mess it soon became really quiet not only did Ryan find no money but as soon as he looked up everyone was laughing at him it was a joke planned against the poor kid there was no money hidden anywhere as Ryan walked home in complete disgust after everyone laughed at him he told himself that he would never ever be put in a situation a situation like that or allow his family to be ridiculed ever like that again today Ryan is a millionaire business person many times over and helps thousands of people with wealth building as their business and and with building their businesses Ryan found passion and purpose in his adversity so what's your passion or purpose and what are you going to do about it reason number four let's prove the world wrong are you an overworked professional you can't see yourself out of out of the rat race with your current job are you a minority too old too young single parent you have plenty of past failures fearful a woman divorced I have no money if any of this is you welcome to the club humans are designed to be Overcomers by Nature it's never too late to start investing wisely just because you have failed at several businesses like yours truly doesn't Define your future your actions today will do that for you begin to take action right now because the past is behind you the future is not guaranteed you to you and all we have is today do something today be intentional about what you truly truly want today let's prove the world wrong together let's do it together reason number five it's a new season for you life happens in seasons have you noticed you have this book in your hands for a reason could it be time to begin a new season in your life a season of doing something you always wanted to do but didn't because of the fear of rejection or feel or failure this could very well be the season to confront those lies you believe for far too long and dare to be what you're called to do and be this is your season foreign