August 30, 2014 · Articles · Comments Off

I read once that if you took all the real estate lawyers in Illinois and laid them end to end along the equator – it would be a good idea to leave them there. That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! “Let the buyer beware!”

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars when the deal goes bad. It’s like the old FramĀ® oil filter slogan during the 1970′s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the exercise of “due diligence”.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”.

If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do “harp” on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

POP QUIZ: Here’s is a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE:

Scenario No. 1: It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.

TRUE OR FALSE: Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.

Scenario No. 2: For several years you eyesight deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.

TRUE OR FALSE: Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.

Scenario No. 3: Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your townhome. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your wife for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.

Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.

TRUE OR FALSE: Commercial real estate is the same as residential real estate [Hey, its all dirt, isn't it (?)], so you are being a shrewd businessman by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this "due diligence" stuff anyway?]

ANSWERS:

If you answered “TRUE” for any of the foregoing Scenarios

STOP!

The Quiz is over.

Please find a quite place to reflect upon your life and consider whether the decisions you make consistently give you the results you desire.

If, on the other hand, you understand that the answer to each of the foregoing questions is FALSE, I am available to help you in Scenario No. 3.

For Scenario No. 2, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.

For Scenario No. 1, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]

Investing in commercial real estate can be profitable and rewarding – but it requires good critical thinking skills and competent counsel.

You have a have a brain. It is strongly recommended that you use it.

August 30, 2014 · Articles · Comments Off

People often ask me how I got started in commercial real estate, and I tell them that it was a conscious decision for me.

Most people who begin investing in real estate start off with single family residential properties because that is what they are most comfortable with. They tell themselves, “All I need to do is a couple of deals a month. I’ll make myself five or ten thousand dollars, then at the end of a very few months most of my problems will be taken care of.” They do not really understand everything that is involved in getting these properties going.

They think they are going to be making big money, but before long, oftentimes they end up with a lot of problems and a lot of headaches. They might have traded in their job for a perceived higher paying job, but find that it is really taking a toll on their lives.

If you belong to a real estate investment group, take a look around you. Look at the people who have done twenty-five to fifty houses or more. Are they living the life of their dreams? More importantly, are they living the life of your dreams? They may be better off than you are now, but is this really what you want to work towards? I know so many people who have a large portfolio of properties but really haven’t achieved the type of freedom, success, and wealth that they truly desire. How can you change this? In my opinion, the answer is commercial real estate.

WHY COMMERCIAL REAL ESTATE?

When I decided to start investing in real estate, I stopped and took a look around. I realized that the people who were making the big money in real estate were the people who owned buildings not houses. People who owned the large apartment buildings, the large office buildings, the large warehouse and industrial space – those are the ones who really seemed to be living a lifestyle that I wanted.

They didn’t have to be there tending to their properties; they had property managers who took care of that for them. Yet, they were the ones spending the checks, catching planes to exotic locations and destinations, and living the lifestyle that I desired so much.

After looking at this for quite a while, I decided that there must be a way of getting this done. They couldn’t have been much smarter, have learned much more, or have had access to more resources then I could. Even though I didn’t know how immediately, I knew I could figure out a way to do it.

I sat down and took the time to learn how to invest in commercial real estate, which is what I would recommend that you do. I studied and figured out exactly what it would take, and as I learned, commercial real estate became less and less of a mystery to me.

How can you start? First of all, let’s talk about why you would want to do it.

MORE CASH FLOW

What are the benefits of commercial real estate? First of all, one of the biggest benefits is that commercial real estate is valued differently. By “valued differently”, I mean the amount of income that a property produces is directly proportionate to its worth. So if a property produces more income, then it is worth more. It has very little to do with “market comps”.

Second, along the way you are going to get a far greater cash flow. Imagine if you were to buy a $250,000 home. That $250,000 home may rent for somewhere in the neighborhood of $1,500 per month. The underlying mortgage on that home may be somewhere between $1,000 and $1,400 per month. So you end up struggling to gain between $100 and $500 per month in positive cash flow. That’s not a very high number for the amount of work you have to put in, and it certainly is not going to get you on the jet set.

Now, let’s take a look at a similar investment from a commercial standpoint. That same $250,000 investment may end up yielding you an 10-unit apartment complex, based on $25,000 per unit to acquire the property.

(Please note: Although these numbers work in MOST parts of the country, I realize there are certain high-priced areas, notably the west coast and parts of the northeast, where houses start in the $600,000+ range, and $60,000 and up per unit is much more common for apartments. Rest assured that these concepts still work 100% — only the numbers, and the PROFITS, are larger.)

Let’s say each of those units were two bedrooms, which could rent in most areas of the United States anywhere between $400 and $600 per month. For simplicity’s sake, let’s use an average of $500 per month. At $500 per month times ten units, you’re bringing in $5,000 per month – more than double the rent that you could expect to get from that same $250,000 single family home. Your underlying mortgage payment would be very similar to what you would expect on a residential property; for this example, let’s use $1,400 per month.

Your cash flow on this 10-unit apartment building will be $3,600 per month ($5,000 per month income, minus a $1,400 mortgage payment). Now that will make a difference in just about anyone’s life.

LESS RISK

Third, and most essentially, you’re now spreading out the risk over ten tenants, as opposed to one. If your single-family home goes vacant, you’re on the hook for the entire mortgage. Every penny of that mortgage, all of the maintenance, and everything that goes along with it is now your responsibility. If the house is vacant for two months, you’d better be planning on spending a minimum of $2,800 to cover that mortgage plus miscellaneous expenses including maintenance, utilities, taxes, and insurance. Potentially, you’re looking at a very heavy negative cash flow.

On the commercial property, however, if one of your ten units goes vacant at $500 per unit, you’re still bringing in $4,500. So you get slightly less positive cash flow but you’re certainly not experiencing negative cash flow. Say three units go vacant – you’re still covering your mortgage and putting cash in your pockets! Do you see how there is actually LESS risk in commercial properties?

INCREASE VALUE AT WILL

The fourth reason you should be investing in commercial real estate is because of a concept called “forced appreciation”. Forced appreciation means doing things with your property that will increase your income and decrease your expenses. Remember that the more income your commercial property brings in, the more it is worth.

As an example, let’s go back to our 10-unit apartment building. Let’s say we plan on improving the quality of each apartment unit by replacing the flooring, upgrading to nicer doorknobs and bathroom fixtures and lighting fixtures, perhaps even adding some ceiling fans – all relatively inexpensive fix-ups. As a result, we can now raise the rents by $50 per month per unit. That’s $600 more in annual income per unit times 10 units, or $6,000 more per year total (which will also recapture all the costs of the fix-ups).

Next, let’s decrease our expenses by $100 per month by passing on a portion of the utilities to the tenants, or by doing some competitive shopping for our lawn-care service and finding a company that does the same great job for less money per month. Times 12 months, we’ve just saved ourselves $1,200 per year.

Total increase in annual income is $7,200 ($6,000 plus $1,200). By increasing our income by $7,200 per year, we’ve increased the value of the property by $72,000 or more. That’s the power of forced appreciation.

There are a lot of strategies that you can use to force appreciation and these are just some of the simplest. But needless to say when you’re dealing with 10 units in one building, for instance in our small example, you’ve got an opportunity to improve many things that will help you justify the increased rents. Also, you’ll be seeing yourself dealing with a better tenant mix. Higher quality properties tend to bring more stable tenants.

PASSIVE INCOME = FREEDOM

All of this leads us to the fifth reason why you should be investing in commercial real estate and that is the passive income. Passive income is the key to commercial real estate. The way that commercial properties are managed and the way they allow for a concentration of efforts lets you to put someone in place to manage those properties.

In the beginning, on the smaller 10-unit buildings, you’ll probably need to manage them yourself. But as you climb your way up the ladder, and you start dealing with 20-units or above, you can then offer free rent on one of the units to someone in return for managing the rest of the units for you. As we discussed earlier, even with 10 units you can still make a monthly profit if a couple of the units are vacant, so giving away one unit is certainly a small price to pay in return for the freedom it gives you.

Now you’ve got an on-site building manager who handles all of the tenant problems, tenant issues, tenant improvements, cleaning, and trash removal – all in return for free rent in your two bedroom, $550-per-month unit. Usually these people have other jobs, so you’re not their sole source of income. If your buildings are large enough to keep them busy full-time, however, you will probably have to pay them an hourly wage in addition to the free rent, but that will only be a small portion of your total monthly profits.

Meanwhile, all the checks come directly to you. You deposit them, you pay the bills, you keep the difference – and believe me, that difference can be substantial. Even on the small 10-unit buildings that we’ve talked about, it’s easy to generate $2,000 to $3,000 dollars per month in positive cash flow, over and above your expenses. On larger, 20+ unit buildings, it’s not difficult to create positive cash flows in excess of $5,000 to $10,000 per month if these properties are acquired properly. And since someone else is managing the properties for you, all this money flows to you passively, while you are spending time with your family, or traveling, or looking for exciting, new opportunities.

Obviously there are many more great reasons to invest in commercial real estate than these five that I’ve given you – in fact, I could easily list another thirty: cost recovery, how it’s financed, management opportunities, scales of economy, and so on.

GETTING STARTED

So, how do you get started?

Just as you would get started investing in residential real estate by getting your education first (either “the easy way”, through books and courses and investor group meetings, or “the hard way”, through the school of hard knocks), the place to get started with commercial real estate is by getting your education and learning the terminology. It’s not that different from residential real estate, and it’s not that difficult to understand.

Next, look around – see what’s going on in your market place. Find several small apartment, office, or retail buildings for sale, get the financial information on them, and learn how they work – what they rent for, how full they are, how the utilities are split up, what the expenses are, and so on. Start doing some “practice” deals – go through the motions of buying the property with as much diligence as you would if you were buying a single-family home. Once you understand what the income is and what the expenses are, you can start to figure out how you would acquire that property.

The sooner you get this process going, the sooner I guarantee that you will be a commercial property owner. Don’t wait to get started – now is the time! This is the best commercial market in the last 50 years. Properties are available extremely inexpensively, and there are many distressed properties just waiting to be picked up with millions of dollars in equity in all of them. The bank rates right now for commercial property are extremely low. These factors combine to offer you an incredible opportunity. Do not let this market place pass you by, or you may very well regret it.

Can you imagine buying five 10-unit apartment buildings in the next 12 to 24 months? At the end of that time, you’d have 50 units, managed by someone else, and generating six figures of annual passive income. The exciting part is that apartment buildings are just the tip of the iceberg, and in my opinion, not even my favorite investments. I personally prefer office and retail space which have a much higher profit potential. Apartment buildings are nice but office space and retail space generate the really big money.

I can promise you that if you start following these simple strategies, you’ll generate more than enough gold to fill up the pots for yourself as well as your family and loved ones. The sooner you get started, the sooner you’ll see your first $1 Million profits!

August 30, 2014 · Articles · Comments Off

Let’s face it – you cannot intelligently buy commercial real estate properties without the help of an expert. Hiring a commercial real estate agent is your best bet against losing thousands of dollars you’ll likely spend, when you make costly mistakes or miss out on solid, commercial real estate investing opportunities. That is why finding and hiring a commercial real estate agent should be your first and most crucial step – it can make or break your commercial real estate venture.

Benefits of hiring commercial real estate agents

Professional commercial real estate agents or broker companies give you access to the best commercial real estate information available. They provide you with information about the latest sales price data, vacancy and absorption rates and comparative tax and labor costs to help you make informed decisions.

Experienced commercial real estate brokers can also help explain to you the present market lease trends, the current demographics, and they will give you a straightforward competitive analysis of different commercial properties that fit your purpose and budget. Professional commercial real estate agents or broker companies give you all this information so that you can anticipate opportunities, gain a competitive advantage and implement the best possible real estate approach.

If you plan to build commercial real estate, an agent can help you determine the best location using scientific local market data and a keen knowledge of the economic trends that affect the commercial real estate market. These agents are specially trained to handle very large transactions – millions upon millions of dollars. Their purpose is to find investments that will not only increase in value, but also give the investor a good revenue stream.

Never try to invest in commercial real estate property without consulting a commercial real estate agent. He or she will have the right training to impart helpful research, advisory and transaction services to you so that your commercial real estate venture goes smoothly.