Investing inCommercial Real Estate

www.309Finance.com Presents:

Commercial real estate encompasses a wide range of properties.

It’s possible to invest in commercial real estate with zero investing experience and an average salary.

Commercial real estate can be a safer, easier, and more profitable investment than single family homes.

Advantages ofCommercial Real Estate

“Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk.”

- Armstrong Williams

• Many investors are scared of the commercial market.

Less Competition

• Single-family properties often rent for less than 50¢/square foot

• Office in high-rise building: $100/square foot

• Residential return: 1-4% APR• Commercial return: 6-12%

APR

Higher Income

Opportunity• Vacancy of a rental

home can be devastating.

• However, vacancy of 1 apartment out of 25 in a complex is only 4% of your income.

Lower Vacancy

Risk

Why Invest in Commercial Instead of Residential Real Estate?

• The price is based on the income the property provides.

Prices are Easier to Evaluate

• Sellers are more flexible and less emotional.

• Everything is up for negotiation.

Easier Negotiations • Larger

investments have the potential to provide larger returns.More

Potential for Capital Gains

Why Invest in Commercial Instead of Residential Real Estate?

Commercial Real Estate Investment Opportunities

“Commercial real estate always trails residential, and as residential growth flourishes, shopping centers flourish and service the communities, and jobs come out.”

- Johnny Isakson

Types of Commercial PropertiesRetail

Properties: shopping,

beauty salon, gas station

Apartment Building with

5+ unitsOffice

BuildingHotel, Motel,

ResortMedical Building

Warehouse Mobile Home Park

Self-Storage Facility

Industrial Property

Private Airport

Senior Facility Farm, RanchMovie

Theater, Entertainmen

t Center

Private Cemetery Bowling Alley

Understand the Players“Certainly the advent of technology and electronic commerce has had an immense impact on the real estate industry.”

- Michael Oxley

Real Estate Brokers Developers Property Managers Direct Lenders Financial

Intermediaries

Inspectors Insurance Agents Appraisers Attorneys Accountants

Build a Team of Experts:

Learn the Lingo“In any market, in any country, there are developers who make money. So I say all of this doom and gloom, but there will always be people who make money, because people always want homes.”

- Sarah Beeny

Knowing these terms will help you compare different investment opportunities in the commercial real estate market:

Important Terms to Know

• Number of vacancies / Number of unitsVacancy Rate

• Gross income minus vacancy• Vacancy = vacancy rate x cost of a vacancy• Cost of a vacancy is the lost rental income.

Effective Gross Income

• All the expenses except the mortgage

Operating Expenses

• Gross income minus operating expenses

Net Operating Income (NOI)

• The amount paid over a year on the mortgage

Debt Service

• Gross income minus operating expenses minus debt service

Cash Flow

• NOI / Sales price• This is one of your most important values. It’s a measure of

the profitability of the property.

Capitalization Rate

• Annual cash flow / down payment

Cash-on-Cash Return

How to Analyze a DealThe most important issue is the cash flow!

• Avoid basing calculations on 0% vacancy.

• What are vacancy rates for similar properties in the area?

• Are the current rents reasonable?

1.Determine the annual revenue,

also called “gross

income.”

• Exclude the mortgage, but include everything else:• Taxes• Repairs & maintenance• Insurance• Salaries• Marketing• Utilities• Management services• Any other expenses

2.Determin

e the expenses,

also called the “operating expenses.

”

• Include the monthly mortgage payments.

• Consider your down payment.

• Use current rates for a commercial mortgage from the lenders you may use.

3.Calculate the

cost of servicing the

debt.

• Use annual figures.

• Subtract the expenses and the cost of the debt from the revenue. The result is the cash flow.

• You can use this figure to determine a fair price.

4.Determine the Cash

Flow

Financing Commercial Real Estate

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”

- Russell Sage,American Financier and

Politician

Commercial Loans:• Most often made to business entities• Higher interest rates and fees• Shorter payback period• Harsher prepayment penalties• Amortization often ends with a balloon payment• Frequently require larger down payment• No PMI• Commercial lenders consider cash flow.

Differences Between Residential and Commercial Loans

Lending CriteriaCreditworthin

ess• Credit score of

660 or greater• No bankruptcies

in last 7 years• No current tax

issues, liens, or judgments

• No foreclosures or short sales in last 3 years

Collateral• The collateral is

the property in the deal.

• Rents and lease payments can also be assigned to the lender.

• It’s possible to pledge other personal or business assets.

Cash Flow• The debt-service

coverage should be at least 1.25.

Strategies to Increase Profits

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”

- Franklin D. Roosevelt

Basic Strategies

Raise rents

Decrease vacancies

Convert

ImproveAccumulate equity

Example: Raw LandLease the land

Improve it: build homes or commercial enterprises

Can require additional time and money to generate

income

Example: Apartment Buildings

Raise rents

Decrease vacancies

Convert to condos

Example: Office Buildings

Raise rents

Decrease vacancies

The Most Critical Principles to Success

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

- Andrew Carnegie

$$$

Search for a great price, great terms,

or both.

Avoid costly early

mistakes.

Stick to reasonable

capitalization rate

properties(8-15%).

Purchase properties

with a cash-on-cash

return of at least 10%.

Getting Started“A funny thing happens in real estate. When it comes back, it comes back up like gangbusters.”

- Barbara Corcoran

Determine the type of commercial real estate that interests you.

Begin educating yourself on the local market.

Make contact with a local commercial real estate broker.

Investigate your financing options.

Fully investigate each property that interests you.

Make offers.

Close the deal.

Commercial real estate has several advantages over residential real estate investments.

There are commercial investments suitable for any investor with good credit and a down payment.

Do your due diligence for each deal and, for your best results, stick with investments and properties that you understand.

Conclusion