Commercial Real Estate Investing: A Creative Guide to Successfully Making Money by Dolf de Roos

(Hoboken: Wiley, 2008), 291

Introduction

  • Book summary: aimed at investors focused on finding a twist whereby they can add massive value to their real estate investments (263)
  • he thinks it's silly to invest in residential real estate when you could invest in commercial real estate (xvii-xx)

    • the vast majority of the wealthy real estate investors he knows work in commercial

    • residential real estate isn't bad (much better than stocks, etc.), but commercial offers better returns and more opportunities for creativity

  • also, author has PhD in EE (43)

Chapter 1 - What is Commercial Real Estate

  • Residential where people live
  • Commercial where commerce is conducted

Chapter 2 - People vs. Contracts

  • with residential real estate you are dealing with people

    • people who leave residential real estate usually do because they are fed up with people

  • with commercial real estate you are dealing with contracts

Chapter 3 - Why Invest in Commercial Real Estate?

  • Lease duration

    • benefit to you for planning and certainty

    • most tenants want long leases:

    • goodwill associated with location

    • tenant investment in the property

  • Assignment of Lease

    • you can pursue former tenant for rent if substitute does not pay

  • Tenants Pay the Outgoings

    • triple net (NNN), tenant pays property taxes, insurance, and maintenance

    • tenants also pay for consequential loss insurance (in case they can't pay you when building is non-operational)

  • Tenants Earn Their Income on Your Premises

    • they fix things quickly themselves to keep operating

    • they are interested in improving the property

  • Landlord Pays for Improvements to Commercial Premises

    • you pay for improvements, but tenant pays increased rent at a certain percentage

    • additional benefits to you: depreciate investment, increase value of building at fixed cap rate

    • all at the same time you increase equity, cash flow, collateral, tax write offs, and income

  • Certainty of Collecting Rent

    • fixed operating costs paid by automatic bank transfer...

  • Upward-Only Rent Reviews

    • typically clause that rent can't go down

  • Government Interference

    • much less government regulation

  • Management Overhead

    • less management overhead than residential

Chapter 4 - The Downsides of Commercial Real Estate

He identifies these common objectives to commercial real estate (and argues against them in ch 6, 9):

  • Difficult to acquire tenants

    • residential: can always get a tenant if you drop the rent

    • commercial properties are specific to certain types of tenants

  • Banks Lend Less

Chapter 5 - The True Value of Real Estate

  • Residential: Return = Income / Price; Income and price are both market-determined values
  • Commercial: Property Value = Income / cap rate

    • Two ways to increase property value are to increase income (ch 8) or decrease cap rate

    • If you can double the income, you can double the value of the property

    • Think like this: "The property is being offered with a return of 11% in a market where prevailing cap rates are 10%"

    • cap rates are entirely determined by the market; return is determined by how well you buy

Chapter 6 - How to Overcome The Disadvantages of Commercial Real Estate

  • to master commercial real estate you need to master attracting tenants (because that is what adds value)
  • the key to building wealth is consistently finding tenants for vacant commercial real estate

Chapter 7 - How to Attract a Tenant

  • Who wants to run a funeral business?

    • find a vacant property, then find a tenant and buy the building

  • Finding a warehouse tenant

    • call all warehouses nearby and ask if they need more/less space

    • spend $10k to make the manager's office amazing

  • Power of the Internet
  • Many prospective tenants know your building

    • hang a huge For Lease banner on every property you have available

  • Using a real estate company
  • Wait for a zone change

    • get public info on pending zoning changes and take advantage of them

  • Split single into multiple tenants

    • often you can get higher $ psf

  • Consolidate multiple tenants into one
  • The ultimate way to attract a tenant

    • advertise space for lease, then find properties that would be suitable and acquire them for that tenant

    • attract a tenant first, then find a property for them

Chapter 8 - How to Increase Rental Income

  • Helipads
  • Cell phone towers or other rooftop items
  • Naming rights
  • Air space: protect views, billboards
  • Parking
  • Webcam
  • Remodel
  • Alarm systems

Chapter 9 - What Were the Disadvantages?

  • vacant commercial real estate can be bought for a fraction of what it is worth to you fully leased
  • banks care about rent and cap rate more than acquisition cost

Chapter 10 - Finding Commercial Real Estate

  • Newspapers

    • Good attitude: "Great! With incorrect advertisements and a sloppy attitude about turning up at appointments, my competition will be decimated!" (111)

  • Real Estate Firms

    • talks about strategies for interviewing agents

    • working with investor agents can have benefits

  • Internet
  • Keep your eyes peeled
  • Networking: you become the company you keep
  • Word of mouth: make a good business card for yourself
  • Helping other people
  • The 100:10:3:1 rule

Chapter 11 - Analyzing Deals

  • Due diligence: finding out enough about a property to make sure it is a good deal
  • Four questions to ask:

    • What rent is being achieved in the subject property?

    • What are market rentals in the area?

    • What does the building cost per square foot to buy?

    • What is the replacement cost per square foot?

  • good software takes the emotion out of analyzing deals

Chapter 12 - Negotiating Commercial Real Estate Deals

  • learn as much as you can about the property, the seller, and whey they are selling
  • when situations arise that look like deal breakers, keep your cool and try to figure out a solution that will benefit everyone involved
  • when negotiating rent, don't concede rent but find other options (parking, storage, paint, etc.)
  • always think long-term in your negotiations

Chapter 13 - Financing Commercial Real Estate

  • write up a "Proposal for Finance"; details in this chapter
  • you offer the mortgage to the bank, and they will—by Cialdini's Law of Reciprocity—want to offer something in return (174)

Chapter 14 - Structuring Commercial Real Estate Ownership

  • LLC: flow-through entity: members pay taxes, not the LLC
  • with the number of options available, consult with an attorney to pick the one best suited to your situation

Chapter 15 - Managing Commercial Real Estate

  • the ease of managing a commercial property is directly related to the clarity and quality of the lease agreement
  • be firm but fair in enforcing rules; friendly but not familiar
  • pay your contractors right when they complete the job

Chapter 16 - How to Beat the Average

  • pick geographies that have highest growth rates
  • zone changes that open up new commercial space
  • invest in downtown, land-locked areas

Chapter 17 - Raw Land

Chapter 18 - Extraordinarily Odd Commercial Real Estate Deals

  • oil and shellfish

Chapter 19 - Property Ventures Limited

Chapter 20 - Never Sell

  • why not just sell to reinvest into another property?

    • when you sell you pay taxes (...but not 1031)

    • you could release equity by refinancing the existing property

Chapter 21 - 13 Golden Rules of Commercial Real Estate Investment

  • Risk is equal to yield: seek an appropriate balance
  • Ensure the safety of principle
  • Control your liabilities
  • Add value to a deal
  • Broker/Agent must bring something to a deal
  • Real estate is a long-term investment
  • Minimize number of partners
  • You are going to be in a lawsuit
  • It only takes one deal to go broke
  • It only takes one deal to make a million dollars
  • The value of a property is limited by a tenant's ability to pay rent
  • Appreciation and inflation are compounded annually
  • You cannot give kindness away—it is always returned

Chapter 22 - Investing Abroad

Chapter 23 - Live Life to the Fullest


Topic: Real Estate Investing


Created: 2019-06-17-Mon
Updated: 2022-06-01-Wed