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)

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

Topic: Real Estate Investing

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