by Prince Licaylicay | Dec 27, 2021 | All Articles, Buying, Investing
Successful real estate investors can perceive, analyze, and can leverage other people’s money. As a result, they’ve perfected the art of investing in commercial real estate with little to no money. This is an appealing approach for newer and cash-strapped investors to break into the real estate market without having the necessary financial resources or credit.
It is feasible to get started investing in commercial real estate without spending any money. However, if you are not planning to invest your own money, you will want another resource: a reliable network. The key is to recognize who can assist you and how to collaborate with them. You don’t need an unending supply of cash to get a good bargain. You must understand how to invest in commercial real estate with the proper method and strategy in mind.
We’ll go through the strategies and steps for investing in real estate with little money or expertise in this post. You’ll learn how to start investing in real estate without having to spend hundreds of thousands of dollars. Any property owned purely to create profit, either through rental income or market value appreciation, is referred to as an investment in commercial real estate. There is no such thing as no money down in real estate since the funds must come from somewhere. You must gain the capacity to detect, analyze, and even leverage other people’s money if you wish to invest in real estate with little or no money.
THE FOLLOWING ARE THE STEPS TO INVEST IN REAL ESTATE WITH LITTLE TO NO MONEY OR EXPERIENCE:
- The Subject property must be exceptional or outstanding: Firstly, if you have found a commercial property to buy is must at least have two (2) of the following four (4) characteristics: a) it’s in a good neighborhood; b) it’s priced below market for its condition; c) it already has enough net operating income (NOI) to cover the mortgage payments; d) it has a substantial repositioning upside. This might include rentals that are already below market, a lower-than-market occupancy rate, or the need for low-cost operational and aesthetic modifications to allow rents to be raised.
- You should be able to put down at least 10% of the down payment in your name: The next step is rather important. You must be able to raise 10% of the down payment in your name. The method will depend on you regardless of how you do it. You may borrow from your parents or the bank, sell your assets, or even use a home equity credit line. As a result of this down payment, you will have more power to influence or control the situation. One thing you can bet on is that every investor and lender will inquire about your investment amount, and you do not want to answer “none” to them.
- It would be best if you had a high-net-worth investor or proxy: Find someone to mentor you who has the same level of wealth, cash, and experience as you. In doing so, you will be able to notify listing real estate agents and lenders that you’re representing this high-net-worth investor and are commercial real estate property on their behalf. Indeed, that will open some doors for opportunities. This investor may or may not be the essential principle in the transaction, and you may need to locate another before closing. The investors will most likely have made a lot of loans when this person was replaced with a competent investor.
- You have a fully executed purchase contract on the property: Don’t imagine for a second that private investors and lenders would spend their time on your idea until you have a completely completed purchase contract on the commercial real estate. Hence, you must have executed the property’s purchase contract to show the investors that you intend to and can invest in commercial real estate. This is performed by putting down the previously mentioned 10% down payment.
- Seller Pays the Down payment. Next, inquire with the seller about the possibility of the seller paying your down payment. You’ll almost certainly wind up paying way above their asking price to structure a transaction like this, but that shouldn’t matter because you won’t have to pay anything out of pocket. Getting the property appraised for your new purchase price, on the other hand, may be tricky.
- You have the critical property financials: Without a pro forma predicting revenue, costs, mortgage payments, and net profit over a minimum of two years or the length of time you want to own the property, your transaction won’t stand a chance. These property financials should be based on facts rather than assumptions in the listing broker’s proposal. Actual current and historical rent rolls and profit and loss records are required to prove that the key financials are factual. The purpose of this is to show the investors that you have the financial capabilities to invest in commercial real estate, although you are leading or giving no cash at the moment.
- Your pro forma shows strong financial returns: This is also a key one. Investors must be enthused about the return on their investment after the property has been repositioned. A minimum yearly cash-on-cash return (CCR) of 8% is required. Of course, ten percent to twelve percent is preferable. The annual internal rate of return is more relevant (IRR). This is the sum of operating income and appreciation. Appreciation usually typically outperforms operations in commercial buildings.
- Your executive summary is excellent: Your Executive Summary must be excellent. It should at least have four (4) pages and pitch your business to investors and lenders. Begin by astounding them with the property’s estimated yearly CCR and IRR. Then describe the property in detail, including its location and proximity to main malls and motorways. Add in the price you’re paying for it, the cost of your value adds, and a forecast for how much it’ll be worth in a few years. Don’t forget to explain potential dangers and how you plan to address them. Demonstrating that the property can break even with 75% or lower occupancy can help it weather the storm during a downturn. Finish with an exit strategy.
- Seller Financing: Inquire about the seller’s willingness to bear the debt on the property if you purchase it. You may be able to make your monthly payments to the property owner instead of going through arduous lender approvals. On the other hand, the seller’s financing may balloon after a few years, forcing you to refinance to pay them off, or they may carry the debt for the life of the property — it all depends on how you arrange the agreement. The following are the reasons why a seller should refinance the commercial real estate:
- They want to avoid tax obligations from a sale;
- They enjoy having monthly income;
- This could help them get rid of the commercial property faster;
- The returns could be more attractive in the long run.
- Lease with option to buy/own. Is the commercial property currently unoccupied? If yes, then you might propose a lease-to-own arrangement with the landlord. To make the payments, you’ll lease the property from the landlord and run your business or sublease it to other tenants. This lease can run as long as you and the owner want it to, and the percentage of rent payments that go toward the purchase price will depend on the terms of your agreement. Your monthly payments can go toward the purchase of the building, saving you the trouble of having to put down a significant down payment. This can all be done without having to show money at the initial stage of the transaction.
In conclusion, if you want to invest in commercial real estate with little to no money, stick to this guide strategy. To be successful, you’ll need to practice giving a terrific presentation to investors and lenders and leverage a seasoned commercial broker who specialized in investments.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 14, 2021 | All Articles, Selling
So, let’s say you have a commercial property and you want to put it up for sale. The problem is however that you’re not exactly sure the best process of determining the value of commercial real estate (CRE) properties. Given the fact that most CRE projects are larger deals, much thought should be given so that responsible decisions can be made. We suggest beginning with the first, most basic, yet significantly important action: valuing your commercial property for sale. The fact of the matter is that valuation for commercial real estate is fairly different from the valuation of residential properties. There are added intricacies and heightened value which makes the process of valuation rather complicated.
There is certainly a right way to value your commercial property if you are planning to list it to get the best deal possible. The goal is to find the approach that becomes the most advantageous for you. Therefore, becoming acquainted with the different approaches of valuing commercial properties is a “must” and reading this article should give you an edge over these matters.
Knowing your choices
Below, you will find some of the popular approaches used in valuing CRE properties. Identify which ones will be the most suitable to use in valuing your commercial property for sale.
The Sales Comparison Approach
This is also referred to as the “market approach” – for the rather obvious reason that this method involves looking into what is called the comps or recent sales data. Sales comparison is the most essential data used in this kind of approach; however, it is not often as easy to find. As this approach is more commonly used in the valuation of residential properties and when it comes to commercial real estate valuation, one might need to look outside of the market area for like-kind comparables, demographics, access to infrastructures, leasing trends, and all other relevant information to make a more reliable comparison. The good news is there are many property intelligence or artificial intelligence-powered data platforms that are specifically intended for use in the commercial real estate industry. Appraisers or investors, such as yourself could easily and quickly have access to opportunities in any market and be able to uncover strategic insights which could ultimately result in valuing your commercial property effectively.
The Cost Approach
Since some assume that informed buyers are less likely to spend more on commercial properties than they could on acquiring land and consequently building the same property from scratch—or what is referred to as “costs to build new”, the Cost Approach is therefore born. Here, the cost to rebuild the property from scratch is calculated. By further definition, this type of approach accounts for the current cost of the land as well as costs of construction materials plus labor and more that is supplementary to replacing existing structures of the subject commercial property. The cost approach uses a very simple formula where the property value is derived from the value of the land added with the “cost to build new” and the accumulated depreciation. You may find this approach is not used very often, however, when your commercial property for sale is located in a lesser active market with data needed for all the other approaches is not as easy to collect, you may find this approach most suitable for you.
The Income Approach
The Income Approach is up on the popularity scale. This appraisal technique is most frequently used in valuing commercial property. Based on how much income you expect a particular commercial property could be making or generating in the future, this approach requires you to be familiar with Net Operating Income (NOI) and Capitalization Rate (“cap rate”). The NOI is based on the net income generated by a property minus the operating expenses before capital expenditures, debt service, and taxes come in. As for the cap rate, this refers to the ratio of the net operating income of a value on a particular property. This is used to express the anticipated Return On Investment (ROI) of the property owner for a year prior considering the capital costs, taxes, and debt service. Finding the value of your commercial property for sale using the income approach means using the formula Value = NOI/Cap Rate. While this approach may be highly popular, consider the fact that this can only be most accurate if you take caution on the inputs because miscalculations of rents or underestimations of vacancy rates, for one, could put the numbers in the result significantly inaccurate as well.
The Gross Rent Multiplier Approach
If you are looking for a simpler alternative approach to valuing your commercial property, then the Gross Rent Multiplier approach could be suitable for you. This gets the job done quickly and can give you a rough estimate of the value that you are looking for. To compute the value using the GRM, you will need to be familiar with the formula “Property Value = Annual Gross Rents x Gross Rent Multiplier“, where the property that generates an annual gross rent (rental income) is multiplied by the gross rent multiplier giving you the property value you need for your commercial property for sale. Note that the difference between this approach and the income approach is that here you will use the gross income rather than the net income in calculating the value of your property.
The choice is yours to make
To sum it all up, what can be derived from the different approaches presented is the fact that valuation is driven by information – how much data you collect would have to be how much relevant valuation you could make. Bear in mind that some expert appraisers often use more than just one approach whereby taking an average of these approaches for them to determine the most significantly accurate value for the property. It could only be tough the first time. Assuring enough, the more you can get past this learning curve in making appraisals, calculating for such becomes easier the next time.
Even after outlining all the information above, valuing your commercial property for sale can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your CRE investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 10, 2021 | 1031 Exchange, All Articles, Buying, Investing
Yes. When it comes to 1031 exchange, you can buy multiple properties. In fact, you are allowed to buy up to three properties. But if you want to have more than three properties, a corollary rule of 1031 governs. This is actually possible through a couple of 1031 exchange rules called the 200% and 95% rules. These rules can help you with property identification.
Consequently, property identification can create an ease of buying multiple properties in a 1031 exchange. As to the mentioned rules, the 200% rule allows someone to identify more than three properties, provided that the combined value of the properties does not exceed 200% of the value of the relinquished property. On the other hand, the 95% rule provides for a property identification with no reference to the sale price of the relinquished property, provided that an investor actually acquires and closes on 95% of the value identified.
In summary, you can buy multiple properties in a 1031 exchange as long as you follow the applicable rules. After all, buying properties is not subject to unlimited discretion by the investor. Note, however, that it’s a great idea to have 1031 exchange experts and legal counsels to help you out.
Even after outlining all the information above, dealing with 1031 Exchanges can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your 1031 investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 7, 2021 | All Articles, Buying, Investing, Selling
Commercial real estate (CRE) property prices are influenced by many factors. Price drops or price increases among these properties may be predicted once these factors are analyzed, which include Supply and Demand, Demographics, Location, Interest Rates, Economic Situation, Government Policies, and Global Shifts.
Supply and Demand
Supply and Demand are two of the most basic concepts in the economy. These factors influence several aspects of the economy, most especially real estate properties. The theory of supply and demand in Economics states that if the demand increases while supply decreases, prices will increase; whereas when demand decreases and supply increases – prices will drop.
If there is a large number of investors looking for commercial real estate (CRE) properties but there are not much buildings, prices will increase. Similarly, when there is a huge supply of buildings but only few buyers, the CRE property prices may probably drop. However, this is still reliant on other factors, as well.
Demographics
This factor is often overlooked but is very crucial in determining CRE property prices. Demographics refer to the characteristics and composition of the population, such as age, income rate, civil status, race, gender, and population growth. The characteristics of the population will influence the kinds of businesses to be built, what businesses will boom, and the prices of CREs. Major changes in the demographic characteristics will greatly affect businesses and CRE prices for years, or even decades.
For instance, is the trend among millennials opting to have 2 or less children. Using this trend, investors, developers and businesses will try to accommodate the needs of this small family.
Location
It is already a given that the location is one of the most critical factors affecting CRE properties’ market value. Different locations mean different demographic characteristics, which would also mean different needs. Furthermore, the location where the property is situated can either detract or add potential investors. The access to amenities, such as power lines and transportation will affect the demand for the property.
Crime rates and doubtful businesses will detract investors. Unpleasant neighbors will also scare off potential buyers. CREs around this area will most likely lower down their value for them to get an offer. On the other hand, low market value of CRE may be the result of sketchy businesses coming into the neighborhood.
It is safe to say that cheaper prices are not always the best option.
Interest Rates
Interest rates also have a major impact on the CRE property market value. Interest rates of CRE loans fluctuate. This is a crucial matter especially when you are the one putting up your property for sale. If banks decide to increase the interest rates for loans, it is a possibility that mortgage lenders will also follow.
Higher interest rates mean higher mortgage payments. This is a huge turn-off for most. Whereas, when interest rates are low, potential buyers may increase because of equally low mortgage payments.
Thus, when interest rates are up, CRE properties are less attractive which would force them to lower their market value. Consequently, when interest rates are low, CRE properties are more attractive, which would mean a higher market value.
Economic Situation
The economy may be favorable to some businesses, but not to some. This situation, unfortunately, is outside of anyone’s control but the government.
But you can analyze the economy and check if it is working on your side for you. You can check the health of the economy by examining the economic indicators: Gross Domestic Product (GDP), employment data, the prices of goods, the manufacturing activities and so many more. Generally, when all of these indicators are down, so will real estate properties. If this is the case, you might want to hold and sell your property only when the indicators rise back up.
Government Policies
Government action and legislation greatly affect the demands and prices of commercial real estate properties. It can impact CREs through tax credits, deductions, and subsidies. These policies can temporarily boost the demand for real estate properties until they are withdrawn.
However, the decline in GDP and other economic indicators may opt for the government to increase taxes from other businesses to keep the economy afloat. This will definitely negatively affect CRE property prices.
Therefore, being aware of the current government policies, legislation, and programs sure is an advantage. It can help you determine the changes in the supply and demand of CRE and identify false trends in the economy.
Global Shifts
The contemporary world suggests that when you make business, you must not focus only on your community but for a global scope. Entrepreneurs are connected despite the geographical proximity. When a country’s economy spirals down, one must also look into the possibility that it may affect their business. Take note that your products do not come from one country alone, and when one country’s economy is down, you should also look at the economic indicators of your country. The effect may not be immediate, so it would be best when you look at the trends from time to time.
Pandemics can also greatly impact the demands for real estate properties. For example, the COVID 19 pandemic made major changes in work and school arrangement. Majority of the population practiced working from home. It greatly made an impact on the demand for commercial real estate.
Another global shift to take note is the boom in online shopping platforms. Physical stores are no longer necessary. Customers are buying straight from the warehouse and shipped directly to their homes. This can negatively impact CREs.
So, will commercial real estate prices drop?
There is no definite answer to that. This is a changing world. Trends may continue to evolve. Government policies and programs also adapt to these changes. Furthermore, the economy is a cycle. It may drop now due to the innovations and current events, but it will rise back up, just like how the world overcame the great depression. The key to better anticipate these price fluctuations is to be well-informed of the current situation and of the factors listed above to know the market value of your property.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
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