Commercial Real Estate Investing For Dummies - Peter Harris

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math is sure to get you up to speed.

      Accounting and collecting

      We believe that if you’re going to be in business, you’re going to need to be comfortable asking other people to pay you the money that they owe you (in rents). The neat part is that you can hire a property management company to do all the collecting for you. And, if you’re starting small, you need to get a good handle on accounting and other business essentials. Why? Because throughout this book, we emphasize that investing in commercial real estate is like investing in a real business where you have to pay bills, hire employees, deal with contractors, and know how to read simple financial reports.

      

When coauthor Peter Conti started his first business more than 36 years ago, he read the book Small Time Operator by Bernard B. Kamoroff so he could understand the basics of accounting, setting up a business, paying various taxes, and staying out of trouble.

      Like any complicated business, commercial real estate investing has its share of myths and questions. Knowing this information brings forth some valuable truths that will rescue you from the trappings of confusion.

      The following are some pretty common misconceptions about investing in commercial real estate:

       You must start off in residential real estate to get into commercial real estate. There’s no rule, rhyme, or reason stating that you must first invest in residential real estate in order to make the leap into commercial real estate investing. These fields are two different animals, two different languages, and two different consumers. It’s like comparing apples to oranges.

       Only the rich need apply. As you can probably imagine, this myth is just that: a myth. It isn’t true that you have to be rich to get involved with commercial real estate investing. You can be as creative in your financing here as you can be when investing in homes.If you don’t believe us, here’s an example: Donald, recently purchased a 24-unit apartment building. The purchase price was $750,000. The owner carried a second mortgage of $100,000 for Donald. That left him $50,000 for a down payment. Donald negotiated $30,000 for repair credits at closing. That left him with an out-of-pocket cost of $20,000, which he funded from a refinance from another property. Donald proves you only need to be rich in motivation and creativity.

       This game is only for big-time players. In commercial real estate it doesn’t matter where you start, and it doesn’t matter if you only want to devote part of your time to do it. Having a full-time job or being a single parent doesn’t matter either.Coauthor Peter Harris started his career by buying small commercial properties. His first was a cheap seven-unit apartment building. His second was a small and quaint self-storage building used by the plumbers in town. He did this part time while holding a full-time day job and raising a small family. It all started from there and grew to owning and operating large community properties around the country.

       You need a real estate license. A lot of investors don’t have a real estate license, and they often wonder if not having a license poses a problem. Our answer is no. Not having a license will not hinder you, nor has it hindered many of our successful friends and clients who invest full time or part time. Even one of your humble authors doesn’t currently have a license. The fact is that as long as you’re a principal in the transaction, you don’t need to be licensed. (A principal is someone who buys property to make a profit.) Agents and brokers, on the other hand, are those who help an investor buy or sell, and they’re the ones who get a commission as compensation. The duties they perform require a license. As long you don’t receive compensation or represent yourself or someone else in the transaction, you don’t need one.

       Commercial real estate investing is riskier. To this we say, “Compared to what?” If you compare it to stocks, do you have control over the companies you own stock in — in areas such as income, expense, debt, management, and insurance? We bet not. However, you do have these five controls in commercial real estate investing. If you compare it to residential real estate investing, what happens if you rent out your single-family home and the tenant moves out? What’s your monthly income then? The answer: Zilch. If, on the other hand, you own a 24-unit apartment building and one tenant moves out, what’s your monthly income? Answer: 23 paying tenants worth of rent! What’s riskier? We rest our case.

       Commercial real estate is too complex for simple folks. Again, this isn’t true. Remember when you started using some new software? You had no idea how to use it. It seemed too complicated, and it had entirely too many features. But there was a help section or YouTube tutorial to get you started. After that, through repetition and practice, what seemed much like a puzzle is now fully understood and appropriately used. Getting to know commercial real estate investing is the same concept. You have quite a few things to master, but it isn’t rocket science.

      

Real estate, like the rest of life, does have risks. If it didn’t, it probably wouldn’t be as fun. And it surely wouldn’t pay off with the incredibly strong rates of return that it does.

      Wouldn’t it be great if you could time the commercial real estate market precisely? For instance, what if you could predict what the office building market would do five years from now in your town? Imagine if you had a process and procedure for knowing the perfect time to buy in a certain market. Well, here’s a secret: None of this exists. Sorry for bursting your bubble! But if we could predict such things, we’d be living on our own islands off of Tahiti.

      But here’s the good news. Remember the old adage, “Buy low and sell high?” Believe it or not, this truly is how you get wealthy in real estate over time. It’s a tried-and-true method. And here’s another secret (and this time we’re serious): A tool exists that helps you buy low and sell high in any market anywhere in the United States. That tool is the real estate cycle. And when you pair this cycle with some knowledge of trends, you’re sure to be successful.

      Knowing whether to buy, hold, or bottom-fish

      Real estate cycles are like traffic lights. When you see a green light, you go. When you see a yellow light, you might go, but if so, you proceed with caution. When you see a red light, you stop. The trick, however, is knowing when you’re facing green, yellow, or red lights. Here are some examples:

       A green light in commercial real estate investing may be spotted when you notice upcoming job growth due to a factory expansion. Or when the demand to build exceeds the supply of available properties. Most likely, you’ll also see a lot of undeveloped land sales activity.

       A yellow light may be indicated by interest rates creeping up suddenly and causing you to examine your costs of new money to borrow. Or it could be when you see vacancies and “lease specials” increase. What if your newsfeed reveals many struggling businesses in an area? That has yellow light written all over it.

       A red light may be revealed by a halt in new construction, which may be caused by overbuilding in the area. An increase in foreclosures and a decrease in property values is a sure red light.
Making big money in commercial real estate is all about managing risks. Understanding and gaining knowledge of real estate cycles helps you lower your risk. Even though predicting real estate cycles is largely a game of luck, it gets downright dangerous if you know nothing about the trends in the market in which you’re investing. The following is an outline of the typical commercial real estate cycle. This cycle can help you determine the best time to buy, sell, or go bottom fishing. Here are the phases of the cycle, which are depicted in Figure 2-1:

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