The Encyclopedia of Commercial Real Estate Advice

How to Add Value When Buying, Selling, Repositioning, Developing, Financing, and Managing

Terry Painter

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119629184
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

The first Encyclopedia of Commercial Real Estate

The Encyclopedia of Commercial Real Estate Advice covers everything anyone would ever need to know from A – Z on the subject. The 500+ entries inside not only have hard-hitting advice, but many share enlightening stories from the author's experience working on hundreds of deals. This book pulls off making the subjects enjoyable, interesting, and easy to understand. As a bonus, there are 136 time and money savings tips, many of which could save or make you 6 figures or more.

Some of the questions this informative guidebook will answer for you are:

• How to Buy Foreclosed Commercial Properties at a Discount at Auctions
• Guidelines for Getting Started in Commercial Real Estate and Choosing Low-Risk Properties
• How to Value a Property in 15 Minutes
• How to Fake it Until You Make it When Raising Investors
• Should You Hold, Sell, 1031 Exchange, or Cash-Out Refinance?
• How to Reposition a Property to Achieve its Highest Value when Buying or Selling
• 10 Tested Methods to Recession-Proof Your Property
• How You Can Soar To The Top by Becoming a Developer
• Trade Secrets for Getting The Best Rate and Terms on Your Loan – Revealed!
• 11 Ways Property Managers Will Try and Steal From You - How to Catch and Stop Them!

Whenever you have a question on any commercial real estate subject, just open this invaluable book and get the guidance you are looking for.

Find author Terry Painter:
apartmentloanstore.com
businessloanstore.com

PART I
Smart Strategies for Buying

CHAPTER 1
Who Are You When Buying a Commercial Property?

It might seem strange for someone writing a book on commercial real estate advice to begin the first chapter by asking the reader “Who are you when buying a commercial property?” I am asking you this question because I have found it to be the most important question buyers of commercial real estate can ask themselves to save time and money.

Some of my buying clients clearly did not ask themselves this question. Many seemed to lack confidence. They spent so much time evaluating the wrong properties, and so many different types of properties, that I found myself spinning in circles with them and getting dizzy. Did they want to buy properties close to home or out of state? Properties that did not need any work, or those they could add value to? They couldn't make up their mind. For some, all the choices seemed to be too risky. They just could not decide on the level of risk they could live with. After bumping into endless walls, many found themselves quite miserable. Some just quit the process. Some made it through and actually closed on a property. But many of them ended up owning the wrong property in the wrong place at what turned out to be the wrong price.

And then I have had clients that clearly knew who they were and what they wanted from the beginning. Most of them were experienced. It seemed as though they were born to invest in real estate. I had fun working with investors in this group; we shared the love of the deal. They also bumped into lots of walls because that's what you do when you buy commercial investment property. But they had a blueprint to follow that kept them going in the right direction.

The goal of this chapter is to help you understand which category of investor you fall into, and how to determine the risk level of a commercial property you are interested in purchasing.

SEVEN TOP CHARACTER TRAITS OF EXPERIENCED COMMERCIAL REAL ESTATE INVESTORS

1. Are You Determined, Confident, and Unstoppable?

In 2005, an LAPD officer named Kelly Fabros called me for financing. She had taken a course called The Maui Millionaires and decided at the age of 32 that she was going to retire from the force. She was going to move on to becoming a millionaire through commercial real estate investments. Our first conversation went something like this:

“Hey Terry, I have found the perfect 164-unit apartment complex called Riverwalk Apartments in Wichita.”

“How much is it, Kelly?”

“Six million eight hundred thousand.”

To get people who are not qualified off the phone fast I always ask them two questions:

“How much do you have to put down?”

“One hundred and sixty thousand.”

I then added, “And do you have experience owning a large apartment complex?”

She replied, “No, but I'm not concerned about that. I do own a home we rent out.”

“I'm sorry,” I told her, “you are just not qualified. Why don't you buy something you can afford and have the experience to run, like a fourplex?”

“You don't need to insult me,” she answered, “Riverwalk is what I am looking for.”

I went on, “I'm certainly not trying to insult you. It's just that you only have about two percent to put down and no experience.”

Kelly very proudly told me, “That's not going to be a problem. I can find investors.”

You would think that would be the end of it. Not at all. Kelly Fabros is the most determined and focused beginning commercial property investor I have ever worked with to this day. Her confidence and determination are unyielding. Through the course she had taken she had learned that if she found the right property for the right price she could raise investors to muster up the down payment, and that is exactly what she did. She brought in a high-powered executive from Intel, her parents, and a few other investors and had the down payment. Now she had my attention. I gave her an extensive due diligence list and she knocked off 100% of it enthusiastically. After crunching the numbers together, I told her that the property would not cash flow the 75% loan she wanted and that she would have to negotiate the price down to $6.3 million. “Okay, not a problem,” she told me. And she did it. Kelly repeated this recipe many more times and did indeed become a millionaire.

I have come to recognize what I call the “Kelly factor” in other commercial property investors.

They just do not know they cannot do something that to others is so obviously out of their league. They don't have those thoughts of “Oh, no, what have I gotten myself into? What if everyone can tell that I'm just winging it?” Or “This is so much more than I can handle, I've had enough!” Instead, they see every roadblock as a challenge to find a solution for it. And then they knock down those roadblocks. If they don't know something, they learn what they need to know. If they don't have the down payment, their enthusiasm is so contagious that they have investors lining up to join them!

2. Can You Make the Right Choices at the Beginning?

Are you good at making choices at the beginning, or are you a wanderer? You really have two choices: is it more you to be proactive or reactive? As a buyer, are you more prone to start out knowing what you want and be in charge of finding a property that meets those objectives? Do you have the willpower to not detour much from those goals? Or is it more you to go with the flow—to start out in a direction that seems interesting and then veer from it because something completely different catches your eye?

For my client Janet, finding the right commercial property reminded her a lot of online dating. She had sold four rental homes and wanted to get into commercial property. She found a 24-unit apartment complex in her hometown of Syracuse, New York, offered at a 7% cap rate. This made it a good buy since properties of this quality were going for closer to a 6.5% cap. She thought that maybe she would do some cosmetic work on it, raise the rents, increase the value, and flip it. It started out with “Hey, I like your pics, let's meet up.” Which led to “Thank goodness I didn't waste my time on that one—it has too many problems.” And then her real estate broker showed her a small strip mall that had really good looks and a great upside—under-market rents. Janet hadn't thought of retail but got the feeling that this property just might have chemistry. The meetup went well. But then she looked at the rent roll. The tenants were indeed paying under-market rent, but it concerned her that most of the leases did not mature for two to three years. The realtor explained that this was why he had chosen the property for her: “It is such a good buy.” She replied, “So, the property is overpriced now, but in two years it will be worth it?” When Janet finally got the financials the net operating income (NOI) did not match up with the cap rate. Now she was really mad because she felt she had been lied to.

So a friend told her that she really should try self-storage. She went on LoopNet—the largest online commercial property listing service in the United States. Janet found a self-storage facility in Chattanooga, Tennessee, offered at a 9% cap. During the flight over to see the property she was filled with excitement. On the ground, this turned to confusion when the listing agent told her that the current owners were managing it and living on-site and that there was a nice apartment for her to live in while she ran the business. Janet's intention was certainly not to move to Chattanooga and buy herself a job. And if she paid the estimated $24,000 per year to have someone else live there and manage the property, she would be buying it at a 6% cap and the property would be vastly overpriced. The listing agent had a remedy—a great price on a single-tenant property in town. The tenant was a day care center. Janet thought, okay, maybe this is the one.

Successful, proactive commercial property investors know who they are, what they are looking for, and where they are looking for it. They know exactly what their financial objectives are for the short term and the long term. These investors have a plan and they do not deviate much from it. It would not occur to them to see which way the wind blew that day and drift in that direction like Janet did. They are willing to look at dozens of properties to find the one that fits their plan. Proactive investors also know what type of commercial property fits their lifestyle and become experts in that type. These self-directed individuals know where they want to buy and whether they would be comfortable moving for a property that needs hands-on management. They kn...