Commercial Real Estate Investing For Dummies. Peter Harris
don’t have to pay expenses. So, after the tenants pay for all the expenses and you pay the mortgage, the rest goes into your pocket. It’s quite typical for a triple net lease to be 5 to 20 years in duration with rent increases every couple of years. But that can be a disadvantage as well, and here’s why: Let’s say that the lease is for ten years. If your neighborhood experiences explosive growth over the next three to five years, you won’t be able to charge higher rents or capitalize on what’s happening because you’re locked into a ten-year lease agreement. But overall, triple net lease investments are very much sought after.
Retail centers
Retail centers, also known as shopping centers or malls, are at the heart of most of the towns and cities in our country. These are the places where people come to shop, eat, and meet with friends. And retail centers are one of the commercial property asset types that you can invest in. Most investors like retail centers because, like office and warehouse properties, many retail properties are leased out on a long-term triple net lease basis where the tenants pay for all the expenses. The upside to this as an investor is that your rates of return won’t go down over time as the taxes and expenses go up. In fact, as rents go up over time, your returns just keep getting better and better. And as in most triple net lease agreements, rent increases are built into the agreement with the tenant.
Warehouses or industrial properties
With the advent and growth of online shopping or e-commerce, companies that ship to us need a place to store their goods. These buildings, known as warehouses, are pretty simple — large structures, four walls, multiple doors, and centrally located for shipping purposes. Warehouses tend to be relatively low-maintenance properties, focusing on storage more than aesthetics. Also, warehouse tenants may be more inclined to sign longer-term leases in the coming years as e-commerce grows.
Self-Storage Facilities
Just like everyone needs a place to sleep at night, nearly everyone needs a place to store their stuff — old things, recently purchased things, and treasured personal things.
Why is it so popular amongst investors? Compelling reasons include
No toilets to clean
Low cost of operations
Low building costs
Operations can be automated
Low down-payment loans
The various types of self-storage facilities to consider are
Self-storage
Warehouses
Cold storage
Climate-controlled storage
Vehicle storage (including RVs, boats, and cars)
One of the most important things to consider is your facility’s location. Ideally, it should be located where there’s demand for storage, where it’s easy to drive to, and where there’s high visibility. If there are a lot of small houses in a town, it’s good sign that there is an opportunity for a self-storage investment. Small houses mean a large percentage of people in that town require extra storage spaces for their stuff.
Hotels and resorts
This asset type isn’t our recommendation as the place to get started, but many experienced investors have found it to be a fun and highly profitable area to focus on. Of course, other investors have also lost their shirts (and sometimes their trousers, too), so make sure that you know what you’re doing before jumping in. Most of the deals we've run into have been smaller hotels or motels rather than the larger nationally branded, or as they're referred to, “Flagged” hotels.
One commercial client of ours used a commercial master lease, a form of creative financing (see Chapter 9) to get a 40-unit motel outside of Springfield, Missouri. They changed the name of the motel, hired new staff, and upgraded the units. Six months later they sold it for almost twice as much making almost $500,000. Another student of ours has a 135-unit hotel under contract with plans to convert it into apartments.
Getting Started
What’s the secret ingredient that allows someone to make it big in commercial real estate? If we told you, how long would it take for you to jump up, bolt out the door, and go find your first commercial deal? Well, you’re about to find out, so put on your running shoes. The secret ingredient is none other than motivation. If you were expecting some fancy formula, we’re really sorry. But, in the end, it really boils down to how bad you want it and what you are willing to do to get it.
If you are truly motivated, you’ll find a way. But now that you know the secret, you still need to be familiar with the tools, techniques, and guidance that help you along the way. We explain them in the following sections.
Investing in commercial real estate requires a handful of skills. You don’t need to understand differential equations or know how to rebuild a transmission. However, the skills in the following sections are a must.
Easily meeting people and making new friends
If you connect with people easily and like meeting new friends, you’ll do well at creating a stash of contacts. It’s important to network with the people who will be investing in your commercial real estate deals because they hold the “pot of gold.” People that you meet will eventually be your advisors, investors, and partners, and they’ll send deals to you and connect you with wealth-building resources.
If you’re the shy type, we’re betting that you’ll sooner or later get over your shyness after you see all the money that’s being made by other investors who love having a network of colleagues and friends. If you really want to succeed as commercial real estate investor, you’ll have to gradually come out of your shell.
Doing simple math
You’ll need to be able to look at property information online, properly enter numbers into a simple spreadsheet, and use a calculator. These skills help you determine what a commercial property is worth, what you should pay for it, and what your