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Are you looking for a good return on your money?  A better return than you can ever get from a bank or money market investment?  Why not invest in commercial real estate.  Although the residential real estate market has pretty much bottomed out throughout most of the United States, the commercial real estate market is thriving.  If you have always wanted to invest in the real estate market but are hesitant about the current residential market, invest in commercial real estate.

When you invest in commercial real estate, you need to understand that there is a vast difference between commercial real estate and residential.  Not only is the market different, but so are the laws.  Due diligence in commercial real estate is different than that in the residential market.  You still want to make sure you get an inspection of the property prior to the settlement as well as a survey of the property.  You also have to make sure that you get any easements included in the sale if they are needed.

Most people think of easements as those that burden the property, such as those for utilities and sewer.  With commercial property, there are often easements that benefit the property.  In some cases, in order to get to a property people have to drive their vehicles over other property owned by other people.  In such a case, the person who purchases the commercial real estate will want to make sure that they get the easements needed for parking or entering and exiting.  These can be included in the deed or in an easement agreement.  

The only way to see if you need easements is to get a survey of your property depicting not just the property but any easements that pertain to the property.  The title insurance commitment should also reflect a legal description of the easements.  The title company needs to search not only the commercial real estate property that you are purchasing but also any other property in which you are receiving an easement.  The reason for having this property searched includes the following points:

1.You need to know that the person who signs the easement agreement or deed is legally entitled to convey interest in the property;
2.You need to know that there are no burden on the easement property that would prevent you from using it;
3.You need to know that the taxes on the easement property are current.  It would be unfortunate to purchase commercial real estate property that is dependent on easements and discover that the property is in a tax sale.  A person who purchases the property could insist that you pay money to use their property; they may even erect a fence to prevent you from using the land.

When you invest in commercial real estate, make sure that you have an attorney who is well versed when it comes to commercial real estate, not just residential real estate.  Commercial real estate is an entirely different than residential real estate and your attorney should be knowledgeable in this aspect of the real estate industry.

Commercial Real Estate Appraisal

Commercial real estate appraisal is a combination of art and science. Knowledgeable appraisers gather and analyze data prior to making informed decisions about real estate value. The appraisal profession has developed a series of well-established analytical techniques; the cost approach, income approach and sales comparison approach. The most appropriate approaches depend upon the characteristics of the subject property.

The cost approach is considered most applicable for commercial real estate appraisals for relatively new properties and special-use properties. Commercial real estate appraisers are less likely to use the cost approach for older properties due to the difficulty of precisely calculating the amount of depreciation.

The income approach is considered most applicable for investment or income properties. Appraisers gather data regarding the actual income and expenses for the subject property, rental comparables, expense comparables, industry expense data, market occupancy, and rental market trends. The commercial real estate appraiser then estimates gross potential income, other income, effective gross income, operating expenses, and net operating income. Net operating income is converted into an indication of market value using a conversion factor termed the capitalization rate, using the following formula:

Market value = net operating income/capitalization rate. This process is termed direct capitalization.

The income approach can also be calculated using a discounted cash flow analysis. Revenue and expenses are estimated for a period of years and the resulting annual cash flows and gross proceeds from a projected sale of the property are discounted to a present value using a discount rate.

Commercial real estate appraisers also utilize the sales comparison approach to estimate market value. The sales comparison approach is often considered most comparable for owner-occupied properties. After obtaining data regarding similar properties that recently sold, the appraiser makes adjustments to generate an indication of market value for the subject property.

After considering each of the three approaches to appraisal and preparing an analysis for the approaches which are considered relevant, the appraiser reconciles the indications of value to a final value conclusion. The quality and quantity of data for each of the approaches is considered when reconciling to a final value conclusion.

O’Connor & Associates is the largest independent appraisal firm in the southwestern United States and has over 40 full-time staff members engaged full-time in valuation and market study assignments. Their expertise includes valuing commercial real estate, single-family, business personal property, business enterprise value, purchase price allocation for businesses, valuation for property tax assignments, partial interest valuation, estate tax valuation, expert witness testimony and valuation for condemnation. They have performed over 20,000 commercial real estate appraisals since 1988.

To obtain a quote or further information for a commercial real estate appraisal, contact either George Thomas or Craig Young at 713-686-9955 or fill out our online form.The appraisal division of O’Connor & Associates is a national provider of commercial property real estate appraisal services including cost segregation studies, due diligence, insurance valuations, business personal property valuations, business purchase price allocations, single family litigation support and business valuations.

All commercial property types benefit from our appraisal services including multi-family housing, retail stores, hospitals, hotels, industrial properties, manufacturing facilities, medical offices, commercial offices, restaurants, self-storage units, shopping malls, shopping plazas and warehouse/distribution centers.

If you have some experience investing in residential real estate, how much of your knowledge applies to investing in commercial real estate? Unfortunately, probably not very much. Your knowledge of financing terms and of some general real estate terms will be helpful. But beyond that, it’s like comparing apples to oranges. Without getting too complex, let’s take a look at the major differences.

The value of residential real estate is usually determined when a buyer and seller agree upon a price based on comparing the recent sales prices of other nearby properties with similar characteristics. For instance, the selling price of a three bedroom two bath house with no upgrades will usually be within 1% to 2% of other similar three bedroom two bath houses in the neighborhood. This is called the sales comparison approach, and it’s the standard method that buyers and sellers use to determine value for single-family properties.

For commercial real estate, the standard method for determining value is to measure and compare cash flows. Of course, the physical characteristics of a commercial property are valued as assets on the owner’s business balance sheet. But the primary method of deciding on a purchase price for commercial property is to compare its cash flow with the cash flow of other investment opportunities.

This unit of measurement is called Net Operating Income, or NOI. It’s calculated by subtracting operating expenses from operating income. The rate of return that the investor wants to make on his money will determine the amount that he’s willing to pay for the cash flow.

For example, if an office building has a net operating income of $50,000 per year, and the investor needs to make a 10% return on his money, he would be willing to pay $500,000 for the property.

The investor would be comparing the purchase of the office building with other opportunities to make a 10% or higher return. If he could purchase a $60,000 per year cash flow for that same $500,000 he would make a 12% return on his investment.

In that case, of course, he would buy the apartment building instead of the office building because he’s comparing cash flows. Notice that he’s not concerned that one is an apartment building and one is an office building. His investment goal is to get the highest Return On Investment, or ROI for the $500,000 that he’s spending.

With residential real estate, the value lies in the physical assets of the building and the land that it sits on. Additional value is created through making improvements to the property and through appreciation, if and when that occurs. With commercial real estate, the value lies in its cash flows, which can be increased either by decreasing expenses or by increasing rents.

Investing in residential real estate is like being able to drive a car. Investing in commercial real estate is like being able to drive an 18 wheeler. They’re very different vehicles.

1. Get organized – most competent lenders can give you a checklist of their needed documents immediately. Full documentation loans (like SBA 504’s) are worth spending the extra time on in order to get organized and shave a couple hundred basis points (100 basis points equals 1.0%) off interest rates. This will add up to tens of thousands of dollars, if not more, over the life of your loan.

2. Get pre-approved – this saves you time by knowing what you can afford to “shop” for. There is no sense wasting your time looking at $3 million buildings if you can only afford a $ 300,000 one. We have gotten very efficient and accurate with these (assuming you provide the documents we need to examine), issuing them in as little as 24 hours.

3. Know the market you’ll be buying in.— use a knowledgeable commercial realtor to find your new property. If you’re like most business owners, you don’t have time to go on endless drives shopping for a building. A competent commercial realtor can save you time plus give you comparable sales/lease rates in the area, demographics, and plans for growth.

4. Consider low down payment and longer-term loans — this preserves your capital for better utilization, keeps your cash flow high, and allows you to redeploy the “capital savings” into other profit-generating business activities. Small business owners no longer have to put down 20 percent to 30 percent or accept fifteen-year terms with five-year fixed rates that balloon from ordinary lenders to get a “good deal.” The commercial loans we provide (504’s) are a perfect antidote to those ordinary loans. The key point here is to actually do something with the “capital savings” you get from only putting a third to half as much equity down and getting up to 25-year terms.

5. Buy commercial real estate for the “right” reasons – if your likely exit strategy someday is not an IPO, but rather selling or simply closing your business, then it makes great sense to “pay yourself rent” rather than some landlord. As soon you have the capital for the down payment, you should consider turning that rental payment into a mortgage payment that will at least give you something for your effort – just like buying a home instead of renting an apartment. By doing this, you no longer will be throwing away your lease payment monthly, but building equity in an appreciable asset that also offers multiple tax advantages and income-sheltering opportunities not available with leasing.

6. Consider adding other furniture, fixtures and equipment (FF&E) into your commercial loan — as long the FF&E costs are still a minority of your overall project costs and the FF&E have relatively long useful lives, you will get to amortize these on the much longer real estate terms (which will greatly improve your cash flow) at the same time that you depreciate these over shorter, allowable IRS schedules. This aspect gives you truly the highest cash-on-cash return for your project when you employ 90% loan-to-cost SBA 504 financing.

7. Consider buying/building more square footage than you need right now — you can always grow into it, but this will also allow you to get some rental income until that time. In virtually all situations with 504 loans, you will have to occupy at least a simple majority within one year of buying the property.

8. Always establish a real estate holding company or what is known as an Eligible Passive Concern (EPC) to own your new property — the formation of a master lease between an EPC and your operating company is how you’ll tie the two together. If you later decide to sell your operating business, you can keep the real estate company (and by default, the real estate) from which you can continue cashing rent checks. It is in this way that owning your commercial property can become a great retirement asset for small business owners everywhere, all while “paying yourself” to do it.

9. Consider partnering with another business owner in your EPC if coming up with the down payment is tough – if we’ve already pre-approved you for X dollars, this solution will allow you to gain the advantages of commercial property ownership even while you share the equity requirement and upside with another. Please understand that your new partner’s operating business will also have to be examined to commit to your loan, and don’t forget to always use good judgment when partnering with someone else. Make sure to clearly stipulate the buy-out provisions in your operating agreement or other documents ahead of time — disagreements do occasionally occur, but corporate entity documents are usually better at resolving disputes than personal memories.

10. Only work with a commercial loan specialist – again, your time is precious so only deal with a lender that specializes in commercial loans. Involving residential mortgage brokers or banker in your transaction will only slow the process down and will probably cost you in expertise, loan terms, fees, and pricing.

Philadelphia, fondly known as the City of Brotherly Love, is the largest city in the state of Pennsylvania, in the United States. It has a population of over 1.4 million with a growth rate of 1.2% on average until 2009. This growth is considered one of the lowest in the United States, however, at the present time, there has been a small but significant influx of migrants into the Philadelphia area which has helped somewhat make the office space market in Philly stable. Philadelphia played an important role in what has become America as we know it because it was here that the American Revolution and Independence was fought for.  We also list all the office spaces in Pittsburgh and the majority of local listings in: Blue Bell, East Falls, Hatboro, Manayunk, Market St., Oreland, Roxboro, Bridgeport, Chester Springs, Exton, Hanover, and Queen Village.  If you need an office space elsewhere check out our office listings.

Local Economy and Companies Supporting Philadelphia:

Philadelphia’s main economic interests lie in the areas of manufacturing, oil refining, food processing, health care and biotechnology. Some prominent Fortune 500 companies that have their base here are Comcast, Lincoln Financial Group, Sunoco, Rohm and Haas Company, Wyeth and Glaxo SmithKline. Some of the federal government’s facilities are also here for e.g., the United States Mint and the Federal Reserve Bank’s Philadelphia division.

Philadelphia New Commercial Developments:

New commercial development is said to be ready to make a comeback with the economy showing signs of recovery. Many business owners are planning their strategy for expansion and new ventures. The commercial districts are poised to be ready when the businesses come back strong after the turmoil. Even the local communities have agreed to work together to make these new ventures work.
Office Space In Philadelphia Rental Rates:

Philadelphia recorded one of the lowest office vacancy rates in the nation at 10.2% despite the economic crisis hitting the whole country. The commercial office rentals faced a hard knock though with a huge dip in rentals which has been experienced across the entire country.  The bad economy has affected all types of spaces like serviced units, temporary office spaces, furnished units, and even just conference rooms rented by the hour have dropped in price.  Many land and building owners had to package their tenancy agreements with a lot of concessions to make it attractive for businesses. The average office rentals in Philadelphia ran from $21.65 to $24.75 per square foot in the central business areas. This trend is expected to continue right through to 2010 and even further as most experts think office spaces in Philadelphia will take a few years to recover as most companies are afraid to commit to a lease or long term office rental.  For more news on the local area and other major cities check out our commercial real estate articles.

Philadelphia Crime Rates and Current News:

The crime rate here is at 54 crimes per one thousand residents. This figure is considerably low if compared to the other cities in the US of the same size and population. Philadelphia is made up of large divisions, namely North, Northeast, Northwest, West, South and Southwest Philadelphia. These areas surround the Center City. Many people like to go to the old part of the city in Downtown Philadelphia rather than the mid town as the traffic is much bearable and you can take a pleasant walk to the ‘Welcome Park’. It is the place where the government of Pennsylvania first started its administration at the Slate Roof House way back in 1701. You will also come across the City Tavern Restaurant where you will find the waiters dressed in old colonial costumes to give it an authentic quaint feeling.

When most investors think of affordable housing, they immediately think of the vehicle to address this niche as apartments. In fact, the majority of affordable housing stock is apartments. However, following the lemmings has never been a great investment tactic. Mobile home parks, and not apartments, are the correct option for high investment returns in this growing market segment.

Why affordable housing?

In our new, depressed economy, the only form of housing demand that is consistently growing is housing for poorer people – called “affordable housing”. These are the people who often work minimum wage jobs and have few economic resources. A quick look at the “help wanted” section of your newspaper will demonstrate that most of the available job openings are in this “affordable” demographic. Section 8, the government program to house people who cannot afford housing, is also a part of this sector.

Why mobile home parks are superior in this niche

One of the great benefits of mobile home parks over apartments is that the owner is only responsible for the land under the mobile home, whereas apartment owners have to contend with the buildings. And being in charge of buildings with affordable housing customers is the great downfall of investing in this arena.

Affordable housing customers are notoriously rough on their dwellings. Their chaotic lifestyles, which often include very large numbers of children and a rough & tumble attitude, lead to large numbers of repair and maintenance problems. Virtually everything in the unit becomes broken over the span of their tenancy – the faucets, knobs, drawers, cabinets, windows, screens, doors, all need to be replaced. And that does not count the endless repair calls for stopped up toilets and sinks.

Apartment owners are deluged with these issues. When the phone rings at a mobile home park, the repair approach is much simpler. You just say “I’m sorry, but we don’t own your home”. In fact, the mobile home park owner is only responsible for the roads, landscaping, and delivery of water, sewer, gas and electric to the customer’s lot.

And don’t forget about liability

One of the additional problems with affordable housing tenants is their endless appetite for litigation. They see the legal system as a means to make quick money, whether or not their claim is legitimate. These legal avenues can include black mold, formaldehyde, and sub-standard housing. They can also turn about any repair claim into a slip and fall or endangerment claim such as a faulty smoke detector.

With a mobile home park, these claims can’t happen – you don’t own the unit.

Why mobile home parks have higher returns

Mobile home parks have higher investment returns than apartments for two main reasons.

The first is that they are priced to allow a significantly higher return. Due to the lower investor demand for these properties, they are priced to often yield a 10% cap rate on the front end, as compared with a 7% in apartments. This is almost a 50% greater return.

The other reason mobile home park returns are higher is that the pricing information is often imperfect. The old moms and pops who own most mobile home parks are very poor at managing their properties. You can often increase the revenue by a huge amount – often 100% — due to the lack of increasing rents over years to match the market. Additionally, most moms and pops have extremely poor cost-control systems. You will find mobile home parks that are carrying management overhead, in the form of salaries, that can be $50,000 on a park that should be $15,000. These kind of problems can be corrected virtually overnight and the returns are enormous.

And don’t forget about seller financing

Most mobile home park sellers are happy to carry the paper. This virtually never happens in apartment complexes. Since most moms and pops own the property outright, they can afford to carry the financing, often with as little as 10% to 20% down – although in some cases they will even do 100% financing, if the property needs significant turn-around work.

And this seller financing, unlike apartment complexes, is often non-recourse.

In a terrible environment for real estate financing, like we’re in, this additional plus to mobile home parks is incredibly important.

Conclusion

If you want to invest in affordable housing – and that’s just about the only slice of commercial real estate that is showing any future right now – you should aim for mobile home parks. They are less management intensive, have greater upside, and are priced to allow for much greater returns than apartments.

One of the basic lessons of real estate is that it is just as easy to flip a house for $10,000 as it is for $100,000, there is just a few more zero’s there. But the truth is that when you send an email out and you start talking about commercial property, you could almost hear people starting to get a little jittery like they are nervous enough about houses and things like that. Then you couple that with all the bad news about the economy and all the impending real estate foreclosures, so you may ask why now, why the focus on commercial short sales now, what is the big impact that it can have on people?

When you talk about commercial vs. residential, when you buy a 20 unit apartment building, think about 20 houses all under 1 roof. So you are going to get some economy to scale but they pretty much work the same way, you can flip them, you can rehab them, you can option them, you rent them and the nice thing about commercial real estate is unlike houses is you have to keep finding deal after deal to make more money.

The nice thing with commercial real estate is that you can do 1 deal and you can make enough money to live off of for the rest of your life. It doesn’t mean you are going to go out and make millions but you don’t need to hit it out of the park to create 2,3,4,5, or 10 thousand dollars a month of income coming in from the rental only to scale but they pretty much work the same way. Just an average plain vanilla deal will provide that kind of income so it is really worth understanding how it works because unlike how people think it’s really not that complicated.

 

Are you looking for a great investment that is sure to grow in time? Consider business property, commercial real estate, and other commercial endeavors; these are excellent ways to build your investment portfolio with tangible items. Unfortunately, many people have been frightened away from commercial and residential property investing in recent months.

 

The good news is that these reports are greatly over exaggerated. Even better is the news that now may be the best time in quite a few decades to buy commercial property. Prices are at an all time low. Interest rates are more than buyer friendly. There are plenty of properties available, forcing sellers to sweeten the deal in creative ways. It is truly a buyer’s marketplace.

 

Investing in property, commercial or residential, can create a great security blanket for your future and the future of your family. There are many pitfalls you can fall into along the way if you aren’t familiar with the real estate marketplace or the property buying process, and if you don’t go into the transaction fully aware of the potential problems and benefits of each and every property you purchase.

 

This is why it is so important to find a qualified real estate professional who is able to manage many types of property. Commercial properties cover a great deal of real estate (no pun intended). There are many nuances to finding a property that will be ideally suited for your investment needs.

 

Just because someone is a commercial property realtor, however, doesn’t mean he or she is the right choice for your real estate needs. An exceptional real estate agent will go above and beyond the call of duty in order to help you set goals for your property investing endeavors and will purchase properties that are ideally suited to help you reach those goals.

Commercial real estate seminars are a great way to learn about the industry or brush up on specific aspects where you’re knowledge may be lacking. They run the gambit from introductory to ultra technical and advanced. Picking the right commercial real estate seminars, making the most out of them and what you do with the information after you leave can mean the difference between turning a profit and having a property bleed you dry.

If you’re just getting into the world of real estate investment or making the leap from residential to commercial make sure you know the basics so you can assess the information being thrown at you. Yes, this may require some actual reading on your part and you may even have to visit an actual brick and mortar bookstore. OK, use your Kindle if you must, but just digest the basic information one way or another. Unfortunately, there are lots of so called experts and gurus out there who have figured out its easier to slap together an investing course or seminar that it is to actually invest. They put on sham commercial real estate seminars that are nothing more than fronts fro their expensive and pretty useless “get rich quick” systems.

Since you have done the basic research and refuse to be seduced by pictures of big checks, fast cars and mansions you’re not going to fall prey to this old game. An important step in your real estate investment career is to join a local investment club so you can bounce ideas off other investors, learn from their mistakes and get the skinny on seminars they have or haven’t gone to. If you don’t have a local club or you’re an agoraphobic shut in don’t sweat it; this wonderful blog is written and maintained by commercial real estate experts who are more than happy to guide you. Make sure to sign up for our updates and check out our seminar reviews before you leave.

Once you have learned to ferret out the good commercial real estate seminars make sure to maximize your time there. Yes, it may be a couple days away from your kids or very demanding cat but you need to squeeze it for all it’s worth. You’re probably paying for these commercial real estate seminars so maximize that return like a good investor and attend all of the discussions, participate in the workshops, network with other investors and professionals and pass out those cards. Yes, we know it can be tedious but it’s all a numbers game and you never know when a connection you made will pay off in spades.

Information products, those fun seminars and systems sold by gurus in every industry, are seeing new heights in popularity and the commercial real estate investing course is no exception. With double digit job loses, a sluggish economy and the constant threat of being the next line item deleted from the budget many people are trying to find alternatives means to make a living. Whether you’re looking for additional or primary income from real estate investments make sure you’re not flushing money down the toilet with subpar real estate courses.

A commercial investing course or any other informational course can easily be thrown together by someone with some experience in the market. But like grandpa used to say, “If they’re making so much money doing it why would they tell me?” Believe me if I knew the million dollar secret I wouldn’t be telling you about it, I’d be blowing my nose with Benjamins in the Bahamas! Most supposed gurus know that they can make a lot of money by simply packing together some basic information, pictures of their “big check” deals and the hot cars they drive. This line of work probably makes them more money than property investing without all the pesky headaches of analyzing, hunting and making deals work.

The “experts” that put together the flashy commercial real estate investing course you might see on late night television or on the internet know that most people will buy in, follow along for a little bit but when they hit a road block they will give up and move on to the next big thing.

But it doesn’t have to be this way. Flashy seminars and the hard sell courses are nothing but glitz with no substance. You need to stand back and examine the course and the “guru” to see if it’s what you want to be buying into. The best way to navigate all of this is to get some help. Join a local real estate club and start talking to real experts who make their money at the daily grind of making deals happen as opposed to those who are simply just really good at marketing themselves. Talk to people; ask them what seminars, books or courses are really good.

To find out what commercial real estate investing course is legitimate find yourself a mentor. They can guide you through the choppy waters of real estate courses and seminars and point you in the right direction. Failing that, find a commercial real estate investing course that holds you accountable every step of the way and provides feedback and help when you need it.