Commercial Real Estate Investing For Dummies. Peter Harris
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you for generations to come.
When people get started with their investing, most of them dream of creating a six-figure annual income stream so that they can quit the rat race. However, deep down many of them have doubts that they can actually make it happen. But never fear. The goal of this book is to give you the starting steps and specific know-how to help you realize that you really can live the life of your dreams. And we want you to do it in a way that creates the lifestyle you want without years of hard work. We’ve helped other clients do it, and we know you can do it, too.
Understand that there are still going to be naysayers out there who say you can’t invest in commercial real estate in today’s market, in today’s economy, or in today’s cosmic layering of celestial occurrences. But you have a choice. You can either buy into what these financially stressed-out individuals are desperately clinging to, or you can let go of everything that’s been holding you back and go after the future that you want and deserve.
HOW A COLLEGE DROPOUT TURNED $4,000 INTO A $120,000 PROFIT IN 60 DAYS
Morgan was the kind of teenager who struggled in high school. He didn’t get good grades, and he didn’t earn a college degree. He worked a variety of jobs until he found himself working as a bouncer in a bar and surviving on 69-cent cans of beans. Financially, he had a pretty bleak-looking future.
For some reason, Morgan had the wild idea that he could somehow make money investing in real estate. So, he drove around town talking to agents and looking at properties. One day he saw a sign on an empty lot that said, “Exxon Corporation Land for Sale.” Morgan didn’t know much about land, but after looking at the county records, he figured that the property might be worth about $200,000.
After calling and meeting with the agent, he was able to put a contract in place to buy the land for $160,000. But now Morgan had a big problem because the agent was calling about the $4,000 earnest money deposit that Morgan had promised to give to them. So, he went down to the bank and talked them into lending him the $4,000 based on the value of his car, which was the only real asset that he had.
Now Morgan was faced with the problem of having to close the deal in 120 days, or he would lose his deposit and perhaps his car, too. So, he went back to the county office and looked at all the other parcels of land around his piece that he had under contract. He saw that there was a larger lot behind his property that could have its access restricted depending on how he developed his property.
With the help of an architect, Morgan put together two sets of plans. One set showed a larger commercial shopping center that restricted access to the lot behind it. He also put together another set of plans with another smaller building designed as a gateway to the property behind it. Morgan’s next step took a straight face. He marched into a meeting with the owner of the property that was behind his property and dropped both sets of plans down. Morgan told the owner (in a nice way) that they had a choice: The owner could either accept a wholesale assignment of Morgan’s purchase contract for $320,000 so the owner could develop it with the gateway, or (if the owner didn’t want to buy it) Morgan was going to develop the property himself and restrict the other property owner’s access.
Morgan was scared stiff at this point because he knew that he didn’t have any way to close the deal himself. Fortunately, the owner agreed to the wholesale assignment of Morgan’s property for a total price of $320,000 — and after they went through the due diligence, the price dropped down to $290,000. The seller got the $160,000 they were expecting, and Morgan walked away with $130,000 in profit by assigning his purchase contract. This happened because of two reasons: One was that Morgan found himself in a place in life where he didn’t have a lot of choices. Either he was going to go for it and make it in life, or he wasn’t. The second reason that Morgan was successful is because he had guts. Guts boil down to a willingness to move ahead, even though you’ve never done it before and even though you’re scared to death. You can find out more about wholesaling in Chapter 4.
Exploring the Available Types of Investments
Most people think commercial real estate is all about apartment rentals. Even though residential properties are a big part of commercial real estate investing, other types of properties make for excellent investment opportunities, as well. For instance, commercial real estate includes offices and warehouses, retail centers, and even undeveloped land.
We define commercial real estate as any real estate that’s bigger than one house on one lot. So even if people live in the property, it’s still commercial as long as it’s bigger than one house. Some people would argue that a little property like a duplex or a four-unit isn’t really commercial. That’s okay. We like keeping our definitions simple. Actually, five or more units in an apartment building is considered commercial, but who’s counting? We explain each of the different types of commercial property in the following sections.
Apartment buildings (also known as residential properties)
The commercial properties that are in the residential category include everything from small apartment properties (five or more units) to huge apartment building projects that cover several city blocks. You drive by thousands of commercial properties like this every day (or you may even live in one). Every single building you see is owned by a commercial investor who’s in the game to make money. (Now anytime you see a nice apartment building, you won’t be able to stop thinking about getting into commercial real estate investing.) What we find great about investing in apartments is that they’re easy to find, banks love to lend on them, and they’re great cash flow generators.
The advantage of starting off with residential properties is that they’re a great way to jump into the exciting world of commercial real estate investing. We both started off investing in small- to medium-sized multiunit properties. This was a great experience because it allowed us to make the jump to get started. For most people, getting started is the hardest part. However, after you’ve started investing in commercial real estate, you’ll have a difficult time going back to the old grind of the rat race that so many others find themselves trapped in.
Office buildings
After you get the itch to invest in commercial real estate, you’ll never walk into an office building again without thinking, “somebody owns this building. Why couldn’t it be me?”
As our populations expand, more and more office buildings are being constructed. Offices are great for investing because they have what we call triple net leases. This type of lease is one in which the tenants in the property pay you the rent plus they pay for the following:
All maintenance and repairs
The insurance on the property
The real estate taxes
Bingo! It’s called passive income for a reason. After you get your office building rented out, you can sit back and watch the cash flow come rolling in. Heck, you can even hire a property management company to lease it out for you. Then your only obligation is to sit on the beach.