A new client of mine is the focus of this case study. The situation is one that reminded me of the challenge property owners face when looking shopping for insurance for old buildings.
The particular property is like many in the Portland downtown. It is a 9,000 square foot one story brick building with wood trusses built in 1927. The tenant is a retail business with a showroom. The building is wide open with a small mezzanine and a small area walled off for some storage. There is one bathroom, and a small break room with a sink. There are two perimeter walls visible to the sidewalk and busy city street which are showroom windows. The other two walls are solid brick, with no openings.
The estimated replacement cost estimate generated by a replacement cost estimator used by insurance companies. $1,332,780.00.
The current rents are $12,000/ month, $144,000 annually.
Building systems: It is widely held belief that building systems have a limited life expectancy. Therefore, insurance companies require that systems, roof, electrical, plumbing & heating and cooling systems be replaced every twentyfive to forty years. If not replaced, a carrier will require an inspection from a licensed contractor stating the condition of the system is sound.
Current code does not require the building to be sprinklered based on square footage and occupancy.
The owner received a notice from his insurance company notifying him that they would not be offering renewal due to the age of the building. When he contacted his agent, the agent, said there was nothing he could do.
I discussed with the building owner the history, and prepared applications in order to tell the story of the building to potentially willing carriers.
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CREPN #102 - Should You Lease or Own a Commercial Building with Allen Buchanan
How do you know if you should Lease or Own a Commercial Building for your business needs?
The economy is growing, rents are rising, and commercial real estate space is more difficult to find.
So what questions should you answer to know if you should lease or own a commercial building for your business needs ?
Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building.
Questions to ask before buying commercial real estate
Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?
Who are You?
What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years?
If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.
What are the Steps to Buying Commercial Real Estate?
If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.
Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some
How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:
What are the Benefits to Ownership?
Long term, for the right situation, you can benefit significantly through:
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How do you transition from investing in Single Family Rentals to Commercial Real Estate?
Most people recognize single family properties because they live in one. It’s recognizable and comfortable. The barrier to entry is low. Banks are willing to lend on the borrower’s credit score, job history and the property appraisal.
Many investors start in single family residential, and never consider commercial real estate. While single family rentals is an investment strategy, the most significant increase in wealth consistently comes from investing in commercial real estate.
For investors who are stuck in single family or just getting started, and possibly afraid of larger properties, here are the steps needed to get into commercial real estate.
The Steps to Transition
Get the Knowledge
You need to make some connections with a few key professionals.
You need to have a clear understanding of who you are and what you are looking for. Explain your “why” to the broker and ask for input from the broker to gain confirmation you are on the right path, or learn what might be a better option for you.
Ask to See Some Opportunities
Now that you have an understanding of what is required, and a level of investment you feel comfortable pursuing. It’s time to analyze some opportunities. Ask a broker to show you some deals.
Look at potential deals and even deals that have already closed and run the numbers. The more you do this the more comfortable you will become, and you will be able to recognize a good opportunity when it presents itself.
Analyze as many deals as you can.
Pull the Trigger
You will never know everything about real estate investing. Each investment will teach you something new. Your team will help you make a good decision. In fact, the larger the deal, the more help you will get. Why? Because the bank will not let you make an investment into a property if the numbers do not work.
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Three Steps to Financial Freedom. Can it be so easy?
Financial freedom is the goal for every working adult around the world. So why do so many people struggle to get there?
Tim Rhode has come full circle. He was a poor student, part time grocery clerk and found his passion and created financial freedom through real estate.
Before you can invest, you have to be aware of your ABC’s of your personal finances.
Once you have money to invest, you can pursue Financial Freedom.
The three steps to Financial Freedom:
Step 1: Awareness
It all starts with awareness. This includes getting educated about your surroundings and the people in it and where the path of progress going.
With some basic awareness, you have to jump in because you can’t win the game if you aren’t in the game.
Now you have to be willing to grind and focus.
Step 2: Become a Master
The grinding starts to pay off after you have some experience. You will start to recognize the next level of the game and how you can play it.
Exchange into bigger opportunities. In real estate, the 1031 Exchange is a vehicle for deferring the taxes from a real estate sale. Because you still have the would be taxes to invest, you are able to leverage up into properties that are more easy to operate.
It takes time
Quit looking for the shortcut to getting rich. Everyone has heard a story about the overnight success. But the reality is that true success takes time. If you are willing to invest in yourself and your time, doing what works, over time, you will have success.
Remember, education is a lifelong pursuit. You have to commit to continuously educating yourself.
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Buy and Hold Investing is the standard for most Canadian real estate investors.
Jesse Fragale bought his first rental when he was at college. Recognizing a good thing, he grew his student housing portfolio with multiple single family and condo rentals.
You might think student housing equals keg parties and irresponsible tenants. While this may be true, it was a guaranteed way to push market rents in a rent controlled market.
Jesse is a Commercial Real Estate broker in Toronto, where the rent control policy caps rent growth to a maximum of 1.8%. The only time a landlord can increase rent by more is after a tenant moves out, which is frequent in student housing.
Interestingly, the policies meant to help tenants gain affordable housing, has prevented investors from entering the market to build more units. It is estimated that over ninety percent of all apartment housing in Canada was built prior to 1970.
Instead of building new apartments, investors have purchased condominium units and placed into rental. Until now, condos have evaded rent control. Ontario has proposed changes to rental housing policy to close the loophole and bring condos under rent control. Ontario’s 16 new housing measures
Jesse and a partner recently purchased an eleven unit property. Two vacancies allowed for market rate rent increases. Also, there is a possibility of creating an additional unit from a large laundry room. These measures will dramatically increase the value of the property.
Buy and Hold for the long run
The 1031 Exchange available in the USA, allows the investor an option to defer paying capital gains tax when a seller buys a larger property. No such option exists in Canada. Due to the lack of a 1031 exchange, most Canadian investors buy and hold focusing on the long .
Jesse would like to grow the portfolio substantially in the next five years. However, given the challenges in Canada, he is considering his options in the US.
For more, contact Jesse Fragale at:
Where are the Multifamily Market Opportunities?
Find a market with jobs, low rental housing supply and rents that are affordable.
The Multifamily market has been cooking for several years as the demand for rental housing created by the crash and millennials who choose to live in cities.
As the cycle continues, investors begin to ask, “how long can this last?”
If you are a developer or investor, the ability to look at a specific market and identify the characteristics in play are critical to your success. Firms like firms like Axiometrics, acquired by RealPage, specialize in providing monthly multifamily market data.
Primary markets with the most demand and development, are showing signs of oversupply in the class A units. In these markets, free rent concessions have begun to show up and rent growth has slowed.
Say goodbye to rent growth of 12, 14 and 16% year over year is no more in most markets. The healthy markets for the near future suggest 2 - 3 % annual rent increases.
Are there still multifamily market opportunities?
While primary markets ability to absorb all of the new units has begun to cool, the secondary and tertiary markets still show signs of opportunity for investors and developers.
What’s the key? The fundamentals of opportunity remain the same. Where are the jobs? Where is supply tight, and rent is still affordable.
Tech jobs pay well and drive up the demand for high end housing.
Things to watch?
The cost of construction is rising based on the tight labor market. This has not slowed development, but it is driving the cost of developing new units and repositioning older units.
Millennials continue to want to live downtown, are not getting married and do not want to move to the suburbs. Until then, multifamily demand should remain strong.
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A local real estate investor can grow big, and gain efficiencies not available to investors who spread their portfolio over multiple markets.
Brian Murray, founder of Washington Street Properties shares how he moved from his position as a college professor to a full time real estate investor in Watertown, NY. His focus on local real estate has created multiple opportunities for growth and the ability to contain expenses.
Advantages to investing in local real estate
There is no substitute to seeing your portfolio daily. If you find something is not right, you can address it immediately. This nips the problem in the bud and can reduce the cost of the fix.
Local knowledge provides you the real time ability to know if your rents are too high or too low, and to make adjustments accordingly. This helps maximize income.
Opportunities for growth
When you are visible in the community, brokers, owners and potential tenants know who you are. Brokers and Property owners looking for a buyer will contact you first because they know what you have done and that you can close.
When you have more properties in a single market, you can accommodate tenants needs for more or less space
Contracts for service.
Many investors focus on just one asset class which supports the notion of specialization. However, if you specialize in one local market, you can gain pricing advantages from vendors not otherwise available. The same service provider for roofing, electrical, parking lots, plumbing, carpet cleaning, lawn care, etc. can service multiple properties for you. When vendors have the opportunity to do more work for you, they are willing to provide a discount.
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Brian’s B ook: Crushing It in Apartments and Commercial Real Estate: How a Small Investor Can Make It Big
It is said that the First Multifamily Deal is the hardest. For Jason & Pili Yarusi, they realized that there are efficiencies in multifamily are greater than what you can get with smaller properties.
Once they decided to move forward with multifamily, the question turned to where?
Jason & Pili are residents of New Jersey, where real estate prices are prohibitive for investing due to compressed cap rates and tenant laws do not favor landlords.
The markets they found to support their criteria:
The first member of the team in was property management firm. The criteria for selecting a property management firm:
How did you find the property?
Their property manager led them to a property that had been on the market previously. They believed it had some value add potential. They analyzed the deal, and made an offer. The seller countered, but quickly they realized they were too far apart.
After six months of a continued search, they circled back, and made a second offer to the seller. This time, they provided numbers to back up their offer and explained the reasons for their offer. The seller came down $600,000 and requested that the buyers pay their brokers commission.
After analyzing hundreds of deals, making multiple offers, and always being disciplined, their efforts paid off.
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Podcast: The REI Foundation Podcast with Jason and Pili
Retail Commercial Real Estate is NOT DEAD! Despite of what you’ve heard about how Amazon killed retail, it is fake news.
The Amazon effect has made it challenging for older stores and malls that attempt to continue operating as they did twenty years ago. However, this challenged subset of retail is not reflective of the whole asset class. The rest of the class is doing great!
My guest, Commercial Real Estate Broker, John Crossman with Crossman & Company, discusses the retail sector and provides an overview for what is working.
There are multiple types of retail real estate, including: strip mall, neighborhood shopping center, community center, power center, lifestyle center and enclosed malls.
Since the beginning, healthy retail has relied on the surrounding two miles of residents for support. This continues to be true today. If a community has jobs, and a minimum of 10,000 residents, you can have a healthy retail center.
Successful retail centers have a component of civic purpose. Centers that have been architecturally designed, without function continue to fail. People want and need connection with others. A successful retail experience provides this both a connection and a sense of community. A good example of a center is a grocery store.
Evolve and survive!
The rules have changed. You cannot limit your search to a big box retailer to fill an empty big box space. You have to get creative and look towards non traditional tenants such as; healthcare, education, office, church, and gyms.
The upside for these tenants is, less expensive rent than downtown, easy parking and access to retail shops & entertainment.
Tenant space requirements have changed. Space in the range of 800 - 1500 square feet is always in demand. Space that is larger than 1600 square feet is more difficult to lease.
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Private Money can be the solution to your real estate investing when the bank shuts you down.
That’s exactly what happened to my guest Jay Conner after years of successful borrowing and repayment from his bank line of credit he used to fund his real estate deals.
At first he did not know what to do. How was he going to continue without the $1 million line of credit from his bank?
In just ninety days, he found $2,150,000 of private funds at his disposal, and he thanked his bank for shutting him down.
What is Private Money?
For the uninitiated, private money is synonymous with “hard money”. Hard money is typically provided through a broker for periods from six months to one year. The average interest rate is greater than 15% and requires additional loan origination fees from two to ten percent of the loan.
Private money lending connects the borrower and the lender direct. The rates tend to be more than you will get from a bank, but less than Hard Money. The length of the loan can go from two to five years, and be interest only. This allows the borrower to season the property before obtaining long term traditional financing.
Who has private money to lend?
There are two sources of private money. The first is your warm market which includes friends and family. The second is those private money lenders who are already in the business of lending their private money.
What are the benefits of using Private Money?
There are many including:
CREPN Radio listeners, goto: www.jayconner.com/CREPN
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