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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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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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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Every real estate deal starts with a pro-forma analysis. The buyer learns quickly if the seller and his broker’s numbers support the asking price.
If you do not confirm all the numbers, you will be the fool.
Beau Beery is a Commercial Real Estate Broker with Coldwell Banker in Gainesville, FL who specializes in Multifamily. I had the opportunity to review with Beau the numbers and learn what should be present when doing an analysis.
Grab the example used on the call click here.
Beau’s experience has shown there are some primary expenses that tend to be different for the seller and the buyer.
Pro-forma Analysis Expenses
Property Taxes: Property taxes are based off of a tax value, which rarely reflects current market conditions. If the seller has owned the property for a long time, it is likely that the taxes reflected in the pro-forma will be substantially low. It is important to evaluate what the taxes will be when you buy the property.
Reserves: Smaller properties that are managed by the seller will likely either show a low number, or nothing at all. This is where you account for things like new roofs, ac units, paint and parking lots. It’s a real expense, and an easy number to omit, or minimize which will affect the actual performance of the property.
Insurance: The seller’s insurance program is likely not what you will find. The seller could have multiple properties and have access discounts not available to you. Or if the seller does not have a loan, he may elect to self insure.
It is a must to learn, know and evaluate the numbers presented by the seller to make certain your deal will be profitable for you.
For your FREE Deal Workbook to analyze your next property, click here.
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Hey property investor, have you thought about what happens when disaster strikes your property, how do you keep from a loss of rent?
If your tenants are unable to occupy your building, your rent will stop unless you protect your rent. Where will you get the money you need to pay your mortgage, pay your employees, and ongoing expenses? What about your profit?
You would be shocked to know how many landlords do not buy Loss of Rent protection, especially on C & D class assets.
If income matters, you want to insure your rents from loss in the event of a “covered loss” to your building.
Insurance is complicated, so please understand this:
1 - The Property Coverage Form, has multiple lines of coverage. If there is not a number on your declaration page next to the coverage description, with rare exception, you do not have coverage!
2 - A property insurance policy with “special form” protects your Building from all perils EXCEPT those that are excluded, such as; “Earth Movement” & “Flood”.
What do you need to protect yourself from Loss of Rent?
A - The coverage you need to insure your rents can be called a couple of things:
What is covered?
B - The property policy provides protection from loss caused by a covered peril including:
How much do you need?
C - There are multiple coverage limitation options available. You need to consider the time needed as well as the amount. If your market is experiencing significant rent increase, or a local building boom, and the damage is extensive, you may need substantially more than you expected to get back up and running.
Actual Loss Sustained is the most preferred option if your insurance company provides it. The simple reason this is preferred is because there is no dollar limit.
However, the standard length of time for Actual Loss Sustained is twelve months. This is great in a partial loss and normal building market. If you need more time, you could be screwed. Unless you are able to extend the time limit.
There are insurance companies that provide coverage time limitations of 18, 24 and even 36 months of coverage. You will need to check with your company or agent to determine the maximum amount of time available.
Other versions of coverage require that you preset a specific dollar limit. These options include additional terms you need to understand:
For your FREE worksheet to determine the amount of rent you need, CLICK HERE
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