by Prince Licaylicay | Dec 27, 2021 | All Articles, Buying, Investing
Successful real estate investors excel at perceiving, analyzing, and leveraging other people’s money. They have perfected the art to invest in commercial real estate with minimal personal funds. This approach is particularly appealing to newer or cash-strapped investors who want to enter the real estate market without substantial financial resources or credit.
Feasibility of Investing with Minimal Funds
It is possible to start investing in commercial real estate without spending your own money. However, if you don’t plan to invest your own funds, you’ll need another crucial resource: a reliable network. The key is recognizing who can assist you and how to collaborate effectively with them.
You don’t need an endless supply of cash to secure a good deal. Instead, you must understand how to invest in commercial real estate with the right methods and strategies.
Strategies for Investing with Little Money
In this post, we’ll explore strategies and steps for investing in real estate with minimal money or experience. You’ll learn how to begin investing without spending hundreds of thousands of dollars. Any property owned purely to generate profit, whether through rental income or market value appreciation, is considered an investment in commercial real estate.
The Myth of No Money Down
There is no such thing as “no money down” in real estate because the funds must come from somewhere. If you wish to invest in real estate with little or no money, you must learn to detect, analyze, and leverage other people’s money.
Steps to Invest in Real Estate with Minimal Funds
1. Identify an Exceptional Property
First, if you’ve found a commercial property to buy, it must have at least two of the following characteristics:
- It’s located in a good neighborhood.
- It’s priced below market value for its condition.
- It already generates enough net operating income (NOI) to cover mortgage payments.
- It has substantial repositioning upside.
These factors could include rentals below market rates, lower-than-market occupancy rates, or opportunities for low-cost operational and aesthetic modifications that allow for rent increases.
2. Secure a 10% Down Payment in Your Name
Next, it’s crucial to raise at least 10% of the down payment in your name. How you achieve this is up to you. You might borrow from your parents or the bank, sell assets, or use a home equity line of credit.
This down payment gives you more influence and control over the situation. Every investor and lender will ask how much you’ve invested, and you don’t want to say “none.”
3. Find a High-Net-Worth Investor or Proxy
Identify a mentor with wealth, cash, and experience similar to yours. This allows you to inform real estate agents and lenders that you’re representing a high-net-worth investor in commercial real estate deals. Doing so can open doors to opportunities.
This investor may not be the principal in the transaction; you might need to find another before closing. Typically, investors make numerous loans, and a competent investor may replace the initial one.
Critical Components for Success
4. Secure a Fully Executed Purchase Contract
Private investors and lenders won’t consider your proposal until you have a fully executed purchase contract on the commercial real estate. This step shows your commitment and capability to invest. You achieve this by putting down the 10% payment mentioned earlier.
5. Explore Seller-Paid Down Payments
Ask the seller if they’re willing to pay your down payment. You may end up paying above their asking price to structure this deal, but it shouldn’t matter if you avoid out-of-pocket expenses. However, getting the property appraised for your new purchase price might be challenging.
6. Gather Critical Property Financials
Your transaction won’t succeed without a pro forma predicting revenue, costs, mortgage payments, and net profit for at least two years or the duration of ownership. These financials should be based on facts, not assumptions in the listing broker’s proposal. You’ll need current and historical rent rolls and profit and loss statements to prove the accuracy of the financials.
Ensuring Strong Financial Returns
7. Present a Strong Pro Forma
Investors need to see solid returns on their investment after the property has been repositioned. A minimum annual cash-on-cash return (CCR) of 8% is required, with 10% to 12% being preferable. More importantly, focus on the annual internal rate of return (IRR), which includes both operating income and appreciation. Appreciation often outperforms operations in commercial properties.
8. Create an Excellent Executive Summary
Your Executive Summary should be top-notch, ideally at least four pages long, to pitch your business to investors and lenders. Start by highlighting the property’s estimated annual CCR and IRR. Then, describe the property, including its location and proximity to key areas like malls and highways.
Include the price you’re paying, the cost of value adds, and a forecast of the property’s worth in a few years. Address potential risks and explain your strategies for mitigating them. Demonstrating that the property can break even with 75% or lower occupancy shows its resilience during economic downturns. Finish with a clear exit strategy.
Additional Financing Strategies
9. Consider Seller Financing
Ask the seller if they’re willing to carry the debt on the property. You might make monthly payments to the property owner rather than going through rigorous lender approvals. However, seller financing may balloon after a few years, requiring you to refinance to pay them off. Alternatively, they might carry the debt for the property’s entire life—this depends on how you structure the deal.
Reasons for sellers to consider refinancing include:
- Avoiding tax obligations from a sale.
- Enjoying a steady monthly income.
- Accelerating the sale of the commercial property.
- Securing more attractive long-term returns.
10. Propose a Lease with Option to Buy/Own
If the commercial property is currently unoccupied, propose a lease-to-own arrangement with the landlord. You can lease the property, operate your business, or sublease it to other tenants. This arrangement can last as long as you and the owner agree, with a portion of your rent payments going toward the purchase price.
Your monthly payments contribute to the building’s purchase, eliminating the need for a significant down payment upfront. All of this can be done without showing money at the initial stage of the transaction.
Conclusion
If you want to invest in commercial real estate with little to no money, follow this strategic guide. Success requires mastering the art of presentation to investors and lenders and leveraging the expertise of a seasoned commercial broker specializing in investments.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Dec 22, 2021 | All Articles, Selling
Deciding when to sell your commercial real estate (CRE) property involves many factors. It shouldn’t be an impulsive or overnight decision unless absolutely necessary. Making a profitable decision requires time, research, discussion, and reflection.
Assessing the Right Time to Sell
There are methods to determine the optimal time to sell your property. This article will explore how to identify the best time to sell your CRE property and increase your chances of a successful sale.
Property Income vs. Sales Price
Two key values influence your decision to sell: the projected income your property can generate and its sales price. To make your property attractive to buyers, the projected income should exceed the sales price.
For example, if a property is projected to earn $6,000,000 in income but is listed for $5,000,000, it offers buyers an immediate $1,000,000 advantage. Conversely, if the income is $5,000,000 but the sale price is $6,000,000, it’s better to hold onto the property until the numbers improve.
Preparing Financial Projections
To assess your property’s viability, prepare a pro forma with the following:
- Financial projections of income
- Operating expenses
- Net Operating Income (NOI)
- Cash flow
- Capitalization Rate (Cap Rate)
- Internal Rate of Return (IRR)
- Equity Multiple
- Cash on Cash Return
Market Conditions and Potential Returns
As a CRE owner, studying your current market is crucial. Analyze the demographics of your competitors and potential buyers. Consider vacancy and interest rates in your area. Market trends can fluctuate, so trust the data when deciding to sell.
With this information, calculate two important values:
- Potential return upon selling
- Projected income if you keep the property
Compare these values with current market trends to determine if selling now is more profitable or if holding the property will yield better returns.
Operating Costs vs. Annual Return
Calculate your total annual operating costs against your annual property income. If the property fails to meet the required return percentage, consider selling before its value drops further.
For instance, if a property needs a 20% annual return to sustain operations but only generates a 10% return, selling is a better option. However, if you expect rent increases and steady leasing, holding the property might lead to greater long-term profits.
Competitive Prospective Buyers
Different buyers have varying needs and motivations. Larger companies with broader coverage areas might pay more for your property compared to local business owners. Understanding your potential buyers can create competition, allowing you to leverage a higher sales price.
Knowing your buyers helps you position your marketing effectively and identify the right audience willing to pay premium prices.
The Importance of Market Research
Finding the perfect time to sell your CRE property relies heavily on market research. Understanding current market trends enables you to make data-driven decisions. Analyze your competitors and potential buyers to better position your property in the market.
Tracking and trusting the numbers is essential for maximizing profit and securing better deals. Remember, market conditions are always changing, so continuous monitoring is necessary.
Hiring a Commercial Real Estate Broker
You don’t have to navigate the selling process alone. Hiring a commercial real estate broker provides access to expert opinions and helps secure better deals. Brokers have the knowledge and resources to assist you in making informed decisions and achieving successful sales.
Conclusion
Determining the right time to sell your commercial real estate property involves careful analysis and strategic planning. Conduct thorough market research, evaluate financial projections, and understand your potential buyers. By following these steps and leveraging professional expertise, you can make profitable decisions and optimize your CRE investments.
Even after outlining all the information above, determining when to sell your commercial real estate (CRE) can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Dec 14, 2021 | All Articles, Selling
If you have a commercial property and want to put it up for sale, determining its value is crucial. Given that most commercial real estate (CRE) projects involve significant investments, careful consideration is necessary to make informed decisions. The first and most important step is valuing your commercial property accurately. Valuation for commercial real estate differs from residential properties due to added complexities and heightened values, making the process more challenging.
Approaches to Valuing Commercial Real Estate
There is a correct way to value your commercial property to get the best deal possible. The goal is to find the most advantageous approach for you. Understanding the different methods of valuing commercial properties is essential, and this article will help you gain an edge.
The Sales Comparison Approach
The Sales Comparison Approach, also known as the “market approach,” involves analyzing recent sales data, or “comps.” This method is commonly used in residential property valuation but can also apply to commercial real estate. However, finding comparable data for commercial properties is often more challenging. You may need to look beyond your market area for like-kind comparables, including demographics, access to infrastructure, leasing trends, and other relevant information.
Fortunately, property intelligence or AI-powered data platforms are available specifically for the commercial real estate industry. These tools allow appraisers and investors to quickly access opportunities in any market and uncover strategic insights, ultimately helping you value your commercial property effectively.
The Cost Approach
The Cost Approach is based on the assumption that informed buyers are unlikely to spend more on a property than it would cost to acquire land and build the same property from scratch. This method calculates the cost to rebuild the property, considering the current land value, construction materials, labor, and other factors. The property value is derived using a simple formula: Property Value = Land Value + Cost to Build New – Depreciation.
While this approach is not commonly used, it can be useful when your commercial property is in a less active market where data for other methods is difficult to collect.
The Income Approach
The Income Approach is one of the most popular methods for valuing commercial property. It focuses on the income the property is expected to generate in the future. To use this approach, you need to understand Net Operating Income (NOI) and Capitalization Rate (Cap Rate).
NOI is the net income generated by a property minus operating expenses, excluding capital expenditures, debt service, and taxes. The Cap Rate represents the ratio of NOI to the property’s value and indicates the anticipated return on investment (ROI) for the property owner.
To find the value of your commercial property using this method, use the formula: Property Value = NOI / Cap Rate. While this approach is popular, it is only accurate if you carefully consider all inputs. Miscalculating rents or underestimating vacancy rates can lead to inaccurate results.
The Gross Rent Multiplier Approach
If you prefer a simpler method, the Gross Rent Multiplier (GRM) approach might be suitable. This approach provides a quick estimate of your property’s value. The formula used is: Property Value = Annual Gross Rents x Gross Rent Multiplier.
Unlike the Income Approach, which uses net income, the GRM method relies on gross income to calculate property value. This approach can be helpful when you need a rough estimate quickly.
Making Your Choice
In summary, valuing your commercial property is driven by the information you gather. The more data you collect, the more accurate your valuation will be. Expert appraisers often use multiple approaches and average the results to determine the most accurate property value. While the process may seem challenging initially, it becomes easier as you gain experience.
Even after outlining all the information above, valuing your commercial property for sale can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your CRE investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Dec 10, 2021 | All Articles, Buying, Exchanges (1031 & DST), Investing
Yes, you can buy multiple properties in a 1031 exchange. In fact, you are allowed to purchase up to three properties. However, if you wish to acquire more than three, there are specific 1031 exchange rules that govern this scenario. Understanding these rules, known as the 200% Rule and the 95% Rule, is crucial for successful property identification and acquisition in a 1031 exchange.
The 200% Rule
The 200% Rule allows you to identify more than three properties, provided that the combined value of these properties does not exceed 200% of the value of the relinquished property. This rule is particularly useful when you want to diversify your investment across multiple properties without exceeding the allowed value limit.
The 95% Rule
The 95% Rule, on the other hand, offers more flexibility by allowing property identification without reference to the sale price of the relinquished property. To comply with this rule, you must acquire and close on at least 95% of the value of the identified properties. This rule can be advantageous if you aim to purchase multiple properties but want to focus on a larger portion of the overall value.
Summary
In summary, you can indeed purchase multiple properties in a 1031 exchange, as long as you follow the applicable rules. It’s important to remember that the process of buying properties in a 1031 exchange is not entirely at the discretion of the investor. For this reason, it’s highly advisable to consult with 1031 exchange experts and legal counsel to ensure you navigate the rules effectively and maximize your investment potential.
Even after outlining all the information above, dealing with 1031 Exchanges can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your 1031 investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Dec 7, 2021 | All Articles, Buying, Investing, Selling
Commercial real estate (CRE) property prices are influenced by numerous factors. By analyzing these factors—such as supply and demand, demographics, location, interest rates, economic conditions, government policies, and global shifts—you can predict potential price drops or increases.
Supply and Demand
Supply and demand are foundational concepts in economics that significantly impact real estate prices. According to the theory, when demand increases and supply decreases, prices rise. Conversely, when demand decreases and supply increases, prices drop.
For example, if many investors seek CRE properties but few buildings are available, prices will likely increase. On the other hand, if there is an abundance of buildings but few buyers, prices may decrease. However, these outcomes are also influenced by other factors.
Demographics
Demographics, often overlooked, are crucial in determining CRE property prices. Demographic factors include age, income, civil status, race, gender, and population growth. These characteristics influence the types of businesses that will thrive and, consequently, affect CRE prices.
For instance, the trend among millennials opting for smaller families may lead investors, developers, and businesses to cater to this demographic, influencing CRE demand and pricing.
Location
Location is one of the most critical factors affecting the market value of CRE properties. Different locations have varying demographic characteristics, which translate to different needs and demands. The location of a property can attract or deter potential investors. Proximity to amenities, such as power lines and transportation, significantly impacts demand.
High crime rates or undesirable neighboring businesses can detract from a property’s value, leading to lower prices. Conversely, a desirable location with positive attributes will likely increase the property’s value.
Interest Rates
Interest rates play a significant role in determining CRE property market value. Fluctuations in CRE loan interest rates can affect buyer interest. When interest rates rise, mortgage payments become higher, which may deter buyers and force sellers to lower prices. On the other hand, when interest rates are low, more buyers enter the market, driving up property values.
Economic Situation
The overall economic situation also impacts CRE property prices. Economic indicators such as Gross Domestic Product (GDP), employment data, and manufacturing activities can give insights into the economy’s health. When these indicators are down, CRE property prices typically decrease. It’s wise to sell property when the economy shows positive growth and indicators are strong.
Government Policies
Government actions and legislation can significantly influence CRE property prices. Policies that offer tax credits, deductions, or subsidies can temporarily boost demand for real estate. However, when economic indicators decline, the government may increase taxes on businesses, negatively affecting CRE prices.
Staying informed about current government policies and programs can provide an advantage in anticipating changes in CRE supply and demand.
Global Shifts
In today’s interconnected world, global shifts can also impact CRE prices. Economic downturns in one country can affect businesses in another, especially if there are supply chain dependencies. Pandemics, like COVID-19, have also shown the potential to drastically alter demand for CRE properties as work-from-home trends emerge and online shopping platforms reduce the need for physical stores.
Conclusion: Will Commercial Real Estate Prices Drop?
There is no definitive answer to whether commercial real estate prices will drop. The world is constantly changing, and trends evolve. Government policies and programs adapt to these changes, and the economy moves in cycles. The best way to anticipate price fluctuations is to stay well-informed about the current situation and the factors listed above. Understanding these elements will help you better assess the market value of your property.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
