Thanks for downloading my special report youre in for a real treat.
Before I go over the ... 7 Most Common Mistakes Investors Make When They Buy Commercial Income Property
Id like to back up and cover the basics of why you should be looking at commercial real estate in the rst place. There are a lot of places you can invest these days, and you should know the reasons WHY before you move forward. Even if youre doing a No Money Down deal, youre going to be investing time and energy into the project, and you will be a whole lot better off if you are made aware of the 7 Most Common Mistakes Investors Make When They Buy a Commercial Income Property ..... .... Lets get started. 7 Most Common Mistakes Investors Make When They Buy Commercial Income Property Avoiding the Surprises that Can Cost Thousands of Dollars. By Paul Forsberg Page 1 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 1. Not Putting Yourself In The Buyers Shoes 5, 10, 20 Years From When You Buy The Property. This is pretty simple but does require some thought. You almost want to buy the project over again in your mind 10 years down the road and ask yourself this question: Based on the future of the location and condition of the property will a buyer nd the property attractive? If you hesitate in saying yes you must denitely do more analysis as to the salability of the project and the area. Do a little more digging and answer the question before you go any further. You wouldn't think that someone would have to tell you this. You'd think it's one of those 'common sense' bits of wisdom but its not. As the saying goes, 'Common sense is anything but common.' The main thing I tell investors to do is to walk the entire propertythen come back and do it again at night. Preferably a Friday or Saturday night Are there 5 or 6 cars up on blocks with oil dripping away under them? Are there groups of people hanging out in the parking lot after dark? Does the guy in Unit #104 have a lot of visitors that seem to just stop by and enter the building via the back door for 5 minutes and come out glossy-eyed with a dumb smirk on their face? Check out the entire property AND the surrounding neighborhood both during the day and at night. Bring your dog and take em for a walk around the area. Is the area appreciating, or is the growth heading elsewhere and growth is going to stop. Page 2 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 There are 3 types of people in real estate 1) Flippers 2) Traders 3) Investors Flippers have a job and need to work every day Traders jump from one deal to another - all based on yield Investors, on the other hand are in it for the long haul. They take along term view - they own real estate because it pays them monthly and gives them HUGE tax advantages. Check it out and ask yourself if this will be a desirable area if you were looking to buy all over again - well into the future. 2. Not Inspecting The Entire Property Prior To Closing. Most commercial properties you invest it, you will initially look at the building and do your due-diligence before you release the contingencies in the offer and then take control of the property within 30 90 days. Be sure you do a thorough Walk-Through of the ENTIRE property prior to closing. I cant stress this enough - go through the building AGAIN to make sure that you will not have any surprise repairs (that may have happened between the escrow period) once you take over. You might think this is another duh idea, but youd be surprised how many buyers jump right into a building without having it properly inspected. Especially when it comes to older properties that can hide a myriad of plumbing and electrical issues behind the scenes. Ive even seen big problems with newer properties as well. Fork out the cash for a professional inspection. These guys look at properties every day, and they know WHERE to look and WHAT to watch out for. Check with your broker and other investors on who they recommend DONT look in the Yellow Pages 3. Work Only With An Experienced Commercial Property Lender. I dont care if you have good credit or have taken a couple of dings on your credit history. This one is a BIGGIE! Save yourself a ton of time and money by working with a banker or mortgage broker that truly understands Commercial Buildings and Properties. This almost more than anything can make or break a good deal for you. Ive seen problems so many times where even investors with A+++ perfect credit wanted to work with their bank and nd out the loan package that was agreed upon changed a week before closing. Dont let this happen to you. If youre working with an experienced Commercial Broker, they can help big time in this area. A solid Commercial Broker and Commercial Lender are worth every nickel. 4. Do Not Buy On The Assumption You Can Immediately Raise Rents BEWARE - Only Under Special Circumstances Will This Happen. Page 3 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 Do not buy on the word of a broker or owner that all you have to do is raise rents and everything will work out just ne. Every seller and I mean E-V-E-R-Y Seller claims that you can easily get more rents. Just jack up the rents and the money will pour in. Yeah right If you believe that, I have some really nice waterfront property in Arizona for sale .... cheap. If simply raising rents was that easy, why didnt the seller raise them already? Why wait? Make sure you do your homework as to the validity of the claim. Then when you can make the increases, youll be increasing the income in a way that Remember: Almost ALL owners say that their rents are too low. 5. Work With An Experienced Broker To Find A Property That Will Work And Protect Your Interests At The Same Time. This may sound a bit self-serving, but hear me out. The best brokers specialize in Commercial Property have either have a designation such as CCIM, or they OWN properties themselves. Do Not work with a Realtor that has open houses on Sundays and expect them to know how to assist you in a protable analysis of a project. And make dang sure you dont work with your cousin Betty to help her out on her rst sale. Prior to working with anyone be sure to ask how many commercial or apartment properties they have sold! One nal qualier that I might add Do Your Best To Work with a broker that actually OWNS investment property. They will know the language and be 100s of times better able to steer you in the right direction when youre looking to buy. The old adage that You make money when you buy has a lot of truth to it. This is a VERY important time to have all your ducks in a row and work with true professionals that have Page 4 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 some experience under their belt. Take chances now, and youll be paying for it for years to come. 6. Not examining income and expenses CLOSELY. Ever heard of a little company called ENRON!?!? Before you say YES to the project, you MUST ask to see the sellers last two years of Schedule E or partnership/corporation return for the property. Put it in the Offer as part of the Due-Diligence required documents. I dont mean to say that have to match the pro- forma provided by the seller or listing agent exactly, but if things are really out of whack, you need to start asking serious questions. If the information provided is out of whack there may very well be an easy explanation. Especially if the property is held in a corporation. This, more than anything will give an accurate reading to you on the performance of the property. Compare the to the gures the owner gave you. One other little tidbit on a huge expense we all face TAXES. Heres a simple process that could save your butt on the dreaded T Word: Call the Assessors Ofce and ask them 4 questions: 1. What is the current tax valuation on the property? 2. What is last years tax valuation on the property? 3. s the tax valuation scheduled to go up from the current amount? 4. When youre on the phone with the Treasurers Ofce, ask them what the current taxes are and HOW MUCH VALUATION those taxes are based on. If its based on last years valuation and you know from talking to the Assessor that the value has jumped up well guess what youre gonna see it on your bill and wonder what the hell just hit you! Many times the current taxes are based on last years valuation so the pro-forma the seller handed you is technically correct, but fails to mention the valuation is increased $40,000 this past year when the city needed to nd some extra money to spend. Every jurisdiction is a little different but basically make sure that the valuation hasnt jumped up recently, which may not be reected on the past taxes the seller is reporting. This tip could literally save you thousands of dollars alone. 7. Not Factoring In Enough Vacancy & Reserves. Page 5 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 During your ownership of the building, you will undoubtably encounter vacant units, empty space and a building(s) needing capital improvements. This is a fact of life for those of us brave enough to sign on the bottom line Dont rely on just the owners representation of vacancy, because some owners dont really get it that when a tenant moves out. It typically takes a few days to get the unit rent-ready again. At a minimum you or your maintenance person needs to thoroughly go through it and check to make sure everything is in working order. Not only that, but I guarantee that over the years you will want to do little improvements here and there to help increase the amount of rent you can get for a unit. These things take time and money, and you should be sure to put at least some percentage in there even in hot markets. Reserves are a little more tricky. Bankers sometimes tell you to use a percent of rent, or X$ amount per unit, but I prefer to look at every property differently. Think forward to any large expenses you anticipate, such as the roof, AC units, hot water heaters, parking lot sealing, painting of the building, signage, cabinets, appliances, etc. Depending on what type of commercial property you own, the type of repair or replacement may vary, but the result is the same. You need to factor in SOMETHING for reserves. Everything has a useful life span. If an AC unit on the buildings useful life is 12 years and the building is 12 years old, the AC unit is working on borrowed time. Sooner or later it is going to go and you will need to replace it. Better to have planned for it ahead of time and have the funds to make repairs. ESPECIALLY for new purchased. Simply gure in X amount per year toward that goal of replacing the roof, or putting in new AC system. Its not an exact science, to be sure, but use your best judgement and think ahead a little bit. Factor these costs in to your operating statements to give you a TRUE idea of how the property will cash ow. The lenders and appraisers will do this why shouldnt you? OKSo now you have a better idea of how you can literally save a ton of money when you Buy an Apartment Building or Property. It can be tough out there, especially when buying and I dont want to see you get taken for a ride. This report - and the 7 Mistakes to Avoid When Buying Apartment Buildings is a great start on your road to true wealth and independence. Page 6 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 All the Best- Paul Forsberg Commercial Real Estate Specialist Page 7 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 lt peeves me to to enJ bow mony reol estote oqents onJ brokers try onJ volue o property on tbe projecteJ rents onJ tbey Jo it in o very Jeceptive woy. l con't stress tbis point enouqb - you neeJ to insist on qettinq TRUE copies of tbe rent rolls l qet top poqe of eocb onJ every leose. lt will proviJe tbe leose term, price, onJ most times outomotic rent increose scbeJules. You olso neeJ to qet copy of o current onJ yeor to yeor Pcl stotement of tbe property. !" $% &'(% ()&* &' +,(-&. &' /0 1,.%23 In My Opinion, The ONLY Way To Go.... Is To Negotiate The Purchase Price Based On The Existing Rents - Period. Buying a Commercial Retail Investment - Partners Wanted I closed another great commercial investment deal for a client last week. Heres the case study: 1. THE CLIENT The client was a Canadian National who lives in Canada and SW Florida. He is a successful contractor/investor with commercial investments in Germany, Canada, and the United States. He feels the European Economy is in way too much trouble and believes 10 years down the road his investments there will be worth very little, so he is liquidating the European properties and moving the money into the US. 2. THE REQUIREMENT The purchase price requirement was: + Anywhere from $700k to $1.5M US. + A cap rate of at least 9.5% for professional building, and 11% for Industrial/Warehouse space. + Must be within 25 miles of his residence in SW Florida. + Preferred multiple tenant NNN deals but was willing to look at other options 3. THE HUNT We analyzed numerous deals but each was disqualified for various reasons: Town Growth going the opposite way Business Growth Not conducive to the buildings available Vacancies too high and projected rents out of line Etc. Eventually we started looking at Gross Lease deals. Their leases are not quite as long as NNN deals but they provide other benefits i.e. its extremely unlikely that all tenants will vacate the property at the same time. 4. THE PROPERTY Eventually we found a deal that looked promising. The asking price was just over $875,000. The cap rate was 9.75%. It was a medical center with two tenants. Upon further analysis I found: The property is within a mile of two hospitals It is the way of town growth The average rent for the units was in line with the market, and current leases had 5% annual rent increases built in already. The building was built in 2007 so it was still in very good condition The property was within a few 100 yards of a CVS Page 8 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 The crime rate was low, schools were good & locals confirmed It was a Bank Owned property and they were willing to finance the property. 5. THE DEAL We negotiated a purchase price that gave my client an 10% cap rate. This is an extremely good result as cap rates have been falling due to heavy demand from investors. An 10% cap rate basically means that that is the return an investment will generate if you paid cash for it. However, due to the fact that in this deal the investor was getting very affordable financing at 4.5% interest, (I negotiated a deal with the bank) his cash-on-cash return was even higher. We worked with a well-known local Law Firm to review the title commitments & the purchase contract. Our phase 1 inspection came back clean, our building inspection had no big red flags, just some minor maintenance items which the seller readily corrected. The new owner never left his office in Canada - the closing was done via Federal Express and the internet. I did the walk through inspections, notified the tenants, and did everything else that needed to be done for a smooth closing. He will be down in 2 weeks and all the work will have already been done. 6. IN SUMMARY The complete process from first meeting the client to closing the deal has taken about two months. The end result, the new owner has a nice investment, completely stabilized, 100% leased out in a great location. He is looking at a 27% Cash-on-Cash Return in year one, and going up from there. Not bad - he owns the property and i is paying him monthly income to own it, he will get tax deductions, depreciations, and the property is going up in value every single day. In closing, I am looking at commercial investment opportunities every single day. In the above case, my investor only wants leased up properties. He does not want anything to do with buying half vacant properties and going through Page 9 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123 Quick down and dirty example: AC System: Cost $12,000. Useful life:12 years. You should put $1,000 per year in reserves for the AC System. If you buy a building with a 10 year old AC system, you should plan on putting $6,000 per year away for replacement reserves - or something close to that number. The same goes for appliances, carpet, roofs, exterior painting, etc. The repairs are going to come - best to plan ahead and be prepared rather than caught with you pants-down. the rent-up stages. even though I would gladly do it for him). There are numerous opportunities in SW Florida to invest in partially vacant properties, get them rented up and stabilized for nice monthly cash flows. Hold them for a year or two and either re-finance them and pull the investment cash out, or to simply sell them and take the capital gains profit, or 1031 exchange them into bigger projects. If youd like to invest in commercial property, or partner up with someone like me who is the Boots on the ground person who can handle lease-ups, repairs, management, and anything else that comes up ..... ..... Feel free to shoot me an email with your contact info and a brief summary of what you ate looking to do. Email me at my PERSONAL email address: Paul@FLACRE.com Page 10 Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com www.FloridaCommercialRealEstateServices.com 2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123