How to get started investing in commercial real estate | REJournals ...

Posted: 29 Oct 2015 08:41 AM PDT

Guest Article By Stephen A. Sobin, president and founder of Select Commercial Funding LLC

Many investors these days choose to invest in commercial real estate. Their investment goals are twofold: appreciation or equity buildup, and return on investment.

What are the best properties to purchase? Which properties will yield the best return? Some investors choose to invest in single family homes while others invest in apartment buildings. Others opt for commercial, retail or office buildings.

The following is an analysis of each type of investment. As an investor, you need to determine your investment time horizon (how long you intend to hold the property), as well as your tolerance for risk.

Single tenant properties

Some investors choose to invest in commercial properties leased on a long-term basis to a single credit worthy tenant such as a national drugstore or supermarket. It is very important that the tenant be financially stable and have a long-term lease.

Lenders are very cautious when asked to finance properties that are occupied by local non-credit tenants or situations in which the lease matures shortly.

In the event the tenant does not renew the lease, or cannot afford to pay the lease, the landlord and/or lender could be left with a vacant building unable to cover the mortgage payments. On the other hand, lenders love to see tenants such as Walgreens, CVS drugstores, national chains, brand name supermarkets etc.

Apartment buildings

Most investors consider apartment buildings to be a prime investment choice. These properties contain many tenants, thereby limiting the credit risk of a major tenant vacating the premises. Apartment buildings are also easy to rent in most markets. This eliminates the fear of units being vacant for months at a time.

The combination of multiple tenants and ease of rental make apartments a very good choice for investors seeking to minimize their investment risk. New investors should seek apartment buildings in good rental neighborhoods and avoid properties in need of major renovations or restructuring.

Experienced investors, with good net worth and liquidity, may choose to purchase apartment buildings that require extensive repairs and maintenance.

Retail centers and office buildings

Many experienced investors choose to invest in these properties. Retail centers may be local strip centers containing local stores, shopping centers containing anchor tenants, or local and regional shopping malls. Office buildings may be single tenant properties or larger office buildings containing multiple tenants.

All of these properties require significantly more management than the properties discussed above. These properties should be considered by experienced commercial real estate investors only.

Purchasers without experience should only consider these properties if they will be managed with a professional property manager. This will be a requirement by all commercial mortgage lenders.

Special use properties

This category consists of properties that have one specific use, such as restaurants, gas stations, bowling alleys, theaters, etc.

These properties have many associated risks and should not be considered appropriate for new investors. They require extensive experience and have the potential to remain vacant for long periods of time in the event the business fails.

Vacant land and development deals

Again, these properties should be avoided by new investors. Without proper experience, borrowers should not consider these opportunities.

Lenders will only consider these opportunities from borrowers that have a positive track record, sufficient cash flow, net worth, liquidity, and history of development success.

Take-away

Prior to investing in any commercial property, an investor should determine if his investment will require active or passive management. He will need to determine whether he has the proper time, energy, and experience to manage the property properly.

A new investor should also limit his investment to properties that are close to home. Properties will require site visits and a significant amount of time at the property. This will be unattainable if an investor seeks to invest too far from home.

In addition, new investors need to realize that real estate investments are not readily liquid. This means that real estate is a longer term purchase then say, stocks or bonds, which may be sold easily. An investor needs to understand that a real estate purchase is a long term commitment.

Only after these items are addressed should a new investor decide to make a purchase. A new investor should consult a competent mortgage broker for advice upfront. He will be able to analyze the property and determine if the property meets the investor's requirements.

The broker will also be able to determine which lenders are appropriate for the transaction.

Stephen A. Sobin is an industry veteran with over 30 years of mortgage lending experience. Mr. Sobin is a proud member InterCapital Group, a nationwide alliance of commercial mortgage professionals.

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Tags | Chicago, Investing, Select Commercial Funding LLC, Stephen A Sobin

© 2015 Real Estate Communications Group. Duplication or reproduction of this article not permitted without authorization from the Real Estate Publishing Group. For information on reprint or electronic pdf of this article contact Mark Menzies at 312-644-4610 or menzies@rejournals.com

Rising to the top | Real Estate Talk | Your Trusted Voice For Property ...

Posted: 07 Oct 2015 09:28 PM PDT

It's not always easy to know what to do when yours is just one of multiple offers on a property. We take a closer look and find out how to make sure your offer stays on top. Angela Young

Whether a property is listed for auction or has a minimum price attached to it (i.e. "offers above $495,000″), there's a good chance you could submit an offer only to find yourself thrown into a mix of other potential buyers, all vying for the same property and keen to be the winner.

Multiple-offer situations can seem a little daunting for any buyer, particularly those who avoid auctions because they don't like the fierce competition.

When offers multiply

Real Estate Institute of Queensland (REIQ) CEO Antonia Mercorella notes that buyers can become very anxious.

"As soon as an agent communicates there are multiple parties interested in buying, [people] can feel a little bit like they're boxing at shadows,"

she says. "There's that fear of 'Am I paying too much?' or 'Should I really reveal all my cards here?' 'Should I put every dollar I have on the line or should I hold back because I might get a second opportunity?'

"I think it's really important that buyers ask the question of the agent – is this it? Is this genuinely the only chance I'm going to have? Will I have another opportunity to increase my offer and what is the process you're going to follow?"

Questions, it seems, are definitely a buyer's friend in the multiple-offer scenario, as Brian Grieg of the Real Estate Institute of Western Australia (REIWA) can testify.

"Buyers should ask as many questions as possible," he agrees. "REIWA would suggest that buyers ask the question, 'Are there any other offers that the seller is currently considering?' and, 'If I submit an offer, will you be advising me if an alternative offer's received?'"

When it comes to the regulations, though situations vary state to state,

the general rule is there are no hard and fast rules. While agents must never engage in misleading and deceptive conduct – which would include advising a buyer that multiple offers were on the table when in fact they weren't – there's no obligation for an agent to disclose

the number of offers or how much they're for.

Indeed, it would go against the obligations agents have to the seller, their client. As Mercorella points out: "They have fiduciary duties to their client and ultimately that's who they're acting for – the vendor," she says.

Real Estate Institute of South Australia CEO Greg Troughton explains that divulging the actual amount of another offer is a serious no-no – something that's known as "a Dutch auction" in the industry.

"[Agents] can and should disclose if there are other offers," he says, "but not the amounts or conditions of those offers."

Mercorella adds: "An agent obviously should be willing to assist a buyer to the extent that they can, but if buyers feel like they need some guidance, they should think about perhaps engaging a buyers' agent to act on their behalf."

Employing a buyers' agent is also one way to try and avoid the dreaded prospect of overpaying, something most buyers in a multiple-offer situation fear.

"A buyers' agent can provide some good, objective professional advice about what the price they should be willing to pay is," Mercorella says.

"We can become very emotional… it's easy to get carried away and become emotionally attached to that property and you might want it so desperately that you're prepared to pay more than what it's worth.

"You should always think about getting a third party that can be objective."

Know its worth

Another way to avoid overpaying is to undertake some serious due diligence. As Karen Young of Property Zest points out, you should really be going into an offer situation like this with a good understanding of what the property is actually worth.

"Get out there and see other comparable properties on the market and research recent sales history," she advises. "This sort of information is available on the internet but first-hand knowledge of having inspected lots of properties in the area is very valuable."

For Open Corporation's Cam McLellan, overpaying is one of the drawbacks – he's been burned himself.

"I'm confident we paid about $40,000 too much," he recalls of a purchase made in 2001/2002.

"(My wife) Felicity and I purchased a block that was 2,600 square metres and we were actually putting four units on it," he says. The McLellans put in an offer of $340,000, but the agent disclosed afterwards ("which he probably shouldn't have") that the next offer had been only slightly more than $300,000.

So, did this alter McLellan's multiple-offer method? No, as it turns out.

"We ended up getting permits and selling the thing for over $500,000," he says, "which was huge money back in 2001, so it wasn't the worst, but at the time I kicked myself because $40,000 was huge back then."

The fact is, he says, he was happy to pay the $340,000 at the time and, seeing as profit was made, he's just glad not to have missed out on the opportunity.

Working out just what you're prepared to pay for a particular property is key when there are several offers on the table.

Young makes it clear to her clients that as it's impossible to know what other offers have been made, it's important to just focus on "playing our own game – meaning simply working out at what level the value represents value to us and offering accordingly".

Tip-top conditions

Other ways for getting your offer to the top of the pile include offering the most attractive terms you possibly can, in the form of shortened contract periods, no (or few) conditions, and even waiving some of your rights.

"You get five days cooling-off rights in Queensland," Mercorella says, "and that creates some level of risk for the vendor… to waive or shorten those cooling-off rights is an easy thing to do.

"Obviously buyers should get some advice if they're thinking about waiving or shortening their cooling-off rights, but if you're really keen to get it, that might be something you think about offering to do."

PropertyPreneurs' Debbie Williams suggests scoping out the state of the house.

"If the property's in a mess and people are still living in it, make your offer flexible for settlement as they may not have found somewhere else," she says, adding that you could also offer for them to leave it "as is", letting them off having to clear all the years of rubbish from the property.

"This gives them time to find another property without pressure of a deadline and they can just take what they want and leave the rest there."

Williams also has some rather cunning tips for getting on the right side of the agent.

"If you're investing, ask the agent for information on their rental service! If they believe they're going to get an ongoing gig from the sale, it can sway them when offers are close," she says.

Equally, if you're planning on renovating and selling on, let them know how good they are as an agent, she says: "Be genuine and see if they'd be interested in selling it for you once you're done."

Standing out as a prospective buyer can be important, and can be achieved by such methods as asking for private inspections, if possible. If not, you can even get a little underhand, pointing out the property's various deficiencies (loudly!) as you move around, just in case other buyers hadn't already noticed them.

"This is a tactic to put other purchasers off," Williams says. "You can point out cracks, roof problems, wiring, plumbing, white ants… heaps of things." She does, however, issue a warning: "This won't endear you to the agent very well!"

McLellan has some methods that could even be described as a little extreme.

"If it's an agent I don't know, I'll find out where the offer's being presented to the vendor and exactly what time," he says. "So, if the agent's driving to the vendor's house at six o'clock at night, I'll say 'That's fine, I'll meet you at 5.55pm, out front of the vendor's house, and give you the offer then'.

"Try and leave it to the exact last second."

Clearly that won't always be possible, but McLellan insists it's a great way to prevent agents approaching a bidder they're friends with and saying "Hey, it's come in at this, stick your price at that".

"Trying to control that – getting your offer in at the last second – is definitely the way to go."

Of course, you mightn't be the buyer in this multiple-offer situation – you could be lucky enough to be the seller. In that case, is there anything you need to bear in mind, or should you just be rubbing your hands in glee?

Really, just making sure you're getting the terms you want at a price you're happy with is the most important thing.

"If I'm a seller, it's a very easy one," McLellan says. "What are my holding costs each month? If someone's offering seven-day or 14-day terms, as opposed to three months, what are my holding costs for three months on the property? Discount the offer by that, and then if it's conditional or unconditional on finance, I'll take the unconditional one every day of the week."

Do's and Dont's for Multiple offers

Early, detailed research so you can get in quick
Ascertain exactly what the property is worth.
Obtain pre-conditional approval from your lender.
Don't rely on verbal. Get an offer in writing – preferably by signing a contract.
Offer the best conditions and terms you possibly can.
Put your best foot (or offer) forward.

DON'T

Get caught up in the "competition" and risk overpaying.
Play it too cool with the agent.
Impose conditions that aren't strictly necessary to you.

Real Estate Investing

Thursday, 29 October 2015