Commercial Real Estate Investing For Dummies. Peter Harris

don’t have to pay expenses. So, after the tenants pay for all the expenses and you pay the mortgage, the rest goes into your pocket. It’s quite typical for a triple net lease to be 5 to 20 years in duration with rent increases every couple of years. But that can be a disadvantage as well, and here’s why: Let’s say that the lease is for ten years. If your neighborhood experiences explosive growth over the next three to five years, you won’t be able to charge higher rents or capitalize on what’s happening because you’re locked into a ten-year lease agreement. But overall, triple net lease investments are very much sought after.

      Retail centers

      Retail centers, also known as shopping centers or malls, are at the heart of most of the towns and cities in our country. These are the places where people come to shop, eat, and meet with friends. And retail centers are one of the commercial property asset types that you can invest in. Most investors like retail centers because, like office and warehouse properties, many retail properties are leased out on a long-term triple net lease basis where the tenants pay for all the expenses. The upside to this as an investor is that your rates of return won’t go down over time as the taxes and expenses go up. In fact, as rents go up over time, your returns just keep getting better and better. And as in most triple net lease agreements, rent increases are built into the agreement with the tenant.

      

Office buildings and retail properties have gone through massive changes as a result of the COVID-19 pandemic. Thousands of office workers got the chance to become remote workers and discover they (most of the time anyway) like working from home. Big national companies have closed their stores at shopping malls with some of them going completely out of business. Other stores have transitioned over to doing a large portion of their business online. This change creates opportunities for us as investors. Office buildings are being converted into apartments. Some apartment buildings now include separate “work at home” areas. Department stores have been converted into warehouses for online companies that ship out their products.

      Warehouses or industrial properties

      With the advent and growth of online shopping or e-commerce, companies that ship to us need a place to store their goods. These buildings, known as warehouses, are pretty simple — large structures, four walls, multiple doors, and centrally located for shipping purposes. Warehouses tend to be relatively low-maintenance properties, focusing on storage more than aesthetics. Also, warehouse tenants may be more inclined to sign longer-term leases in the coming years as e-commerce grows.

      Self-Storage Facilities

      Just like everyone needs a place to sleep at night, nearly everyone needs a place to store their stuff — old things, recently purchased things, and treasured personal things.

Why is it so popular amongst investors? Compelling reasons include

       No toilets to clean

       Low cost of operations

       Low building costs

       Operations can be automated

       Low down-payment loans

      The various types of self-storage facilities to consider are

       Self-storage

       Warehouses

       Cold storage

       Climate-controlled storage

       Vehicle storage (including RVs, boats, and cars)

      

For you, the average investor, we recommend you begin your acquisition search for Mom ’n Pop self-storage facilities. Avoid the “big boys,” such as U-Haul and Public Storage, and all other franchise-types, because they are too expensive for the beginning investor.

      One of the most important things to consider is your facility’s location. Ideally, it should be located where there’s demand for storage, where it’s easy to drive to, and where there’s high visibility. If there are a lot of small houses in a town, it’s good sign that there is an opportunity for a self-storage investment. Small houses mean a large percentage of people in that town require extra storage spaces for their stuff.

      Hotels and resorts

      This asset type isn’t our recommendation as the place to get started, but many experienced investors have found it to be a fun and highly profitable area to focus on. Of course, other investors have also lost their shirts (and sometimes their trousers, too), so make sure that you know what you’re doing before jumping in. Most of the deals we've run into have been smaller hotels or motels rather than the larger nationally branded, or as they're referred to, “Flagged” hotels.

One commercial client of ours used a commercial master lease, a form of creative financing (see Chapter 9) to get a 40-unit motel outside of Springfield, Missouri. They changed the name of the motel, hired new staff, and upgraded the units. Six months later they sold it for almost twice as much making almost $500,000. Another student of ours has a 135-unit hotel under contract with plans to convert it into apartments.

      

The success of any hotel or resort is composed of two parts, the property itself and the business of marketing, managing, and operating the property. If you're going to invest in this niche, we suggest that you invest in the property and then lease it out to another company that will operate the hotel or resort.

Getting Started

      What’s the secret ingredient that allows someone to make it big in commercial real estate? If we told you, how long would it take for you to jump up, bolt out the door, and go find your first commercial deal? Well, you’re about to find out, so put on your running shoes. The secret ingredient is none other than motivation. If you were expecting some fancy formula, we’re really sorry. But, in the end, it really boils down to how bad you want it and what you are willing to do to get it.

      If you are truly motivated, you’ll find a way. But now that you know the secret, you still need to be familiar with the tools, techniques, and guidance that help you along the way. We explain them in the following sections.

      Investing in commercial real estate requires a handful of skills. You don’t need to understand differential equations or know how to rebuild a transmission. However, the skills in the following sections are a must.

      Easily meeting people and making new friends

      If you connect with people easily and like meeting new friends, you’ll do well at creating a stash of contacts. It’s important to network with the people who will be investing in your commercial real estate deals because they hold the “pot of gold.” People that you meet will eventually be your advisors, investors, and partners, and they’ll send deals to you and connect you with wealth-building resources.

      If you’re the shy type, we’re betting that you’ll sooner or later get over your shyness after you see all the money that’s being made by other investors who love having a network of colleagues and friends. If you really want to succeed as commercial real estate investor, you’ll have to gradually come out of your shell.

      Doing simple math

      You’ll need to be able to look at property information online, properly enter numbers into a simple spreadsheet, and use a calculator. These skills help you determine what a commercial property is worth, what you should pay for it, and what your