Commercial Real Estate Investment Basics

Commercial real estate is a broad term describing any non-residential property used to generate a profit. Some examples of commercial real estate include office buildings, industrial parks, medical centers, hotels, malls, apartment buildings, parking structures, and warehouses.

Although investment strategies for commercial real estate are fairly simple on the surface, many investors don’t fully understand how commercial real estate can work as an investment vehicle.  Commercial investors typically make money in one of three ways:  Through rental income, by purchasing or leasing the property and charging tenants rent in exchange for use of the property, through appreciation in the value of the held property over time, and by brokering or negotiating a deal between a buyer and a seller of the commercial property.

In this article, let’s examine the first of these commercial investment strategies a little more closely.

 

Rental Income

 

  • Offices, office space/cubicles etc.:  A typical tenant might be a marketing firm or sales company or telemarketing company.  The company pays the rent and has lease terms, often in the five to ten year range.

 

  • Apartment Buildings: Apartment buildings, whether multi-use or multi-family, typically have individuals, families or even companies as tenants. Leases can be short term or long term. Most are not longer than a year and some can even be month to month. These buildings can have several tenants and leases to manage and account for each month.
  • Industrial: Warehouses, garages, refineries and factories, etc.: A typical tenant might be a manufacturing and/or distribution company or mechanic or machinist. These properties aren’t generally located in areas that would be very desirable for residential or retail properties. Lease lengths are typically longer terms of five years or more.

 

How To Acquire a Certificate of Occupancy for Tenant Improvements in a Commercial Building

This article is designed to help you through the permitting and construction processes associated with a tenant improvement (TI) project. Tenant improvements are defined as structural or nonstructural interior alterations to an existing commercial or industrial space. This includes electrical, mechanical and plumbing permits, a change in the permitted use or an increase in the permitted number of occupants.

To apply for a tenant improvement permit, you need to stop at the building counter in the public service building in your city and provide them with a complete submittal package. A complete submittal package consists of the following:

  1. A completed Tenant Improvement Worksheet.
  2. Four copies of a Plot/Site Plan showing the general layout of the existing building site, the location of the tenant improvement, the address, and the handicapped path of travel from parking to the accessible entrance(s).
  3. Four copies of construction plans and details, including but not limited to the floor plan, exiting plan, reflected ceiling plan, framing details, lighting plan, electrical/plumbing/mechanical plans and other applicable plans as listed in the Tenant Improvement Worksheet.
  4. Two sets of Title 24 energy compliance documents, when changes are proposed to the mechanical system, lighting or building envelope.
  5. A completed Hazardous Materials Questionnaire.

During the permitting process you will be asked to pay two separate fees: a plan check fee and permit fee. You are required to pay the plan check fee before they take your application for plan check. As for the permit fee, you must pay it at the time of permit issuance. Both fees are determined by the type of construction, the type of occupancy, the square footage and the extent of the tenant improvement.

After the development services technicians (DST) verify that the application package is complete, and you have paid the plan check fee, they will forward a set of plans/documents to each of the four departments/divisions: Building, Planning, Engineering and Fire. Approval from all four departments/divisions is required prior to permit issuance.

After you obtain all the required approvals and pay the permit fee, a DST will issue you a building permit. Now you can start construction. At certain stages during construction, you must schedule an inspection. The following list represents the sequence of required inspections for a typical tenant improvement:

  1. Underground plumbing and electrical
  2. Foundation
  3. Interior wall framing and rough electric
  4. T-bar ceiling and rough trades (electrical, plumbing & mechanical)
  5. Drywall nailing
  6. Electrical service
  7. Final Inspection

After all required inspections are approved and any required approvals from other divisions and/or departments are obtained, the building inspector will notify the utility company to release the electric meter and a Certificate of Occupancy will be issued. The issuance of a Certificate of Occupancy authorizes you to occupy and use the facility based on the permitted use shown on the Certificate of Occupancy.

How to Calculate the Value of a Multi-Unit Property

A multi-unit property is a building with separate housing units that are available for residential inhabitants. There are various forms of multi-unit properties, such as duplexes, quadruplexes, and townhomes, but the most common is an apartment building. Multi-unit properties are designed to house families by giving them separate units that are clustered in one structure.

If you own a multi-unit property, calculating its value is not a difficult task. All you need is the operating data. The NOI (Net Operating Income) is an important inclusion for the calculation of the value of the property. This is because the computation will derive from an income approach appraisal. NOI can be obtained by subtracting all the expenses from the gross income generated by the property. These expenses usually include management, landscaping, taxes, repairs, insurance, and maintenance.

The next important thing to consider is the capitalization rate. We need to divide the NOI using the value of the capitalization rate to come up with an accurate market value. Capitalization rate can be determined with the help of brokers, lenders, and appraisers. They are expected to know the market cap rate, which is the average of the cap rates for properties with common characteristics in one specific region. These cap rates are computed by dividing the purchase price with the NOI; variables that are presented upon purchase.

When the NOI and the capitalization rate are finally known, you can start calculating the market value of a specific multi-unit property by using the following formula:

Capitalization Rate/ NOI = Property Value

 

For example, if the capitalization rate is 7.5% and the NOI is $330,800, we will have the following equation:

$330,800 / .075 = 4,410,666.67

Property Value = 4,410,666.67

 

It is important to note that these variables are not constant. You should be able to understand how they work together to quickly come up with an accurate market value. Once you have the accurate operating data and accurate information from the real estate experts, computing the market value of a multi-unit property is just a calculator away.

Commercial Real Estate Investment Basics

Commercial real estate is a broad term describing any non-residential property used to generate a profit. Some examples of commercial real estate include office buildings, industrial parks, medical centers, hotels, malls, apartment buildings, parking structures, and warehouses.

Although investment strategies for commercial real estate are fairly simple on the surface, many investors don’t fully understand how commercial real estate can work as an investment vehicle.  Commercial investors typically make money in one of three ways:  Through rental income, by purchasing or leasing the property and charging tenants rent in exchange for use of the property, through appreciation in the value of the held property over time, and by brokering or negotiating a deal between a buyer and a seller of the commercial property.

In this article, let’s examine the first of these commercial investment strategies a little more closely.

 

Rental Income

 

  • Offices, office space/cubicles etc.:  A typical tenant might be a marketing firm or sales company or telemarketing company.  The company pays the rent and has lease terms, often in the five to ten year range.

 

  • Apartment Buildings: Apartment buildings, whether multi-use or multi-family, typically have individuals, families or even companies as tenants. Leases can be short term or long term. Most are not longer than a year and some can even be month to month. These buildings can have several tenants and leases to manage and account for each month.
  • Industrial: Warehouses, garages, refineries and factories, etc.: A typical tenant might be a manufacturing and/or distribution company or mechanic or machinist. These properties aren’t generally located in areas that would be very desirable for residential or retail properties. Lease lengths are typically longer terms of five years or more.

3 Tips for successful Apartment Management and Operations

Becoming an investor in apartment complexes is a big step in real estate investing. Depending on how much time and ambition you have, you are going to either manage yourself or you are going to pay a management company to do that for you. Typically, investors will hire a company to do the work for them when the complex is 20 units or bigger. When this is the case you are passing a lot of the stress and work of to someone else.  When you are looking at a complex that is under 20 many investors will take on the management responsibility themselves. Being an owner of rentals as well as having managed a 72-unit complex in the past I’m going to give you my 3 tips to being a successful apartment investor when managing them yourself.

  1. Hire a live in property assistant manager

Obviously this is not what you need for a fourplex but when you are looking at 8 units or more this can be a big help. You are still the owner and manager of the property but you’re handing off some of the responsibilities. For example, have them do showings, collect the monthly rent, take maintenance calls, and even take care of some basic lawn care needs. All of this can be done for just giving a discount towards their rent. If you have a bigger unit where you have an office at the complex, they can staff that as well and receive free rent.          

  1. Set a standard and keep to it

The biggest mistake you can do in an apartment complex is start giving special privileges.  Once you let one tenant have a pet or accept late rent they are all going to take advantage of you. Decide from the beginning what your line is going to be and don’t change it. 

  1. Have a solid contract with a solid damage repair cost contract

It may be overwhelming at the beginning for a new tenant but it’s there to protect them as much as it is there to protect you. This way you can start off showing “I have rules and I expect you to keep them”. It will also protect you from having someone damage your property and not get all the funds you need from them to repair it.

  

These are just a few tips on what I believe helps being an investor in apartments to be a good experience rather than a bad one. Just make sure to do you your research and talk to those with experience before you take the big step.     

Why Hire a Property Manager

Having a competent property manager on your power team can add substantial value to your investment. I would recommend investors who are planning on doing a buy and hold strategy to get a good property manager to work with them. They can save you time, money and legal issues from tenants. I will outline eight reasons you should hire a property manager.

Screening Tenants: PM’s (Property Managers) have a lot of experience in screening for the right tenants for you. They know how to quickly analyze a good tenant from a bad one, saving you hassle in the long run.

Tenant Retention: It will be important for you to have long term tenants and one way to insure the tenants are happy is to have a good PM taking care of the tenants needs. A good PM will have general business practices that will ensure good tenant retention, so be sure to ask them what programs they have in place.

Rent Collection: Too often when investors try to manage properties themselves they let tenants walk all over them. A good PM will be your barrier between yourself and your tenants. PM’s are doing a job and will follow the terms of the lease and tenants know they don’t make the final decision, you do, and they don’t have access to you. Therefore, this process keeps you out of the light and lets the PM do their job.

Maintenance Cost: Knowing who to call to fix problems with your property is huge. Most PM’s know experienced contractors who have already been vetted by them, who can also give you price discounts on repairs. Keeping the properties in good condition will save you on costly repairs and keeps your tenants happy.

Vacancy: Shorter vacancy time is better for your revenue. A good PM can help improve and prepare the property for rent to maximize profits. They can determine proper rental rates to maximize the units. Lastly they can effectively market your properties to potential renters via many advertising mediums.

Legal Problems: Seasoned investors can tell you that a troublesome tenant can cause enormous legal problems. That’s why a good property manager is important to have because they will have knowledge of the most current landlord-tenant laws and can save you from any potential law suits.

Taxes: Most PM’s can help you understand what tax advantage you can claim. They can also help organize all your paperwork to give to your accountants.

Owners Benefits: A good PM will keep your stress level low because they will handle all the day to day activities on your properties. They have a network of people they will utilize so you don’t have to go searching around. They can free up your time so you can focus on other aspects of your business.

It will take time to find the ideal PM, so use this outline to find the right one for you. They can help protect your assets and keep your cash flow coming in. Make sure to interview several to get an idea on whom to go with.