Issues to Consider for the Individual Investing in Commercial Real Estate:

More and more Baby Boomers, with cash and equity, means more buyers (competition) for the same properties. They have a big problem facing retirement: how to begin converting equity to income. Residential housing may be approaching saturation status and is no longer attractive. The Economic Cycle of growth and contraction have big impacts on commercial real estate in terms of vacancies and rental rates.

Finding, Valuing, Acquiring, Financing, Managing Commercial Real Estate:
Types of properties: Strip shop centers - Can be great income generators when bought right. Multi-unit apartment buildings, but good property managers are hard to find. Plan on managing it yourself. Condo converters have gobbled up the good ones. However, with more apartments going offline combined with rising condo prices makes upside on rents (demand) very realistic. Make sure you can condo map prior to completion of due diligence period. Office condos - we are in the seventh inning of a nine inning game. Most will pay more rent than a SFR, while your tenant pays the expenses (NNN). For all of the reasons that residential condos have skyrocketed in the past 4 years, so will office condos in the next 4. Investors and professionals want to own.Raw land - Ask yourself if you will be the end user or end developer. Because, price is less important if you plan to hold or use for your business or practice. Single purpose, NNN, properties (such as a restaurant) - Will be hard to finance and harder to sell. Check the lease term. Industrial Warehouses - have your tenants lined up before you close escrow.

Ways to Value Real Estate (through the eyes of the bank and the appraiser):
-Income Approach - The total gross rents collected minus all (operating) expenses equals Net Operating Income (N.O.I.). By dividing the NOI by the sales price you arrive at a Cap Rate as expressed in a percentage. If you find a neighborhood strip center selling at a 7.5% cap rate where others are/have sold at a 7% cap rate, then with all other things being equal you may have a good buy candidate.
-Market Comparables - What other similar properties in the area recently sold for on an income and on a $ per SQ FT basis. (6-9 months back).
-Replacement Cost - The cost per square foot to build the property today. If you buy a building for $100 per square foot and it would cost $150 per foot to build new, then you may have found a $50 per foot discount, less depreciation.

There are statistics and then there are statistics:
Costar.com, Loopnet.com, Grubb.com & Marcus & Millichap, all provide stats on demographic growth and solds by property type.

Commercial Financing Options:
+Commercial Banks -Expect to put down 20-30% with a bank. Look for 30 year loans due in 5 or 10 years. Today, fixed rates tied to the 10-year treasury or Libor are good bets. If rates are going up or inflation heats up, your hard asset will probably appreciate. But, right now, you need to get good cash-flow with the lowest rate.
+Seller Financing - many sellers are willing to carry the loan for two purposes: they may want to convert equity to income (retirement) or they may want to spread out the capital gains over many years. They may also be willing to get the property back should you default. But, sellers may be more flexible to work with than banks and with few fees involved. Also, the bank may say no if the income is not 120% of the expenses. (Maybe you should as well)
Banks look for: The ability of the property to pay the loan, based on rental and expense history. They want a minimum debt service coverage (DSC) of 1.2. Meaning 120% of actual net income to cover actual expenses.

Where to invest now:
Strategic Real Estate, such as office condos, raw land for development, apartment buildings between 5-25 units. (non-institutional), vacation and resort lots and hotel properties, and hotel Condos. The coast lines of the US remain attractive as well as mountian land. Also, look into Costa Rica and Panama.

How to search for Commercial Real Estate:
Go to www.loopnet.com and conduct a property search by county, city, property type and price range. DO NOT GET FOOLED BY A LISTING. DO YOUR HOMEWORK. For example, if financials listed are Pro forma, request actuals from the listing agent. Don’t do this alone. Enlist the service of a commercial realtor® who will help you negotiate all of the aspects of the transaction.

Property Management:
Plan on managing the property yourself and get good at it! It will save and make you money. How do you do that? Learn how to deal with people (tenants). Use handymen for easy repairs and keep the place clean and the parking lot surface oiled once a year. Have your flat roof painted each spring until you can install a foam roof. Only use licensed plumbers and licensed electricians for those type of repairs. Maintain your property on an ongoing basis. Therefore, you must keep a reserve in your bank account for repairs/maintenance. You will be rewarded later for keeping up the property.

Insurance:
It’s expensive and must be reviewed each year so that it keeps up with rising building costs. I did not say rising values, as so many have reported, but rather the rising construction costs per SQ FT to replace your structure.

Investors Considering Retirement Opt for Property Investments
from The WSJ online reports that more individuals are looking at commercial real estate as a more stable investment than stocks.

Planning to sell a Commercial Property?