If you are new to commercial real estate as an investment vehicle, then perhaps you should consider multifamily rather than single family residential.
People look for single family properties they can rent because they have the expertise from a lifeime of buying single familiy properties for themselves. The entry to the investment is cheaper, and does not require a lot of knowledge or number crunching. The question is, "Will it produce rent, and will I net enough to cover the mortgage and make a profit?" If it has never been rented before, then it's unlikely that you will know the answers, unless there are other owners of similar properties who are doing the same thing. But even so, the numbers and vacancy rates you hear about, may not be the real story.
Multi-family property investments are simple, especially if you use a broker who can crunch the numbers and explain them to you. They require a similar set of knowledge and skills as single family and there are so many different types, to choose from, one will certainly fit your investment style and comfort level.
Apartment buildings are one place to start. Remember for either investment of single or multi-family you will need the ability and willingness to hold for multiple years. Single-family properties require more management and maintenance, because each single family property issue is infront of the individual tenant. When a tenant moves out, you will have no income until a new tenant moves in. Maintenance is necessary for each property you own. Multi-family properties are easier in comparison to manage and maintain because of the consolidated maintenance and the rent security of multiple tenants for each property.
The property knowledge required for Multi-family is similar to single family, as it is still living quarters, but it will have common areas and amenities that can be shared by all tenants. With a Multi-family building, with a good rental history, then it is likely to continue based on that history. If something changes in the market, it's generally a percentage change over a period, and rarely 100%.
With multi-family properties, you will pay more to get started, but the idea is to find a property that will pay your debt service and then let the tenants pay your expenses. If you buy a solid property, well constructed, in a good location, then chances are good it will stay rented and not show wear and tear before you start making a profit. There are many sizes and types to fit practically any budget. Concrete, block or brick construction will last longer in most parts of the country over wood. The best properties can sometimes be the ones with a motivated seller. The worst will be the ones where the seller knows something that will effect the future revenue stream, that you do not know. We solve this with some due-diligence. Part of your due diligence will require you or your broker to drive the area to see if there is anything new which might effect your prospect property.
Consider multi-family properties over single family residential to reduce your vacancy risk, provide a greater return and bigger future upside.
Sunday, October 24, 2010
Tuesday, October 12, 2010
Barriers to Entry
When evaluating a business investment, one of the many factors for making a decision should be whether or not your future business is going to be unique. Can it be started by anyone, or is there something that keeps others from opening up the same type of business across the street, or even next door.
Lots of people call me to purchase a service business. One of these service businesses that attract attention are pool services. In Florida, if you own or rent a home with a pool, the pool will need regular service, otherwise, it will turn green. People hire pool service contractors to prevent this from happening. Overtime they learn what it takes to maintain the pool, and after a while start to service their own. Pretty soon they are offering the service to their neighbors and relatives. The next thing you know, they want to buy a neighborhood route from a pool service company.
The business itself is relatively easy, but it's time consuming and not very profitable if all you do is service pools. A license for servicing is not hard to get, but, as you will find, the real money is in parts and repair, and therein lies the 'rub.' In Collier and Lee Counties, in Florida, to get a license, it requires two years experience of pool service and repair, which must be proven or vouched for by other licensed persons. After completing the experience requirement, you must pass a difficult test. If you want to repair a pool pump or pool heating system, you need this license. This is a sample of 'barriers to entry.' If you are willing to scale the barriers, then you will have less competition.
If you are thinking of opening a business, then something unique and difficult will make it less attractive to competitors. When entry barriers are high more people will be reluctant to enter that type of business.
If you are successful, eventually others will want to feed off of your success by opening something near you. Why do you think there's a Walgreens and CVS Pharmacy on opposite corners of major intersections. The sad truth is, profitable markets that are successful will attract new competition. More competition will indeed increase traffic, but most likely decrease profitability. If you pick a shopping center where you can write some sort of exclusivity for your particular type of business, then you certainly should. That is another example of a 'barrier to entry.'
Business is hard enough without having competitors nipping at your customer base. If there are barriers to entry, you can hold them off long enough to recapture your investment and make a good profit. Good luck. Call me if I can help you.
Lots of people call me to purchase a service business. One of these service businesses that attract attention are pool services. In Florida, if you own or rent a home with a pool, the pool will need regular service, otherwise, it will turn green. People hire pool service contractors to prevent this from happening. Overtime they learn what it takes to maintain the pool, and after a while start to service their own. Pretty soon they are offering the service to their neighbors and relatives. The next thing you know, they want to buy a neighborhood route from a pool service company.
The business itself is relatively easy, but it's time consuming and not very profitable if all you do is service pools. A license for servicing is not hard to get, but, as you will find, the real money is in parts and repair, and therein lies the 'rub.' In Collier and Lee Counties, in Florida, to get a license, it requires two years experience of pool service and repair, which must be proven or vouched for by other licensed persons. After completing the experience requirement, you must pass a difficult test. If you want to repair a pool pump or pool heating system, you need this license. This is a sample of 'barriers to entry.' If you are willing to scale the barriers, then you will have less competition.
If you are thinking of opening a business, then something unique and difficult will make it less attractive to competitors. When entry barriers are high more people will be reluctant to enter that type of business.
If you are successful, eventually others will want to feed off of your success by opening something near you. Why do you think there's a Walgreens and CVS Pharmacy on opposite corners of major intersections. The sad truth is, profitable markets that are successful will attract new competition. More competition will indeed increase traffic, but most likely decrease profitability. If you pick a shopping center where you can write some sort of exclusivity for your particular type of business, then you certainly should. That is another example of a 'barrier to entry.'
Business is hard enough without having competitors nipping at your customer base. If there are barriers to entry, you can hold them off long enough to recapture your investment and make a good profit. Good luck. Call me if I can help you.
Friday, October 1, 2010
What is it worth?
We recently invited a respected appraisal company to speak to our commercial brokers. We are in one of those periods where the old rules of value do not apply. Lately an appraisal is only viewed as representative of the correct value by one party to any transaction. If the appraisal is high, then the seller will quote it as gospel. If it's low, then the buyer becomes a convert. But who really knows right now.
It use to be, back in the 'good ole days' that as commercial agents we could use three methods to value a property, and depending on your belief in the strength of the under-lying numbers, one would lead you to the correct value. For this discussion we will not discuss 'Highest and Best Use' of the property. We will assume we need to value for purchase or sale and its use will not change.
The appraisal company's position was, "when the majority of the comparables are 'shorts' and foreclosures, those prices become the comparable." He specifically said that the three methods of valuing commercial real estate are not valid in this market.
Here's a recap of the three methods and my thoughts on each.
Cost Approach - considers the current cost to reproduce a property minus 'wear and tear.' This assumes that a savvy investor would not pay for an old building if they could build new for the same or less. This was sound logic, when we had builders who had a normal work load and charged a fair price. With building work scarce, some are asking less than a fair rate. Maybe they want to use up materials or just have some cash flow, that might lead to more projects. This method is not consistent right now.
Income Approach - considers that a close relationship exists between the income a property produces and its value. This was my favorite, and seemed to me to be best when used by investors who were looking for a return. The problem now is that all tenants are asking for reduced rent. Most landlords have figured out that it is better to have some income, rather than none. So if and when we recover, the rents may or may not return. Do you rate value on current income, or lease contracts. Tricky at best, and hard to place the right value at this time.
Sales Comparison Approach - considers value to be a reflection of what other buyers are paying for similar properties. The problem with this is that most properties in commercial are different and the motivation of each buyer and seller is also different. Most buyers are demanding a bargain. Sellers want to avoid bankruptcy, others want some cash so they may hold on to other properties. Not many are selling now to get a good price. So, this method, which is the one the appraisers must use, is unreliable.
If you consider that our values might have been inflated by the idea you could buy anything, for any price, and still make money, then perhaps those values were wrong before we got into this mess. There was a greed and haste that led us down this path. Is this where we should be, or is it just an adjustment period correcting what was wrong before? Either way. it will work itself out, eventually. Business purpose leads to commercial sales, and when the bargains are gone, and the economy improves, then optimism in a business venture will draw investors and business users back to the market to chase income opportunities.
It use to be, back in the 'good ole days' that as commercial agents we could use three methods to value a property, and depending on your belief in the strength of the under-lying numbers, one would lead you to the correct value. For this discussion we will not discuss 'Highest and Best Use' of the property. We will assume we need to value for purchase or sale and its use will not change.
The appraisal company's position was, "when the majority of the comparables are 'shorts' and foreclosures, those prices become the comparable." He specifically said that the three methods of valuing commercial real estate are not valid in this market.
Here's a recap of the three methods and my thoughts on each.
Cost Approach - considers the current cost to reproduce a property minus 'wear and tear.' This assumes that a savvy investor would not pay for an old building if they could build new for the same or less. This was sound logic, when we had builders who had a normal work load and charged a fair price. With building work scarce, some are asking less than a fair rate. Maybe they want to use up materials or just have some cash flow, that might lead to more projects. This method is not consistent right now.
Income Approach - considers that a close relationship exists between the income a property produces and its value. This was my favorite, and seemed to me to be best when used by investors who were looking for a return. The problem now is that all tenants are asking for reduced rent. Most landlords have figured out that it is better to have some income, rather than none. So if and when we recover, the rents may or may not return. Do you rate value on current income, or lease contracts. Tricky at best, and hard to place the right value at this time.
Sales Comparison Approach - considers value to be a reflection of what other buyers are paying for similar properties. The problem with this is that most properties in commercial are different and the motivation of each buyer and seller is also different. Most buyers are demanding a bargain. Sellers want to avoid bankruptcy, others want some cash so they may hold on to other properties. Not many are selling now to get a good price. So, this method, which is the one the appraisers must use, is unreliable.
If you consider that our values might have been inflated by the idea you could buy anything, for any price, and still make money, then perhaps those values were wrong before we got into this mess. There was a greed and haste that led us down this path. Is this where we should be, or is it just an adjustment period correcting what was wrong before? Either way. it will work itself out, eventually. Business purpose leads to commercial sales, and when the bargains are gone, and the economy improves, then optimism in a business venture will draw investors and business users back to the market to chase income opportunities.
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