Listing your Industrial property

Let's assume that you were just notified by your previous industrial tenant that they will be moving out at the end of their lease.  If you own an industrial property,  and have had a long term tenant,  there are several things to consider.

First and foremost,  make sure, you are not the reason they are moving.  If they are moving out because you refused to give them a break on the price,  then you might want to crunch some numbers before you make a hasty decision.  I will do that for you below.

SAMPLE NUMBERS

Consider a $1,000,000 property
Taxes sample $8,000
Insurance sample $6,000
Maintenance sample  $4,000
Interest  approximate $55,000
Total Cost  Estimated $73,000.

If you do not have a tenant,  you will pay over $6,000 per month out of your pocket.

If you are receiving $100,000 annually,  and your tenant wants a break on price, consider the net effect on your pocketbook.  You can say no to a decrease,  and hope for another tenant.  If it takes two months, then you lost $12,000, plus real estate commission.  If it takes a year,  you lost $73,000.  If you cut their price by $20,000 you covered your cost, and maybe have a long term tenant.  Remember,  any vacancy month is $6,000.  Any occupied month is profit,  tax breaks, and appreciation on your side of the ledger.  Keep that in mind in this market,  and work with your tenants

Second, good tenants are hard to find,  especially those who pay on time.   What you were receiving from them will not match the current market rate.  There will be a sticker shock on what your next tenant offers.  Third,  there are a lots of properties out there,  and even if yours is the best,  your price may not give your property a chance to prove it, as most people are shopping prices right now.

If you want to lease it right away,  then you make your property the lowest price in your area, for your type and size property.  If you want to be in the middle of the pack,  then you wait for the others to rent,  or the quality, or unique traits of your property to surface.  If you insist on listing above the current market,  then you must be prepared to wait,  and then negotiate if someone finds your property while driving by.

As with most owners just stepping back in the market,  you will see that all properties have dropped in price per square foot.   And there is much more competition.

Although I don't do this on every property,  here is a sample of some marketing efforts I have given my properties.  It will be listed on MLS,  and Loopnet,  the Commercial MLS,  as well as CBC worldwide. We have two different Commercial brokers meetings each month,  where all the area commercial brokers meet to exchange listings and interact with each other.  These meetings give us an opportunity to stand up and discuss properties with the 75 or eighty brokers present. Everyone in our database who has a business,  or expressed interest in Industrial property leases, will get an email or a call.  I can purchase a web address,  and provide the link to anyone on Linked-In and Face Book.  It will be listed on my website,  and I will also distribute the flyer to all of the CBC brokers as well as all CCIM's in SW Florida.

When you are forced back into the market, be prepared. Expect that the tenants will have the upper hand because there are less of them,  and more competition for their dollars. They will be ruthless, as you would be if the tables were reversed.

If you need help securing new tenants,  then call me.  Good Luck!

Heading the wrong direction, the right way.

My neighbor is moving North, from Southwest Florida,  in December.  He never does anything conventionally.  Yet he is a very successful salesman.  He is driven by a different and constant beat,  that most of us cannot hear, much less keep up with.

He is a Real Estate Agent, and before that he sold cars.  He's just a young guy in his twenties.  When he finished school,  he had some good jobs, but moved a few times, because he could not find anyone to give him a chance at sales, which is what he really wanted. He finally answered an ad to sell cars.  Within a month,  he was their number one sales person.  Within a year he was their finance manager,  and after another year,  their sales manager.

Eventually he talked himself into residential real estate.  I was surprised,  by the move,  because of his success.  He had a house, a boat, a Harley, a Corvette, a Cadillac SUV and a Rolex.  He had all the toys.  So why move to Real estate when most people are bailing out because they cannot make a living.  Some people, like this guy, can make anything work.  And he did.

He told me the car business was in shambles,  and he had gone about as far as he could there,  and he wanted a new challange.  You have heard the story,  "when others are selling,  you should be buying."  Well a guy like this can make money no matter what is happening.  In his first fiscal year in real estate, 2009/10,  he did about twenty transactions when veteran realtors were lucky to do ten or twelve.   He was buying houses for 'flippers, geting them repaired and turning huge profits for his customers and himself.  It was amazing.  I thought flipping was dead,  he knew better.

Now he is moving North,  just before our 'Season' begins down here,  and the snow buries the North.  Most Realtor's are looking forward to the influx of buyers moving south. He's heading North.  I have no doubt he will be successful up there.  Everything he touches seems to turn to gold.  I hope you can learn something from him.

He is shipping his vehicles North,  at a hugely discounted rate,  because the trucks are bringing cars south for the 'snow birds' but going back empty.  He makes money on everything.  He bought a box truck from a guy who had used it to move here but had no further use for it, so my neighbor bought it for a song.

My point in all of this, disregarding the fact that it is an interesting story about a truly amazing guy,  is there is always a way to be successful in any venture, market or investment. Make your goal to satisfy the needs of others, who's need, fulfills your need. Their win, becomes your win.  The truck drivers did not want to go back North empty,  my neighbor helped them.   The people buying fixed up properties could not afford to buy them at auction and fix them up,  but could afford to buy  a nice low price home with a mortgage. My neighbor helped them.

Learn from my neighbor.  You could do what he did,  or you could find a need,  that will help someone, which in return will help you.  Think about the commercial real estate in SW Florida.  Who can you help? You will end up helping yourself.

How do others make money and you do not?

I am in a unique position in commercial real estate. I sell real estate and I also sell businesses. For a while it seemed that when one market was down, the other was up. Unfortunately, commercial real estate and business opportunities are both down now.

I really thought that the softening of the market, low building prices,  low interest rates and foreclosures filling every commercial and industrial park, that investors and users would be snatching properties so fast that it would start the recovery.

With high unemployment, certainly there are brave souls out there willing to jump into the entrepreneur arena and start paying themselves. But it seems that we are a nation of followers. Everyone is waiting on the crowd to start the momentum for us.

I had an investor tell me today that dispite the fact that they had a property in our area that had been vacant for two years, they really liked the area, and they wanted to look at acquiring another property. That is what I have been expecting from those who own the big houses and have multiple cars. I assume they were buying when others were affraid. I think the numbers of those who do, are far less than I expected. Maybe that's why there is such a huge disparity between the 'haves' and the 'have nots.'

Here is a relevant poem written by somone unknown to me.... Sorry pardner, I acknowledge that I did not write it, you did, but I don't know who you are.

Investors Lament
I hesitate to make a list of countless transactions I have missed;

Bonanzas that were in my grip - I watched them through my fingers slip;

The windfalls which I should have bought were lost because I over thought.

I thought of this, I thought of that, I could have sworn I smelled a rat,

And while I thought things over twice, another grabbed them at the price.

It seems I always hesitate, then make my mind up much too late.

When Newport Beach was cheap and barren land, I could have had a heap of sand;

When Palm Springs was the place to buy, I thought the climate much too dry.

Invest in Orange County – that’s the spot! My sixth sense warned me I should not.

I chose to think, and as I thought, other’s bought the deals I should have bought.

Today I cannot be enticed for everything seems so overpriced. The market’s soft, it’s this it’s that.

At times a teardrop drowns my eye for deals I had, but did not buy.

For now life’s saddest words I pen – "If only I’d invest NOW…and then!"

Multi-family vrs Single Family properties

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.

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.

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.

Other People's Money

We got where we are in this real estate mess because everyone was trying to make money in Real Estate. That is not possible. Someone has to lose at some point in the investment life of a property. But for some reason, not only did the investors believe they could, the banks believed the investors could too. The Stock market doesn't work that way, why should the real estate market.

While all investments share the same elements, some issues are only found in Real Estate investments. One is the ability to buy it with OPM. Other People's money.

All investments have risk, and liquidity issues. Some investments require you to actually manage them to get your return. Since there is a basis in the investment and an income stream, hopefully, there will be tax considerations. But, other than perhaps a margin account, you will have to put up all the cash for all other investments except real estate.

Using OPM is called leverage. If you can make more income than the cost of the debt service, then it's called positive leverage and that is a good thing.

Let's crunch some numbers to show the effect of using OPM, rather than your own.

Source of Funds                                    Bank                        Bank Account 
Investment                                      $2,000,000.                    $2,000,000.
Out of Pocket                                      200,000.                      $2,000,000.

Cash Flow Year 1
              Income                                     $175,000                     $175,000
              Interest                                        77,126                                0
              Cost Recovery                              9,828                            9,828
              RE Taxable Income                     88,046                         165,172
              Tax Savings                               $24,653                          $46,248

After Tax Investment Return                       28.36%                         17.61%

You can calculate this with a financial calculator or you can let me use a spreadsheet and run various scenarios for you. As you can see when you have less money at risk, and the investment returns more in income than the cost of the money, then in the term of the investment you will get a better return by using OPM. It has a lot to do with the spread between the Interest Rate and the Cap Rate on the investment. It also has to do with the tax advantage of deducting the interest against the income before calculating the tax. In this case, with the sample numbers shown the return is 11% greater with financing.

Investments can be risky, not everyone can make money. Don't make it worse and risk your own money if you don't have to.