You Make Your Money on the Buy

You may have heard this old adage, which is very true when investing in real
estate, as well as other investments. Many investors have a tendency to attribute
it solely to pricing. It’s true that pricing is a major component and is important;
however, it’s not the only important component. There are many other elements
that can play a crucial role in evaluating investment real estate that will have an
effect on its current and future value.

Specifically, what I’m referring to is the investigation or due diligence performed
when looking to put your hard-earned money into real estate. This is a subject
that the vast majority of investors will skim over, relatively speaking, instead of
doing a “deep dive” and giving it the worthy consideration it deserves. Too many
investors are under the influence of “hopeium” when purchasing investment real
estate. They believe and hope that it will all work out in the long term, which may
or may not be the case.

Warren Buffet said, “Risk comes from not knowing what you’re doing.” The
typical investor is usually doing their real estate investing on a part time basis and
is under time constraints to get their due diligence completed. There is plenty to
do during that process. Depending upon the investment genre, you may have to
gather market info, if it’s not in your familiar marketplace. You have physical
inspections, lease reviews, loan application, appraisal, etc. Most buyers are
stressed and just trying to survive to make it through to the close of escrow with a
minimal number of headaches, distractions and hurdles to overcome. The
problem with this scenario is you are counting on no hidden issues popping up
during due diligence, or especially after the closing, that will cause you heartache,
or worse, financial disaster.

There are an untold number of items and issues that can derail an investment
that you will not know about unless and until you uncover them before you close
escrow. The idea of conducting proper due diligence is to minimize the risk and
optimize the value through thorough investigation of the investment. We know
that the seller of the property will not hand you a list of issues and potential
problems when opening escrow. In fact, they are hoping you don’t discover any
issues or reasons not to complete the transaction.

Once you become aware and acquire the skillset of properly conducting due
diligence when purchasing investment real estate, you will feel more confident
making an informed and intelligent decision. You will know, once you have
completed the due diligence process thoroughly, to move forward with the
purchase, or not.

Here are some of the items and issues that many investors may leave to chance
and often overlook:

  • Thorough review of the leases and all the provisions that can affect value
  • Thorough review of the service agreements
  • Not insisting on interviewing the tenants
  • Investigating the submarket they are investing in more thoroughly
  • Not visiting the property at different times of the day and week
  • Not utilizing a skilled real estate attorney to help them through the transaction, including negotiating loan documents
  • Not hiring professionals to assist in various aspects of their investigation whether it be legal, financial review, lending, etc.
  • Letting the appraisal process go on “auto-pilot” hoping they get to the value they need for the loan they applied for
  •  Knowing how and what you should negotiate on with the seller to legitimately ask for a credit

There’s a list of other items, tips and strategies that can help to save you money,
headaches and stress, as well as optimize value once you know where to look.

I heard a story from a friend of mine who is in the property management
business. He said he received a call from an investor one day who said they were
referred to him. He was in the process of buying his first office building and
needed a property management company to manage it. He asked if he could help
him with the transfer of management when it closed escrow, which was in the
next two weeks. My friend asked when his due diligence period ended. The
investor asked, “What’s due diligence?”. My friend was taken aback, especially
when he was told his earnest money was already non-refundable.

Yes, that is an example of an investor who was more than “clueless” investing in a
real estate investment he knew nothing about. Believe or not, there are similar
examples of this type of investing process that goes on every day. I see it regularly with people who are in 1031 exchanges, who are hell-bent not to pay
the taxes and “throw the dice” on an investment they know nothing about
because their back is up against the wall and they’ve run out of time.

There is no reason to put yourself in a bad position when investing in real estate.
You need to increase your knowledge in order to reduce your risk. This doesn’t
mean that every time you invest it will work out fine with no problems. There are
always unforeseen issues that can come up or extraneous factors that will affect
the markets. The idea is to minimize your risk as much as possible, while
optimizing your chances of it working out in your favor.

If you’re interested in learning more about properly conducting due diligence visit
my website at www.impactcoachingsystems.com. I have some terrific resources
and tools available, complimentary, to help you with your real estate investing.

Yes, it takes more time, energy and sometimes expense, but learning these
skillsets will pay you exponentially. It works like any other skill you’re looking to
acquire: the more you do it, the better you get at it.

Brian Hennessey is the author of one of the #1 best sellers of commercial real
estate books on Amazon, “The Due Diligence Handbook For Commercial Real
Estate” as well as “The How To Add Value Handbook For Commercial Real
Estate”. Both are available as audiobooks on Audible.com and ITunes.


You can learn more about his books and other valuable resources for real estate
investing at www.impactcoachingsystems.com.

What can I do to get my property leased?

My property has been sitting vacant for too long.  There has to be something I can do to get it leased.

Some potential problems may be:

• The asking rent is too high

• There's too much competition in the area

• The property needs improvement

• You need help getting it rented

Many investors aren't proactive enough when it comes to getting their property leased.  They'll put up a "For Lease" sign or place it on a website or listing service like LoopNet and hope that the phone will ring.  They'll let it sit vacant for a while, sometimes months, and then decide I better do something.

Here are some questions you need to ask yourself if you have a property that's been sitting vacant an inordinate amount of time:

1. Is my asking rent too high?

 You need to do your homework and find out how your property compares to its competition in your submarket. 

If it's an apartment, what are other similar apartments renting for, what's the vacancy rate in the area, what's the competition offering. 

If it's retail, office or industrial, it's basically the same process.  You want to make sure you're competitively priced and letting the world know you are ready, willing and able to make a deal.

2.  What's the competition out there and how can I position my property differently to attract tenants?

Knowing your competition is a critical component of being able to compete in the marketplace.  How can you be competitive if you don't know your competition and what they're doing to attract tenants?  You can find this out by talking with brokers or calling on the competition and asking what they're offering.

Then you can decide, once you have gathered the facts, what you can do to position yourself in the market to be more competitive.  That may be in the form of lower asking rental rates, concessions such as free rent, moving allowance, or whatever else you may come up with to differentiate yourself.

3.  Does my property need to be improved to enhance its lease ability?

Sometimes investors "can't see the forest from the trees" and don't notice that their property could use some TLC, like paint, landscaping help, etc.  It helps sometimes to have an objective third party opinion as to what they think it could use.  Also, drive your competitive set that you’re competing directly with and see how your property stacks up against them.  Sometimes it is just a matter of taking care of the deferred maintenance.  Don't let that get too far out of hand or the dollars can add up quick.

4.  Could I use help in getting it rented?

Many times investors will try to save paying a commission by trying to lease it themselves.  While this could possibly work out at times, most times I've seen it work against landlords.  I call it "stepping over the dollar to pick up the nickel".  Depending upon your property type, where it's located, what your competition is and other various factors that may affect, you may be better off letting a real estate broker help you in getting your property leased.  Run the numbers on how much a broker's fee would cost versus how much rent you will need to pay the commission, and you'll see how long it has to sit vacant to pay for it. If it sits vacant too long it becomes stigmatized and prospective tenants will start to see it as a problem property and avoid it.  They'll assume there must be something wrong with it for it to sit vacant so long.

In order to find out who could possibly be the best candidate to get your property leased, interview at least three top real estate brokers in your market that specialize in your property type.  Ask them what they would do to get your property leased.  They'll need an exclusive listing to put the time, effort and energy to market it, if you want them to make a serious effort in getting it leased.

It's important to be proactive when it comes to getting your property rented.  After all, it is a business that makes you money, so it makes sense to take it seriously.  Do that and you will increase the chances of getting your property leased in a timely manner.

Brian Hennessey is the author of “The Due Diligence Handbook For Commercial Real Estate” a #1 Best Seller on Amazon.  Coming Soon - His new book is “The How to Add Value Handbook for Commercial Real Estate” also available on Amazon soon.

Posted on July 2, 2017 .

Should Real Estate Brokers Get Involved With Due Diligence When Helping Their Clients Buy Property?

 

The old school approach that most brokers follow is that: "Don't get involved with due diligence when selling property. It will just expose you to possible litigation." That may have been the case many years ago, but it certainly is not the case now. In fact, just the opposite is true. Brokers are exposing themselves to potential litigation by not getting involved with helping their clients with due diligence.

Here are the facts:

• There is case precedence for brokers who were taken to court and lost because didn't get involved with helping their clients perform due diligence. Basically, the courts have ruled that if the broker is going to be compensated in the transaction they should be looking out for their client's best interest and and, at the very least, pointing them to experts or resources that can help uncover certain issues or problems.

• "Ignorance is not a defense." As a broker, you're better off being actively involved with the due diligence process to help your client investigate the investment opportunity.

• You can help to avoid potential litigation by offering your services to assist your client perform due diligence tasks. You will also be seen as a true ally and valuable team member.

Comments from opposing view points:

• Some investors insist that they don't want the broker involved with the due diligence when purchasing investment properties because it is not truly an unbiased opinion.

• Some brokers think that the amount of work involved is not necessary.

• Some brokers believe their clients don't really welcome their involvement with performing most due diligence.

There are some investors that don't want their broker involved with performing due diligence. That could be because their broker has not demonstrated to them that they are quite capable of helping them with it and do in fact have their best interests in mind.

This are many mutually beneficial points for allowing the broker to get involved with helping to perform due diligence. Also, the more brokers are involved and learn how to properly conduct due diligence the more value they add to the equation.

The world is changing rapidly to a more "valueadded" service orientation that clients continue to gravitate to. As brokers add this to their service arsenal, more clients will want to do business with them because they're realizing the benefits of having someone who knows what they're doing when conducting an investigation and due diligence on an investment opportunity. This offers the broker a unique selling proposition that the vast majority of other brokers are not offering clients.

As a broker, you want to find out sooner rather than later if there are issues that can't be resolved so you can move on to do other ones that are doable. As an investor, you want a broker on your side that can help you get through the due diligence process in an efficient manner, reducing the stress and additional workload.

Posted on January 21, 2017 .

Is this A Good Time to Invest in Commercial Real Estate?

In today’s tumultuous investment world it’s very confusing, with all the conflicting information available, to decide where it’s safe to invest money and what to avoid.

Commercial real estate offers investors a diversified investment in a tangible asset which has been steadily climbing in price since the 2009 economic crisis we experienced here in the U.S. Prices should continue to appreciate as the economy improves and demand increases, as long as interest rates continue to stay low.

Depending upon the type of commercial real estate you’re interested in, i.e. retail, industrial, office or multi-family, there are various factors that need to be decided before you invest. For example, are you willing to take a more “hands on” approach, and if so, how much “hands on” work are you willing to do? Obviously, this will depend upon your experience with: tenants; leases; accounting; property maintenance, etc. Also, it is imperative you have a due diligence process plan that will help you determine if the investment is, in fact, what you’re looking for and what the problems or potential pitfalls it may have. Sometimes the best deals are the ones you don’t do.

If you’re going to be an owner/user of the property, either for all of it or a portion, then you may be able to qualify for a Small Business Administration (SBA) Loan which will allow you to get in for as little as 10% down at, incredibly low interest rates. These loans are at some of the lowest rates seen in decades and are actually some of the easiest loans to qualify for in today’s difficult lending market. Lenders are eager to make these types of loans since they are government guaranteed. The one caveat is that you must occupy at 51% of the property to qualify for this type of loan. You may take up to one year to take the required amount of space needed to qualify.

It can make a tremendous amount of sense if you’re willing to be a property owner and tired of paying rent to help your landlord pay for their property. In the 30+ years I’ve been involved in the commercial real estate business, one of the most common remarks I’ve heard from owner/users is: “One of the best things I ever did was buy this property to run my business from. It ended being worth more than the business I’ve had all these years.”

Many business owners have benefited from owning their own building and realized the plusses of it; tax benefits such as depreciation, interest write off; controlling one’s own destiny when it comes to knowing what your rent is going to be in the years to come, and appreciation. Many owners will decide to hang onto the property after they left or sold their business and lease it out as rental property to supplement their retirement. For many owner/users it becomes their main source of retirement income.

If you believe that you may be able to benefit from owning your own commercial property for your business, the best thing to do is have an experienced commercial real estate broker do a financial analysis, i.e. lease vs. buy comparison, to see if the numbers make sense for you. You’ll also need to decide if it fits into your overall business plan and if you have the capital to invest. A few of the questions you should consider are:

  1. How much will my business be growing in the next few years?
  2. Do I plan on staying in the general area or moving out in the near future?
  3. What is the general forecast for the industry I’m in?
  4. Can I qualify for an SBA loan?
  5. What is the optimal size property for me at this time?
  6. How much space will I need to grow into for the foreseeable future?

There are plenty of other issues and questions that need to be addressed and answered before making the decision to move forward in buying a building for your business. This is where a well structured due diligence plan will help you determine if it’s right to move forward with a purchase or not. You want to know what the issues are before you buy, not after.

Whether you are an owner/user or investor, commercial real estate can be a great way to diversify your investments. The commercial real estate market has been hit hard and has been bouncing along the bottom for some time during the economic downturn, but the recent improvement in values over the last 6-10 months has shown that the market is starting to get better. Now would be a good time to invest as values are on an upward trend and interest rates are at all time lows.

To learn more about how to purchase commercial real estate please purchase my book at amazon.com: “The Due Diligence Handbook for Commercial Real Estate”. It has many more tips on how to evaluate, create value, cut expenses and investigate properties so that you can make an intelligent and informed decision while looking to invest in income properties.

Posted on January 20, 2017 .

Energy Savings, Cost Cutting Tips for Commercial Properties

There are a number of ways to add additional value to your commercial property’s net operating income. As part of your due diligence plan you should consider these measures and review the various factors that can cut costs and add value to your investment. There’s adding value through lease up of vacant space; increasing rental rates; property tax reassessment and lowering expenses.  Below are a list of items and ideas that are sometimes overlooked by property owners, but can help yield big results in cost savings and increasing value to your commercial real estate investment.

Energy Audit

One of the more important issues that can have a major impact on your building expenses is its energy usage.  Property taxes and utilities account for over a third of your operating expenses.  It can be highly enlightening to find out why and where your utilities are running on the high side (if in fact there are indications that they are higher than normal by the cost and or usage).  For instance, you may discover that a major tenant in the building is using an extraordinary amount of energy due to running after hours HVAC or 24/7 crews that weren’t initially agreed to in the beginning of their tenancies.  Perhaps a tenant has added additional computer rooms that require more electrical and air conditioning that they didn’t have initially when they moved in.   

The type of lighting (for example T-12 vs. T-8 fluorescent fixtures) will use more power as well as various types of HVAC systems, depending upon the different configurations as well as age of system.  An energy audit will help to determine where savings can be found that can immediately impact the bottom line in a positive way.  Sometimes it can be as simple as installing timers or adjusting the start and stop times on the HVAC units.  As energy prices continue to go up this will become an even greater concern that can “make or break” the cash flow of an investment.  At a minimum, it will keep you apprised of the building’s current electrical consumption status and allow you to plan how to better conserve utilities going forward.  Energy conservation is an ongoing project in a building and one of the first areas that costs can get out of control quickly.

Some of the simpler but effective conservation methods that can be used in order to conserve electrical usage are: 

·      Establishing guidelines for tenants and the janitorial service to turn off lights in the suites when they are not being used or after they’ve been cleaned.  Educating the tenants as to how to conserve electricity and how they benefit by keeping expenses lower, will go far in keeping utility costs lower

·      Switching to lower voltage or less lighting when possible in some of the common areas.

·      Placing light sensors in the restrooms and private offices and other rooms in suites so that the lights go off when no one is there.

·      Minimizing exterior lighting, if possible, without compromising security concerns.  For instance, landscape lighting.

You’ll find just by making some simple adjustments, a significant amount of money can be saved, and will create additional value to the building by reducing expenses.  This can play a crucial role in your due diligence process plan and create a tremendous amount of additional value.

An Important Note:  Depending upon which state you are purchasing property in, the utility contracts may be transferable.  If so, make sure that the contract for the electricity stays with the property and not transferred by the seller (assuming the terms are more favorable than if you would have to go out and reproduce it the day of closing).  This must be done while negotiating the Purchase and Sale Agreement and included as part of the contracts to be assumed by buyer, but no later than prior to removing your due diligence contingencies.

Some other areas that should be scrutinized for possible energy conservation are:

Parking Structure Lighting

Cutting out or down lighting in late evenings, i.e. 11pm to 5am, and shut off during daylight hours (weather permitting).

Tenant “bill backs” for Usage

Many leases have provisions allowing certain kilowatt usage per square foot, thereby determining just how much electrical usage is considered acceptable.  If tenant’s usage is suspect, then a meter can be installed, at their expense, and they can be billed back for any excess usage.

Evaluation of HVAC Efficiencies

An evaluation of the HVAC system in a building will help to determine what types of energy savings can be achieved.  For example, in a chilled water system it is important to make sure that the water temperature is cold enough so that maximum tonnage is being delivered throughout the building, thereby satisfying the building’s needs more quickly and efficiently.

Eddy Current Test

This test helps to determine the integrity of the tubes within the HVAC chiller.  Make sure that a recent test has been performed and obtain a copy for technical review.

Pneumatics

This is one of the largest potential problem issues in a building’s HVAC system.  Think of it as the veins in a body.  If the system is experiencing major leaks or the air compressor is not functioning properly, or the air dryer is not functioning, thus causing the system to be corrupted with water, the building’s HVAC system will run out of control.  This could be an expensive problem in terms of energy savings and repairs.

EMS (Energy Management System) aka BAS (Building Automation System)

The EMS system, which most buildings have installed, is in essence a “time clock” that also regulates the HVAC system and other building functions such as; lighting, locking and unlocking doors, etc.  It is important to determine the age and functionality of the system and whether it could be considered obsolete, as well as the vendor support available.  Is there a current maintenance agreement in place?  Can the system be expanded?  Will the license for the EMS system stay with the building?  Who locally can provide repair and training to our employees?  Can the system be accessed by website?  Insure that all passwords will be provided to you at the close of escrow.  The password will allow the highest level of access to the entire system.

These are just some of the cost savings ideas that can be implemented in commercial properties.  Obviously, not all properties have these systems or utilize these systems.  By being proactive and creative about cost savings there is value to be found in your investment.

To learn more about how to purchase commercial real estate please purchase my book at amazon.com: .  It has many more tips on how to evaluate, create value, cut expenses and investigate properties so that you can make an intelligent and informed decision while looking to invest in income properties. 

Author: Brian Hennessey

He can be reached at brian@impactcoachingsystems.com

Posted on December 17, 2015 .