How To Invest In Commercial Real Estate By Frederic Sealey

How To Invest In Commercial Real Estate By Frederic Sealey

Best Possible Ways to Start Investing in Commercial Real Estate

Have you found yourself ever wondering what commercial investing in real estate is all about? Let’s understand with Frederic Sealey

There’s nothing to overestimate the fact that commercial real estate investment is a road to growing massive wealth. The real estate expert Frederic Sealey on comparing with the residential investment confirms that commercial real estate investing offers many other benefits for investors. Some of the benefits include:

  • Excessive income potential
  • Balanced cash flow
  • Appealing leasing contracts
  • Low risks of vacancy

However, like all investing strategies, commercial investing in real estate is not without it’s obstacles. While they boast of offering substantial upside to investors, they are quite complex and investors are required to undertake proper due diligence before they seek or close any deals. They need to be really clear on how the process works.

As opposed to residential investing in Real Estate, investing in commercial ones normally consist of procuring properties that are solely used for business operations and leasing/renting the space to businesses that reside in their respective spaces. These properties in real estate are known as office, retail, industrial, warehouses, apartment building, and mixed-use buildings.

Now if you are wondering on the best possible ways to start investing in commercial real estate, the following points will take you through the steps one-by-one.

10 steps to Invest in Commercial Real Estate

The exceptional growth and development in the real estate sector have motivated many individuals to venture into the commercial real estate investing fragment. But in any case, before you get associated with it, you need to comprehend the subtleties and other interest points. You should be aware of how the market is, the terms used in the market, and the way to identify a valuable deal. So here we bring you 10 such steps inspired by the advice offered by Frederic Sealey.

  • Get yourself taught and familiar with the world of commercial real estate investing

Before venturing down the path of commercial real estate investing, the first step should be to getting yourself acquainted with this segment. There are numerous schools that offer classes on real estate and you can get a degree on the same. This will help you to be more insightful of the sector. Even if you are unable to enroll yourself into some real estate course, you can start studying the market on your own. Watch out for any new developments that might be happening. Read the newspapers and journals related to real estate daily. Make this your passion. Break down each and every development that you witness in the sector and try to analyze them. Working yourself on getting acquainted yields far better results than getting a college degree.

  • Get acquainted with the most common/key metrics in commercial real estate investing

The following are the key metrics that you should keep in mind while venturing the commercial real estate space:

Commercial Real Estate

  1. Net Operating Income (NOI)

The Net Operating Income (NOI) in commercial real estate of a property is determined by calculating the gross operating income for the first year of the property and then removing (subtracting) the operating expenses concurred in the first year of operation. The final number you get should be positive.

  1. Cap Rate

A property’s capitalization or cap rate is utilized to determine the worth of properties producing income. The cap rates are used to determine the net current value of profits and cash flows in the future. The process is known as capitalization of earnings.

  1. Cash on Cash

Certain investors in the commercial real estate segment rely on third party financing to purchase the properties. Under such circumstances, they utilize the cash-on-cash formula to compare the performances of the first year of all competing properties. This formula takes into account the fact that the investor concerned here do not require 100% cash to acquire the property, but also keeps in mind that the concerned investor is not eligible to receive the entire NOI as he/she will be required to put in some money for the mortgage payments.To determine cash-on-cash, investors need to realize the actual amount needed to invest in purchasing the property or for their initial investment.

  • Work with a real estate developer

To know the tricks, you will need to work with the magician. Same applies to real estate. To get an idea of what actually goes on in the field, you need to work with someone who knows the trade in and out. Sign up for an intern program with a real estate developer in your area. Watch closely how they deal and interact with customers and how they bring a deal to a close. Working with an expert on the field will give you an opportunity to clear away your doubts and gain some practical knowledge on matters that you might not find on the pages of a textbook. At the same time, it will also help you to gain some contacts which might come in handy when you start investing on your own.

  • Get accustomed to the region where you plan to operate

Before you start meeting your customers for property deals, it is very important that you know your region well. You should be well-versed in the market drifts happening in your area and the current costs of the real estate properties in the market, both residential and commercial. Get yourself a reality intermediary to be more aware of the properties at a bargain.

  • Design a foolproof plan of action

While entering into the sector of commercial real estate investing, your top priority should be to map out a foolproof plan of action. Realty projects deal with enormous amounts of cash. So if you have decided to venture into this then you might as well try to figure out how much money are you willing to spend. Whether you will be using your own money or you would like to take up financing?

Frederic Sealey
                                                        Investment By Frederic Sealey

The most important thing is that you have enough funds or can arrange enough funds before bouncing into the world of commercial real estate investing. You can use tools like mortgage calculators to get a clear picture of the total cost you will need to incur.

Some other parameters that you should start planning to track or calculate include your expected return on investment on the deal, performances of key competitors, etc.

  • Develop your network

When you are in the real estate business, you need to be in constant contact with different departments. And it’s always better to have contacts or friendly faces in these departments to get your work done smoothly. Be it moneylenders, home examiners, loan officers, legal counselors, or any other expert associated with the real estate business. You will need to connect with them sooner or later. So it is very important that you develop your network and be in contact with the concerned individuals. Believe it or not, to a large extent your success will be defined by the relationship that you build with these concerned individuals.

  • Be prompt to recognize a good deal

An experienced real estate businessman recognizes a good and profitable deal as soon as he sees one. You need to develop your skills towards this very direction. So, how would you do that? Firstly, real estate pros always have an exit strategy in place. Research has shown that the best deals are the ones where you can easily determine your exit strategy. Always be on a sharp lookout. Always keep a lookout for damages that might demand repairs, assess your risk with expertise, and always keep the calculations at your fingertips that ensures that the property meets your financial goals.

  • Diligently evaluating properties

When it comes to evaluating properties, it is always good to use the three-pronged approach. What is it you ask? Well, the three-pronged approach involves, as the name suggests, three different approaches to locating the most suitable properties. The first approach would be to use the internet to discover eligible properties around your area, second is reading the classifieds in the newspaper to identify those properties that are not up on the internet, and the third approach is to employ bird dogs. Bird dog is a very common term in real estate which stands for hiring people who contribute the majority of their time in shortlisting properties that have a very high investment and return on investment potential.

  • Be ready to serve your customers at any time

A real estate business is not just a mere 9 to 5 job. Realty business demands that you are always open to your customers and you are present whenever there is a calling. You should always be in the game while evaporating their doubts with your solutions. This will ensure that your customer trust you and you are the ones they resort to while selling their property at profitable rates for you. Be prepared to work during weekends and late nights and always treat everyone you meet as a potential customer.

  • Get a real estate license

Last but not the least, to make any of the above points possible, you will need to have a real estate license. Without the license, you will not be authorized to carry out any property deals. You will need to go through certain rules and regulations to procure the license. Also, apply for a permit before you commence your business.

Now that you are well-versed in the steps on how to go about your commercial real estate investing business, the next thing for you to work upon are terms that are used in the real estate industry.

When you embark on this new venture of yours, what do you think would be the first question your customers ask you? Well, it will be about your experience. Now if you are a newbie there’s nothing to feel demotivated. A real estate business, or any other business for that matter, is all about confidence. All you need to do is not sound like you have no experience.

Below we provide a list of 25 industry terms that should be at the tip of your tongue to sound like a pro in commercial real estate investing!

Invest Like a Pro, must know 25 terms in commercial real-estate

Beginner terms

  • Commercial Real Estate: Commercial real estate defines a property with the sole purpose of generating profit for the purchaser, as opposed to being a place to live in (residential). Some examples include retail, office, warehouses, and any other space that is leased out not as a living space but as a workspace.
  • Bidding War: Bidding War refers to the scenario when two parties interested in the same property make very high offers one after the other in order to win the deal. Basically, the party with the last highest offer gets the key to the place.
  • Closing Costs: These include expenses other than the price of the property that is required to be paid before the deal is finally closed. Some of these costs include taxes, title searches, and title insurance.
  • Earnest Money: Earnest money is the cash deposit offered by the buyer to the seller as a symbol of and to shower good faith upon completion of the transaction.
  • Bad Title: Refers to the title of a property that can cause problems in granting legal ownership to new buyers and hence prevents a deal from being closed. Some reasons due to which bad title exists include the lien on the property, unpaid taxes, and violations caused by the property.
  • Dollar Per Sq. Foot: This is a calculation of the price of a property per square foot after repairs. Potential buyers use this as a tactic to decide if it will be beneficial for them to purchase the property.
  • Usable Square Footage: This is the actual area that you can inhabit as part of the commercial real estate property on rent. This excludes spaces like hallways, lobbies, stairways, storage rooms, etc.
  • Tenants: Tenants are the people utilizing the property and paying rent to the owner of the property.

Intermediate terms

  • Private Money Loan: This cover loans taken from individuals or small groups who are not subsidiaries of a lending company. Such individuals or groups may include family, friends, private investors, or co-workers.
  • Principal Reduction: TThis refers to the part of the mortgage payment of the buyer that goes towards the payment of the loan, minus the interest.
  • Hard Money Loan: A loan derived by semi-institutional organized lenders who possess the license to fund the deal for the buyer. In this scenario, the interest rates are much higher when compared to conventional and traditional loans but the advantage is that buyers are able to receive 100% funds in a very short period of time.
  • Assessed Value: Assessed Value refers to the dollar value of the property concerned which is determined by a tax assessor in order to levy real estate taxes.
  • Loan To Value (LTV): The percentage of the property’s value that is utilized by a lender to calculate the loan amount. The final value of the property will slightly vary depending on who assesses it.
  • Building Classifications (A, B, and C): Building classification determines a way to put tabs on the current state of the concerned property:

◦     Class A: The property is in great condition and requires minimal to no repairs. The location is also perfect.
◦     Class B: The property is old and requires repairs.
◦     Class C: The property is older than 20 years and would require major repairs. Also, the location is very poor.

  • After Repair Value: A final estimate of the value of the property upon completion of repairs.
  • Letter of intent: Commonly known as the LOI, it is basically a written document that determines the tenant’s allegiance to rent the concerned property or space.

Advanced terms

  • Net Operating Income (NOI): The Net Operating Income (NOI) in commercial real estate of a property is determined by calculating the gross operating income for the first year of the property and then removing (subtracting) the operating expenses concurred in the first year of operation. The final number you get should be positive.
  • Cap Rate: A property’s capitalization or cap rate is utilized to determine the worth of properties producing income. The cap rates are used to determine the net current value of profits and cash flows in the future. The process is known as capitalization of earnings.

Cap Rate = NOI ÷ Market Value of the Property

  • Cash on Cash: As described by Frederic Sealey, certain investors in the commercial real estate segment rely on third party financing to purchase the properties. Under such circumstances, they utilize the cash-on-cash formula to compare the performances of the first year of all competing properties. This formula takes into account the fact that the investor concerned here do not require 100% cash to acquire the property, but also keeps in mind that the concerned investor is not eligible to receive the entire NOI as he/she will be required to put in some money for the mortgage payments.To determine cash-on-cash, investors need to realize the actual amount needed to invest in purchasing the property or for their initial investment.

Cash on Cash = Annual Cash Flow ÷ Total Cash Invested

  • Debt Service Coverage Ratio: This is a metric used by banks to determine the amount of risk involved in a property deal.

Debt Service Coverage Ratio = NOI ÷ Annual Debt Service Payments

  • Single Net Lease: A lease option that entitles tenants to pay property taxes.
  • Double Net Lease: A lease option that entitles tenants to pay both insurance and property taxes.
  • Triple Net Lease: A lease option that entitles tenants to pay insurance, property taxes, and maintenance.
  • Gross Lease: A lease option that entitles the landlord to pay for all the property costs included in the ownership such as taxes, utilities, and maintenance.
  • Percentage lease: A lease option that determines property costs as the percentage of the sales volume made at the property.

Do you feel somewhat like a real estate pro? Well, you now know half the things about the trade! What’s the next thing to worry about then? Yes, it’s money!

Let’s say you would like to invest your own money in this real estate business venture of yours. That’s good. You would be free from the claws of lending companies and banks who would be after your blood when it comes to loan repayment. But ever wonder what should be your strategy so that you get the maximum possible returns on your investment like the famous hedge funds?

Independent Investment? So what if you can invest in a hedge fund?

Ever been curious on how these hedge funds strategies and how they create hazardous returns for the concerned investors multiple times? Well, you aren’t the only one. For a considerable period of time, hedge funds have held a specific level of riddle around them and also the way in which they operate; and for a considerable length of time, public organizations and retail financial specialists have endeavored to make sense of the techniques behind their (occasionally) clear frenzy.

Commercial Real Estate Investment, Frederic Sealey
                             Commercial Real Estate Investment By Frederic Sealey

It’s difficult to reveal and see every last methodology executed by these investment specialists – all things considered, there are actually a huge number of them (hedge funds) out there. Notwithstanding, there are a few constants that remain the same with regards to style of investment, the methods used for analysis, and other inclinations.

There are primarily three ways in which you, being an independent investor, can invest like a hedge fund without hefty expenses.

  • Keeping an eye on cash flow

As an independent investor in the market for real estate, you should keep a very close eye on the metric cash flow. Cash flow is a very important factor that you need to track if you wish to gain returns like hedge funds. You might be focussing more on your earnings or profits but the bottom line is that the earnings or profits can be easily altered by single events such as extra charges on the property, taxes, or maintenance due to some unforeseen issue says Frederic Sealey.

But at the same time if you keep track of cash flows you will be able to know if your investment is generating the money or not and whether it’s performing healthy when it comes to operations. Determining the cash flow will also help you to realize if you are making any losses along the way and how much money you would have on hand that you can utilize as an investment in other properties or use it for some other purpose.

  • Use derivatives and leverages

Hedge funds are quite notorious when it comes to the use of leverages n order to magnify the returns from investment. They are known to buy securities on a very low margin or acquire credit lines or loans to invest significantly in further purchases. The thought is to seize upon as well as exploit an opportunity that has appeared.

In short, the above just means that if your venture is able to create a sufficiently major return to take care of commissions and interest costs on loans, then this sort of investment can be an exceptionally viable methodology to get maximum returns. So if you think that this commercial property has the potential to shower abundant returns in the future, then don’t shy away to invest on it. Sometimes a little bit of risk can give quite high returns.

  • First hand exit strategy

Frederic Sealey reminds that the common mistake made by independent investors is that they buy into stocks and end up watching the security’s price rise in value. Well, there’s nothing wrong in wanting to make a little more money but there are few investors who know when to give up, i.e they have an exit strategy in place.

The same applies to commercial real estate investing. Firstly, real estate pros always have an exit strategy in place. Research has shown that the best deals are the ones where you can easily determine your exit strategy. Always be on a sharp lookout. Always keep a lookout for damages that might demand repairs, assess your risk with expertise, and always keep the calculations at your fingertips that ensures that the property meets your financial goals.

So why wait? Map out your action plan and get investing in commercial real estate!

Talking of commercial real estate, a new trend has been observed in luxury hotel residence in NY.

Demand of Luxury Residence growing in NY

There has been an increasing demand for commercial hotel residences that provide highly serviced, modern, and lifestyles with rich amenities. This trend was first observed by hotels when they noticed an influx of hotel stays that turned to long-term stays, especially when it concerned individuals with very high net worth and primarily from the East Coast. Upon noticing this trend, many hotels jumped to create hotel residences where apart from enjoying the hotel’s amenities and services, guests can also feel at home at their own residences.

This growing interest in hotel residences has provided real estate agents with more options while on the lookout for a lock-and-leave apartment or condominium for the clients who are always on-the-move. They might be looking for a second corporate residence, a first home, or maybe a vacation property. This kind of hotel residences normally exist in desirable locations, that has the ability to offer experiential lifestyles that cover shopping, dining, and entertainment within just walking distance from the front door.

Another chief appeal of owning a hotel residence is that, in some cases, you can rent back the residence to the hotel and generate income from it.

With the constant increase in global wealth, there will always be buyers for luxury real estate. Moreover, hotel-branded luxury residences have higher retail value because of the value of the brand. And for commercial real estate investors, even if the upkeep is quite expensive, the potential for generating income is enormous, if you are able to negotiate a good deal during purchase.

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