Introduction

Congratulations! If you are reading this book, you are a very lucky person. If you are already investing in commercial real estate, thinking about it, or working in this field, you are a member of a very exclusive group. According to the IRS, less than 8% of all Americans who file tax returns get to invest in income property and under 3% own commercial investment real estate. And if you work in this industry like I do (I do commercial mortgages), well, I hope you think it's fun, as I do, and, might I add, never boring.

As an investor in commercial property, you get to wake up in the morning and say to yourself, “What can I do to this property to add value?” Maybe you have found a Class C minus apartment complex in an up-and-coming neighborhood. Yes, get rid of the slow-paying and no-paying renters, and the ones who have rusty bikes and junk on their patios. Then do about $4,500 per unit in cosmetic upgrades and the rents can be raised $100 per month. Just with those ideas you can be on your way to increasing the property value by 20% or more in five years. I know of no other investment opportunity that is designed like commercial real estate—one where you can choose the right property, add value, and be rewarded with a pay raise, increased equity, and amazing tax benefits.

Remember when you just had a day job? You only had one source of income—the paycheck. With commercial real estate, you get to have four sources of income: rental income, rental increases, appreciation, and depreciation. (I know, how can something appreciate and depreciate at the same time? Only in America.) Oh, but wait! There is actually a fifth one—leveraging your equity tax free into a larger, more profitable property by doing a cash-out refinance or a 1031 tax-deferred exchange. These are covered in detail in Chapter 5.

Is commercial real estate a better or safer investment than the stock market? Well, this is really comparing apples with oranges. Commercial real estate is slow moving. It just doesn't have wild swings from one day to the next like the ones stocks are known for. It is unlikely that you will ever lose 25% of your equity or, for that matter, gain 25% as stocks can over a year—or, even worse, experience a drop of 12% in one week as the Dow did on February 28, 2020, as fears of the COVID-19 crisis impacted the world.

Commercial property investment certainly has its risks, which are explained in detail in Chapter 1. One major risk is choosing a higher-risk property type. Unless you have experience and a nice chunk of cash, you might want to avoid hotels, retail, and office properties. Recessions consistently seem to give these properties heartburn. Oh, and I had better add Class C minus apartment complexes in blue-collar neighborhoods to this list. Boy, do they take a lot of mothering, complete with nagging tenants to be nice to each other and pay the rent. During the Great Recession and the coronavirus recession, these properties had the most slow-paying and no-paying tenants in the multifamily sector due to job loss. Class A, B, and C apartment buildings in good neighborhoods had a very low rate of default.

Recessions can actually offer a bonus when buying commercial property. Many of my clients can't wait for the next one. They have cash put aside to snatch distressed properties at a discount. Many of my experienced clients are careful to recession-proof their properties. Chapter 2 gives you 10 tested methods of doing this. Just one of them, structuring the property so that it can break even at 75% occupancy after paying all the expenses and the mortgage, can make your property bulletproof during a recession.

Actually, in my experience the highest risk is taking shortcuts on due diligence when buying, and getting married to a property who is not who you thought it was. To avoid falling into this trap, be sure to read Chapter 3, especially the 11 due diligence mistakes to avoid.

Unlike investing passively in stocks, investing in commercial real estate is a hands-on business. What causes stocks to go up and down is the performance of the companies they represent and the whims of investors buying and selling each day. Conversely, commercial real estate depends on your entrepreneurial skill. This is what I love the most about it and why I am writing this book, which is chock-full of solid, tested advice on how to make the right decisions and avoid pitfalls when buying, selling, repositioning, developing, financing, and managing commercial real estate.

When my editor, Richard Narramore, contacted me to see if I would be interested in writing this book, my first thought was—“sounds interesting.” My next thought was: “Hey, wait a minute, this is my book.” Why? Because for 23 years, I have lived and breathed commercial real estate. I have financed just about every type of commercial property—from memory-care facilities to a biodiesel plant—during every economic cycle. I know the pros and cons and the quirks of just about all of them. I know that a light-industrial complex will survive better than an office complex during tough economic times. That for the newbie, apartments are one of the easiest types of property to learn about, but that they can be alarmingly risky, since managing them is a bear. That self-storage is a much better investment for the beginner, as it is easy to manage and usually highly profitable at 85% occupancy, but that self-storage properties are difficult to buy. I have learned that owning a commercial property out of state quadruples the risk, and that if you do not have any working capital that's an even bigger risk. Did you know that smaller property management companies steal from the properties they manage more often than you would think? There are 11 very creative ways they do this, outlined in detail in Chapter 12.

I have taught seminars to new investors about how to choose the right commercial property, how to finance it, and how to recession-proof it. I have trained commercial realtors on how to avoid having their deals crash and burn after they have put over a hundred hours into them. I have assisted many of my clients in putting together financing proposals for repositioning all kinds of commercial properties. One of my deepest passions is working with developers—they are amazing people! They start out with an idea, which leads to finding the right piece of land. They then run some numbers. This leads to a design drawing. Next they mix in thousands of hours of work and a lot of brick and mortar. They then get to walk by the bustling property someday with their grandkids and say—“I built this!” Read Chapter 8 to find out if you have what it takes to be a developer.

At my companies, Business Loan Store and Apartment Loan Store, we finance all types of commercial real estate, but we are also advisory firms. I love assisting our clients with making the best decisions based on their long- and short-term financial goals. You would be surprised how many are sitting on the fence on what those goals are. What? You don't know yet if this is going to be a fix-and-flip or a long-term hold? From a lending perspective, my work is forensic in nature: looking under every rock, and sometimes bringing shock and awe to borrowers and their real estate brokers. “Oh, you didn't know that was hiding under there?” I love crunching the numbers: discarding the fiction and uncovering the facts. I do not get to fall in love with a property at first sight. But some of my clients do just that.

Some of the subjects covered in this book are why wealth grows faster using other people's money, how to value a property in 15 minutes, how to fake it until you make it when raising investors, why it might be better to do a cash-out refinance than selling, how to get the most bang for your buck when repositioning and developing, trade secrets on getting the best rate and terms on your commercial loan (lenders are not going to like that I have disclosed their secrets), and whether it's better to self-manage or to hire professional management.

THIS BOOK WILL SAVE YOU TIME AND MONEY

Many experts will tell you that anyone can begin investing in commercial real estate. If that were true, then everyone would be doing it. The problem is that commercial real estate is just not simple. Also, it takes a substantial amount of money. On the other hand, if would-be investors only focused on how complicated it is and how much time it takes to do it properly, few would ever get started. The advice in this book is designed to save you time and money. Much of it comes from what I have learned from working on deals with highly experienced commercial real estate investors. But in the seminars I found myself taking on over the years, I am sure I've taught well over a hundred enthusiastic inexperienced investors, many of whom had found a great property to buy. Most in this group just didn't know how unlikely it would be for them to succeed. Most didn't even have enough cash to come close to covering the down payment. But they were so driven by a dream that I found myself joining them in their madness. Guiding these entrepreneurs, and helping them avoid hazards, has given me most of the material for this book.

HOW TO USE THIS BOOK

There are eight parts to this book, each representing a major topic. Each one starts out with informative chapters followed by an encyclopedia where you can look up individual subjects that interest you pertaining to the topic. Each encyclopedia subject is not just defined, but has sound nuts-and-bolts advice. With 336 encyclopedia subjects on just about everything from A to Z on commercial real estate, you can go back to the encyclopedia sections over time when you need a resource on a subject. As a bonus, there are 136 Time and Money Saving Tips spread throughout the chapters and encyclopedia sections. Commercial real estate terms that are in italics are included in the encyclopedia sections, where you can learn more about them.

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