Peter Conti bought his first commercial property in 1990. He coaches beginner investors on commercial real estate investment. He founded RealEstate101.com.

Peter Harris is the Director of Education at Commercial Property Advisors. He has personally mentored hundreds of commercial real estate investors nationwide since 2003.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting to Know Commercial Real Estate Investing 5

Chapter 1: Just Imagine Commercial Real Estate and You! 7

Defining Commercial Real Estate 8

Getting Started 9

Making money with commercial real estate investing 9

Categorizing investors 10

Crunching the numbers 12

Exploring investing opportunities 13

Financing a property 13

Understanding the Risks of Commercial Real Estate 14

Avoiding lawsuits, the most feared risk 14

Risk-proofing your investment plan 15

Chapter 2: A Crash Course in Commercial Real Estate Investing 17

Comparing Commercial Real Estate and Residential Real Estate 18

Deciding to Invest in Commercial Real Estate 19

Exploring the Available Types of Investments 21

Apartment buildings (also known as residential properties) 21

Office buildings 22

Retail centers 23

Warehouses or industrial properties 23

Self-Storage Facilities 23

Hotels and resorts 24

Getting Started 25

Easily meeting people and making new friends 25

Doing simple math 26

Accounting and collecting 26

Recognizing Myths and Questions about Investing in Commercial Real Estate 26

Timing the Commercial Real Estate Market 28

Knowing whether to buy, hold, or bottom-fish 28

Following Trends 31

Chapter 3: Evaluating Commercial Real Estate 33

Talking the Talk: Terms You Need to Know 34

The Commercial Property Evaluator 37

Why Seller’s Numbers Can’t Be Trusted 37

How the Commercial Property Evaluator Works 38

Diving Deeper into Property Valuation 41

Not-so-obvious tips on analyzing 42

Breakeven analysis 44

Establish and follow guiding principles 44

Running the Numbers on Some Properties 46

Analyzing an apartment deal 47

Analyzing a retail shopping center 49

Valuing Properties like a Professional 52

Approach #1: Comparable sales 53

Approach #2: Income 54

Approach #3: Cost to replace the property 54

Understanding What Creates Value 55

Use: How the property is used gives value 55

Leases: As the lease goes, so goes the value 56

Location: The unchangeable factor 58

Differentiating a Good Deal from a Bad Deal 60

Cash-flow investors 60

Long-term investors 61

Short-term investors 61

Part 2: Getting Started Making Deals 63

Chapter 4: Getting Started by Wholesaling 65

Navigating Too Many Deals 66

Wholesaling Apartment Buildings 68

Getting started without very much money 68

A Wholesaling Example 69

Getting Started: The Five Steps 70

Step one — generating leads 70

Step two — analyzing properties 71

Step three — getting it under contract 72

Step four — finding a buyer 73

Step five — close and get paid 74

Buying From Wholesalers 74

Other Tips to Closing a Wholesale Deal 75

Make sure you help the seller 76

Put your reputation ahead of making money 76

Identifying what a good deal looks like 77

Snagging a Good Deal from Lazy Landlords 77

Choosing the right neighborhoods 78

Acquiring the Tools of the Trade 79

Chapter 5: On Your Mark, Get Set, Go Find Deals 81

Discovering the Secret to Finding Great Deals 81

Defining your property search 82

Developing relationships 83

Getting Leads on Commercial Property Investments 84

Branching out 84

Fishing for Leads on Branch One Properties 85

Finding Branch Two Properties 85

Dealing with government agencies 85

Negotiating with realtors and brokers 86

Joining property owner associations 87

Networking with real estate investment clubs 88

Looking Locally and Nationwide 89

Surveying the pros and cons of local investing 90

Investing outside of your community 90

Determining your location with demographics 91

Locking Down Deals: Don’t Leave Home without These Strategies 93

Allowing the Great Deals to Find You 94

Attracting owners with reports 94

Making unsolicited offers 95

Discovering properties that have been relisted 95

Chapter 6: Strategies for Making Offers and Negotiating 97

Increasing Your Chances of Getting Your Offer Accepted 98

Starting with the end in mind 98

Sizing up the sellers and what they really want 98

Sealing Deals: The Instant Offer System 100

Step 1: Build rapport with the broker or seller 100

Step 2: Establish an up-front agreement 102

Step 3: Build the broker’s or seller’s motivation level for selling 102

Step 4: Determine the financial details of the deal (The Money Step) 104

Step 5: Find the critical pieces to a winning deal (The What-If Step) 106

Meeting the Seller to Submit Your Offer 107

Writing Up the Offer 108

Letter of intent 109

Commercial contract to buy and sell real estate 110

Liquidated damages clause 110

Memorandum of agreement 111

Presenting Your Offer in the Best Light 111

Filtering Through Deals 112

Filter 1: The five-minute test 112

Filter 2: Sign it up! 113

Filter 3: The quick view 113

Filter 4: The “realists” check 114

Filter 5: End users determine the value 115

Celebrating Accepted Offers and Moving to the Next Stage 116

Chapter 7: Due Diligence: Doing Your Homework 119

Doing Your Due Diligence 120

Making due diligence a team effort 121

Getting to the truth about due diligence 123

Putting Property Under Contract 124

Scope out the property 125

Get a title commitment 125

Look at the property’s numbers 125

Creating Checklists for Effective Due Diligence 126

Physical due diligence checklist 127

Financial due diligence checklist 128

Legal due diligence checklist 129

Managing the Whole Process 131

Opening an escrow 131

Getting a preliminary title report 132

Keeping an eye on contingencies 134

Digging up (and Solving) Problems 136

Renegotiating with the seller 137

Making the final decision 138

Setting the sails for the closing date 138

Part 3: Funding Your Deals: Financing and Lending 141

Chapter 8: Conventional Financing Options 143

Wading through the Commercial Lending Process 144

Seeing the process through your lender’s eyes 144

Keeping things moving without incident 146

Knowing the Differences between Commercial and Residential Lending 147

What matters most to commercial lenders 148

The down payment requirement is higher 148

Evaluating Properties Like a Lender 149

Determining the property’s income 149

Revealing the quality of the property and its neighborhood 151

Assessing the strength of the borrower 153

Getting Your Lender to Say, “You’re Approved!” 154

What your lender needs from you 154

What lenders need regarding the property 155

What lenders like in a deal 156

What lenders don’t like in a deal 156

Choosing the Best Loan for You 157

Getting to know conventional lenders 158

Understanding the available conventional loans 159

Selecting a lender for your deal 161

Deciding what you want out of your property 162

Determining how much the loan will cost you 163

Knowing the costs of getting out of a loan 164

Controlling the interest rate (to some extent) 165

Assuming the Seller’s Preexisting Mortgage 166

Chapter 9: Getting Creative with Financing 169

Creative Financing Techniques 170

The Master Lease Technique 173

Getting Someone to Carry Owner Financing 174

Coming up with the Rest of the Money Using Secondary Financing 176

Using the Existing Financing 176

Finding sources of secondary financing 178

Understanding common pitfalls of secondary financing 180

Getting the owner to agree to finance all or part of the purchase 180

Dealing with seller objections 181

Operating the Wraparound Mortgage Like a Surgeon 183

Using an Option to Buy 184

Leveraging the Equity in Your Portfolio 185

Employing blanket mortgages 185

Drawing on 401(k)s or IRAs 185

Chapter 10: Forming Partnerships and Syndicating Deals 187

Identifying the Keys to Raising Private Funds 188

Building Your Database of Potential Investors 189

Creating relationships with potential investors 189

Using executive summaries to nab potential investors 193

Connecting with your investors 194

Deciding Whether to Go It Alone or Use a Partner or Two 195

Creating the Right Teams and Partnerships 195

Joint Ventures and Syndications 196

Knowing how much to pay your investors 196

Creating a Compelling Investor Presentation 197

Writing up the agreements to use with your investors 199

Considering how long you want to partner with someone 199

Interviewing a potential partner 199

Chapter 11: Closing Your Deal 201

Evaluating the Anatomy of a Close 202

Closing 101: The Basics of Closing a Deal 203

What is an escrow and who is an escrow officer? 203

What is title insurance? 203

Do I need an attorney for my closing? 204

Do closing costs differ in commercial real estate? 205

Is it better to close at the end or beginning of the month? 206

How long does it take to close a commercial deal? 206

Asking Yourself Big Picture Questions 207

What are my exit strategies? 207

Are my investment goals being met? 207

Sweating the Details before Signing on the Dotted Line 208

The title work 208

The closing instructions and closing statement 209

The lender 210

Closing Day: What to Expect 211

What’s on a closing statement? 211

What exactly will I be signing? 213

What should I do before signing? 214

When am I officially closed? 216

Taking Legal Ownership 216

Acting and Being the Boss 217

Stage 1: Assess the situation 218

Stage 2: Assemble the team 218

Stage 3: Secure the site 219

Stage 4: Use the info that you discovered 220

Part 4: Day-to-Day Ownership and Operations 221

Chapter 12: Property Management: Who’s Minding Your Ship? 223

Being the Boss: Manage Your Commercial Property Yourself 224

Improving your management skills with a few basic tips 224

Developing basic business systems 226

Doing it Yourself: A checklist 227

Training your tenants to respect you and the property 228

Operating successfully day-to-day with the proper people and tools 230

Letting Go: Using Professional Property Management Companies 232

Understanding the ins and outs of professional property management 232

Deciding to hire a professional property management company 233

Searching for property management candidates 234

Interviewing your prospective managers 235

Checking credibility and capability 236

Drafting the property management agreement 237

Getting your reports: Monthly and weekly accountability 240

Knowing How to Be an Effective Absentee Owner 243

Chapter 13: Protecting Your Assets 245

Taking Asset Protection Seriously 245

Create a plan to avoid lawsuits 246

Plan for the worst and be happy if it doesn’t happen 247

Building a Legal Fortress for Personal Assets 247

Making use of entities 248

Using your entities to your advantage 249

Gathering essential fail-safe documentation 251

Protecting Yourself with Common Sense 252

Treat others as you would like to be treated 252

Meet any potential problems head-on 252

Always have proper insurance coverage 253

Chapter 14: Why Properties Fail 255

What Is a Property Failure? 256

How You, the Investor, Can Cause Failure 256

You made a bad deal 257

You have too much debt 259

You’re in denial regarding problems 260

How Management Can Cause a Property to Fail 261

How the Market Can Cause Failure 263

The ups and downs of real estate cycles 264

Buy right and avoid overleveraging 265

The influence of demographics 266

When to Fold Up and Walk Away 268

Knowing when to fold 268

Choosing to walk away honorably 268

Tried and True Tips on Surviving and Thriving 270

Part 5: Kicking Your Investing into High Gear 273

Chapter 15: Making a Success Out of Commercial Fixer-Uppers 275

Identifying Commercial Fixer-Uppers 276

Distressed and poorly performing property 277

Distressed and poorly performing owner 277

How to find fixer-uppers 279

Where to buy 281

Figuring Out What a Fixer-Upper Is Worth 282

Determining your cash flow 283

Figuring your NOI, cap rate, and sales price 283

Running the numbers on an example property 285

Mapping Out a Fixer-Upper Game Plan 286

Perform due diligence 287

Before fix-up and after: Bridging the gap to payday 290

Determining your break-even point 291

Creating checkpoints for the renovation process 292

Avoiding Headaches and Pitfalls (Or at Least Minimizing the Pain) 295

Recognize hopeless situations 295

Hire good contractors (and think like one when you do projects yourself) 296

Timing Your Fixer-Upper for a Quick Sale 297

Chapter 16: Land Development: The Heart of Commercial Real Estate 299

Weighing the Pros and Cons of Investing in Land 300

The pros 300

The cons 300

Understanding What Makes Land Worth More 301

Knowing Whether You’re in the Right Market 302

Identifying the Three Ps for Successful Projects 303

Investing in Land with a Team 304

Finding the Best Places to Invest in Land 305

With Land, Time Really Does Equal Money 307

Using contracts to get more time 307

Buying time with options 309

Changing the Property’s Zoning and Getting Approved to Develop 310

Determining what to build on your land 311

Taking master plans into consideration 311

Keeping a level-head during the approval process 313

Getting the Green Light on Your Deal 315

Dealing with bureaucrats 317

Avoiding neighborhood opposition 318

Chapter 17: Self-Storage: A Favored Asset 319

Investing in self-storage facilities 320

Upgrading and converting 321

Profiting during good times and bad 322

Choosing the Best Locations 324

A self-storage deal 324

A simple way to evaluate a facility 325

Finding and hiring the right self-storage facility manager 325

Keeping an eye out for your next manager 326

Tips to choosing a good manager 327

Getting funding from investors 327

Marketing Self-Storage Facilities 328

Building a self-storage website 329

Using Social Media 330

Paying for clicks (PPC) 330

Keeping it traditional: flyers & billboards 331

Chapter 18: Expert Tax Advantages and Strategies 333

An Overview of Money-Making Tax Strategies 334

Appreciation 334

Depreciation 335

Paying down the mortgage 335

Rolling over 336

Being an Investor or a Dealer: The Difference Is Huge 336

Holding real estate long term as an investor 337

Comparing wholesalers and dealers 337

Naming Yourself a Real Estate Professional: It Pays 338

Choosing Your Entity: An Important Tax Preparation Before You Buy 339

Sole proprietorships 341

Corporations 341

Limited liability companies 341

Limited partnerships 342

Digging into Depreciation 342

The magic of depreciation 343

Don’t “recapture” your depreciation 344

Cost segregation: Saving thousands more by separating your property parts 345

Avoiding Taxes by Trading in for Another Property: The 1031 Exchange: 347

Before anything else, get expert help 348

Surveying the exchange rules 349

Taking Advantage of Some Commonly Overlooked Deductions 350

Accounting expenses 351

Consulting expenses 351

Home office expenses 351

All property-related expenses 352

Transportation to and from your properties 352

Expenses for your technology gizmos 352

Part 6: The Part of Tens 353

Chapter 19: Ten Ways to Increase Your Property Value 355

Raising the Rents 356

Budgeting Your Way to Wealth 356

Giving the Property a Makeover 357

Changing the Property’s Use 358

Adding Goodies to the Property 358

Standing Up to the Tax Man 359

Passing Utility Expenses to Tenants 360

Renegotiating the Leases 360

Bringing in a New Management Team 361

Adding Value to Land 361

Chapter 20: Ten Easy Ways to Network 363

Finding Easy Places to Network 364

Getting Your CCIM Designation 364

Putting Power in Your Search Engines 365

Going Directly to the Investment Firms 366

Reading the Trades 367

Joining a National Association 367

Getting Involved with BOMA 368

Enlisting with the ICSC 368

Becoming Affiliated with the IREM 369

Staying Current and Connected 369

Index 371

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