Investing in commercial real estate can seem larger than life at first. To those just beginning, there are plenty of numbers and terms that may as well be an alien language. So to help you make better investment decisions, and to understand the Bellingham commercial real estate market better, I’ll introduce you to an important tool available through my website.
The IPV Calculator is a resource anyone can use to gain a bird’s eye view of their commercial investments in seven simple steps. The tool was designed from the ground-up by a team of commercial brokers, developers, and appraisers. Whether you are interested in buying or selling commercial property, the IPV calculator makes it easier to understand the long-term vision of your investment.
I work with all kinds of commercial real estate in Bellingham, likewise, the calculator is set to handle any of the five main commercial property types.
Filling in the details of your commercial property on the IPV Calculator will result in a downloadable report detailing the ten year forecast for your investment. Your final summary will include long-term information like your loan repayment plan, the likely Net Operating Income of your commercial property over the next decade, and your expense growth. Having these numbers available can help you make an informed decision on the best times to buy, invest in renovations, or sell.
Information focused on the short term is presented as well. With the IPV Calculator, you can quickly see which expenses are currently eating the most out of your potential revenue, or how much each tenant is paying per square foot.
The IPV Calculator is an invaluable tool, but it alone does not constitute as investment advice. Before you make any financial decision, I recommend speaking with a local Bellingham commercial broker, like myself! You can reach me through the forms on my website, or call me at (360) 820-2000.
Knowing the difference between Triple Net and Gross Leases is the key to creating mutually beneficial agreements between tenants and property managers. Troy Muljat explains the approaches and what responsibilities each put on the contract signers.
Can you answer the question, “What is a CAP rate?” Troy Muljat explains the concept in a way even investing beginners can understand.
There are three ways to value an investment property: income, cost and sales. Troy Muljat walks you through what each approach looks like.
Search “commercial real estate” online and right away you’re inundated with thousands of sites vying for your attention. I know finding the right site isn’t always easy, so I’ve compiled a list of what I’ve found to be the most essential throughout my career in real estate.
The lead contender among sites that specialize in commercial real estate, particularly in sales, is loopnet.com. The site is owned by the information-driven CoStar Group Inc. and has become one of the most used and valued tools in my real estate toolbox, and for many others in the industry as well.
LoopNet generates an approximate 5 million visitors per month and contains 800,000 to 1 million listings at one time. About 400 to 500 billion is available for sale and at least 6 billion square feet is on the site for lease. The numbers are staggering, and that’s why they’re a leader in reaching brokers and investors online.
LoopNet is free for brokers to search, however a monthly subscription is required for investors looking to gather more information on listings in locations within the United States and beyond.
The CoStar Group Inc. is also the driver behind its own site, costar.com. Specialists in compiling stats on the industry, the site is filled with a variety of data points for serious brokers and investors.
The website shares some data with its subsidiary LoopNet, but provides more extensive research, including comp data, same sale data, and any data from the majority of commercial real estate on the market. CoStar also features information about lease terms, such as availability times and expiration dates. So if you’re looking to get serious about investing, I advise you to spend the $200 per month to access the site in-full.
Auction.com is another great site that focuses on auctions for housing, commercial, multi-family and luxury real estate. You name the property type and they most likely have it covered on their site.
Created by Ten-X LLC, which holds the tagline “where real estate is moving,” the site contains a calendar outlining a series of upcoming auctions. Often, especially in the last 10 years, property owners offer a minimum bid on items they want to sell through the site. Brokers pay a fee to participate, but all can gain access to the sites calendar which lists upcoming auctions throughout the nation.
If you’re looking to search for multi-family properties, I recommend Zillow.com. Based out of Seattle, Washington, the team at Zillow provides online users with a comprehensive search tool to look for not only residential, but commercial properties as well.
When a realtor lists a property through a multiple listing service (MLS), it will often get picked up by sites like Zillow or realtor.com. Specializing in multi-family assets, realtor.com is a great source for agents that participate in the commercial market but don’t want to pay for services like LoopNet.
Speaking of free, don’t forget craigslist.org. Craigslist offers users a look at a variety of mostly small and some commercial properties and investments. If you’re a broker and you’re looking for a for sale by owner or multi-family listing, keep Craigslist in your bag of tricks.
If you’re looking to catch a glimpse at the latest foreclosures, I’d recommend realtytrac.com. The site features up-to-date listings and outlines the basics of foreclosure. Most properties listed on the site are single-family and sometimes multi-family. If you’re looking for retail or commercial office space, for example, I’d still recommend LoopNet and CoStar.
If you’re looking to localize your search I recommend looking at your local commercial multiple listing service in your area. Here in the northwest, we have commercialmls.com, which encompasses Washington state as well as parts of Oregon and Idaho.
Remember that online search tools are crucial for serious investors — knowing where to look will give you an edge.
As a certified appraiser and broker, I know the best practices of valuing an investment property. My go-to list boils down to three approaches related to cost, income and sales. So if you’re not so sure how to value your commercial property, keep reading.
1. The cost approach
Start by identifying the cost to replace the property. This means accounting for all costs associated with construction and property value.
If you come across comparable properties that are priced above the cost to rebuild it completely, educate your clients — the same goes if properties are priced below the cost of reproduction.
If a property is listed 30 percent below its estimated value, for example, acknowledge the edge you have over new complexes on the market that require additional cost to build. Ultimately, they’ll have to charge a higher rent and you’ll have a competitive edge.
2. The income approach
Consider the Gross Scheduled Income (GSI), or the amount of rent collected for the entire property if it was completely occupied, even if some units are vacant.
You’ll need to consider external income generated through on-site laundry, parking or whatever else is accrued through tenant property expenses.
Next, subtract the stabilized vacancy rate from the equation. Depending on your market, you’ll want to stick to about 2 to 5 percent. I always consider vacancy because it’s so unpredictable. It’s rare that an apartment will become available the same day a tenant chooses to move out. Typically, it takes about 5 to 10 days to clean, fix damages and get a new tenant in an apartment.
Once you calculate the stabilized vacancy rate, you get the Effective Gross Income (EGI), which is then subtracted by expenses including taxes, insurance, utility costs, water, sewage, garbage — you name it.
From there, you’ll be able to calculate your Net Operating Income (NOI) which clarifies the amount you’ll profit each year before debt service, tax treatment and depreciation.
Finally, divide that figure into the cap rate, which is the annual return on a property paid for in cash. Simply take the cap rate and divide into the NOI to get the final valuation of your property.
3. The sales approach
Once you’ve identified expenses, you’ll want to break it down to a per-unit basis and compare properties. Compare properties on a per-square-foot basis or even a per-bed basis, depending on your market.
Reconcile the numbers and compare a handful of properties. You’ll then want to make adjustments to your property valuation based on what you find.
Weigh each of the above approaches and determine which works best for you and what gives you most confidence. It’s different for everyone, but it works.
I’ve been involved in commercial real estate for more than 25 years. Since then, I’ve come to understand what works and what doesn’t when it comes to the relationship between a client and their broker. I put together a list of 7 key traits for brokers to strive for, developed from my many years of experience in the field.
1. Brush up on your communication skills.
Communication is key to any successful relationship. It may seem simple, but it’s crucial to maintaining trust with a client.
If you’re a commercial broker, you need to be in contact with your clients on a regular basis.
Update your clients on new investment opportunities; be clear about what you are going to do once you take on the property as a listing; and inform your clients about the marketplace.
If you’re leasing a property for your client, generate a weekly report detailing activity, even if there is none. Don’t be afraid to explain why an office building, for example, leased in a certain market and not the one you’re representing. These conversations build trust and hold you, the broker, accountable.
The door should always be open.
2. Maintain professionalism at all times.
Sure, this may seem pretty straightforward, but putting it in practice is a different story.
As a broker, you should constantly be willing to learn. Be ready to go the extra mile.
I, for example, am certified with the Certified Commercial Investment Member Institute (CCIM) — only one percent of brokers hold that designation. It makes me stand out and gives me the skills to provide a unique and improved service to my clients.
Commit yourself to excellence and hold yourself to a higher standard. Do something that adds value to the client experience.
3. Be knowledgeable and prepared to answer questions.
Are you prepared to answer client questions? Do you understand the intricacies of the market? Are you capable of advising your client to achieve the best outcome?
These are all questions you should be replying to with a resounding “yes.”
Being knowledgeable is essential. My CCIM training, for example, taught me how to define a cap rate, calculate a ten-year cash flow analysis and internal rate of return. If you’re able to answer those questions, you have an edge.
More specifically to you, be prepared to tell clients how many properties you sold in the last year, your total dollar volume and other details related to your professional experience and accomplishments. If you specialize in a specific asset class, tell investors.
Understanding the industry and having a specialty is key.
4. Always be honest.
Being transparent with clients has been at the forefront of my business practice for years. Breaching ethical standards to turn a profit or make a deal should simply be off the table at all times.
Even if you make a mistake, be honest with your clients. It’s your responsibility to build a trusting relationship so apologize for your mistakes and make it right. Don’t make up a story.
Client’s appreciate a broker that strives to maintain a high level of integrity at all times.
5. Don’t forget to be tenacious.
Do you prefer to work from 8 a.m to 5 p.m. or do you like to get out and knock on doors? Going the extra mile makes all the difference.
Half of my sales come from properties that aren’t even listed — I’ve sold everything from a movie theatre all the way to a hotel on properties that weren’t listed.
As a broker, it’s your job to stir up deals. Inform the public about the market and make moves.
6. Entrepreneurship opens doors.
A mere 8 percent of brokers own a property outside of their own home. That means more than 90 percent of brokers don’t own an investment property. Run the numbers.
If you’re going to do business and encourage investment, you should know how to answer client questions from experience. That’s why I’ve invested in commercial real estate for years.
Not only has it generated tremendous opportunity for me, but it’s provided me with a unique insight that I can bring to clients. I know what it’s like to be a landlord. I’ve been in those situations and I can tell clients how I handled it on my own.
Being an entrepreneur demonstrates self-motivation and goes a long way in business.
7. Persevere when times are tough.
Transactions that take months to finalize are one of the most challenging aspects about being a broker, but you’ve got to stick with it.
Face it, commercial transactions take time. You have to communicate with your client throughout the process, even if it takes months. Remain up to date on the information and send your client progress reports. You’ll need to continue providing assurance to your client and others involved throughout the process, despite how long it takes.
To counter that, know when it’s time to cut your losses. It’s acceptable to identify that a transaction is not working. Inform your client and choose what’s best.
Learn to persevere and you’ll be successful in the long run.
Not so sure how to answer the above question? Here’s what you need to know.
A capitalization rate, or a cap rate as it’s often referred, is the rate of return anticipated for one year if the property was paid for in cash — It’s the ratio between Net Operating Income (NOI) and the property value.
If you pay $1 million on a property in cash with a 10 percent cap rate, for example, you should expect to see $100,000 rate of return per year.
For investors or brokers, you’ll have to calculate your Net Operating Income (NOI) to identify the cap rate. To do that, you’ll need to account for the Gross Scheduled Income (GSI) of potential renters and subtract the vacancy rates and property expenses to calculate your gross income. The net profit you generate before debt, divided by the purchase price of the property, is your cap rate.
Now, it’s not often that investors are buying properties in cash. Frequently, they’re incurring debt and placing a certain percentage down on the property.
If you’re intending to leverage the property, you’ll want to subtract total yearly debt costs, or your annual debt service, from your calculated NOI to identify net cash flow. Most often, your cash-on-cash return should be slightly above the cap rate if your borrowed interest rates fall below the cap rate.
Let’s say you’re a property owner and you want calculate the cap rate of your own property. First, hop online and look at property comparables. Let’s say you come across a 20-unit apartment building with a NOI of $50,000 and it sells for $1 million. That’s a cap rate of 5 percent. It’s as simple as that.
Remember, cap rates are extracted from the market, so keeping close attention to what’s selling today is crucial in determining the perfect cap rate for your property.03
In commercial real estate, whether it be for a retail, office or industrial lease, the terms “triple net” and “gross net” come up often.
Learning the difference between the two could make all the difference in reaching an agreement that is mutually beneficial for the tenant and property manager.
Often referred to as a net-net-net (NNN) lease, the triple net is a common structure for commercial leasing these days. With this lease structure, tenants agree to pay, in addition to the base rent, a cost covering Common Area Maintenance (CAM), real estate taxes and insurance as well as other property expenses.
Essentially, charges included under a triple net lease often cover everything except for the floor, foundation and roof of the property. As a landlord, you’re not burdened with direct expenses that result from owning a property.
Let’s look at an example. If you take a small retail building with three tenants, each taking up a third of the space and you have expenses that equate to $12,000 per year, or $1,000 per month, tenants will pay $333, or 33 percent, each month on top of base rent.
Sophisticated tenants often resort to capping their triple net lease, which is often quoted annually by the property manager. After about 90 days pass in the new year, tenants typically reconcile expenses from the previous year and set a new budget for the next.
I’ll note that this is not always the case. Hybrid forms of the triple net and gross lease exist. A double net lease acts as a prime example. With a double net, the tenant could be paying all expenses with the exception of property taxes, for example. It’s that simple.
Conversely, a gross lease requires the owner to pay all variable expenses associated with the property while the tenant agrees to pay a singular rate through the year. In this scenario, fluctuations in taxes or insurance, for example, have no impact on the tenant.
Surely, the safety of knowing exactly what is required each month through the contract provides a sense of comfort for tenants, but for landlords, it gets a bit more complicated when the property is in need of repair or tax or insurance costs creep up.
In this scenario, landlords can consider the cost of property when determining rental cost. With this, monthly rental fees can cover a variety of costs associated with maintaining the property.
These days, real estate investors are increasingly looking to multi-family properties to generate high rates of return. With demand for apartments and similar units on the rise, learning to weather fast market conditions is an imperative to getting the best value for your property.
With years of experience as a commercial broker, I’ve developed three key strategies for maximizing profit when selling real estate in a tight market.
Step One: Be prepared to answer questions.
Prior to listing the property, you want to be informed.
Prepare records from the current year to date, referencing profit, loss, net income and capital expenses. Remove irregularities, such as infrequent need-based repairs, to form a standard income and expense list.
Records should prove that you’ve been able to maintain a steady growth of income — if that’s not the case, you’ll need to be prepared to clearly tell potential buyers why.
Once this step is complete and your offering memorandum and supplemental literature is prepared, it’s time to list the property.
Step Two: Hold an open house.
Talk with tenants and get ready to host an open house after the listing has been out for one week. Let the listing grow interest and don’t take the first, or even the second offer.
I recommend scheduling just one open house during a two-hour time slot. Of course if it’s a larger property, space it out between two days, if necessary.
The value in hosting one open house is immeasurable, in my experience. A large crowd indicates to everyone in attendance that the property has sparked widespread interest and creates a sense of urgency amongst buyers. It’s also important to keep in mind that one open house, as opposed to many, reduces impact on existing tenants.
Keep in mind that this is the prime time to reference details you’ve prepared about the property prior to listing it on the market. If potential buyers have any remaining questions, be sure to get back to them within two to three days with an answer.
Step Three: Call for offers.
Five days after the open house, call potential buyers for an offer. Details about the property are still fresh in their mind and they’ve had some time to think about the investment.
If you’re doing your job right, you should expect to generate between 5 and 15 offers. After that, you’ll just need to make a choice and move forward with the deal.