Commercial Investors and the Time Value of Money (TVM)

There are 4 elements of the Time Value of Money that all commercial investors want to look at and evaluate before making a decision to buy a property. A Cash Flow Model is one of the main tools that investors will use in this process.

The 4 elements of a Cash Flow Model:

  • Initial Investment
  • Cash Flow from Operations
  • Cash Flow from Disposition
  • Holding Period
The Cash Flow Model helps to make this decision

Initial Investment: This includes more than just the down payment but other items as well. If the investor is leveraging the property the question of what will the banks require as a down payment and are there any loan fees or points to pay? Appraisal fees – tests on the property as well as any structural concerns – brokerage fees. All of these items and maybe even more will make up the initial out of pocket money in the initial investment.

Cash Flow from Operations: What is the NOI (net operating Income) projected over the anticipated holding period of the property? This calls for a lot of speculation as you look out 5 or 10 years in the future. These projections require a lot of analyzing of the current local market as well as national market. Historical data also needs to be studied.

Cash Flow from Disposition: Again this calls for the investor to look out into the future and try to anticipate a sales price less any additional costs such as commissions – surveys – closing fees – etc. While it is not an exact science generally if you spend enough time evaluating income growth (NOI)from year to year you can come to realistic projections.

Holding Period: When will be the best time to sell the property and get his/her investment back an maximize profit? By working up a cash flow analysis worksheet by year you can evaluate just what year might be the best time to sell the property and get the best return. Again the more time and effort spent projecting future cash flows the easier it becomes to identify the best time to sell

When an investor is evaluating a single property or multiple properties they generally will have two basic preferences: 1.More is better than less. 2. Sooner is better than later. By providing investors with this kind of information you will help them make good buying decisions and provide you with good repeat business and referrals.

 

 

Small residential and commercial neighborhoods the new wave

Looking to the future, it seems  like small residential and commercial neighborhoods are the wave of the future. In the early part of the 1900’s, before the automobile became king, people had to walk in order to do their shopping. During the first half of the 20th century the A & P Markets were the largest retailer in the county. There was a small A & P in every neighborhood that served the local community. A & P along with the community shopping areas went by the wayside, in favor of freeways and big shopping malls.

Back to the future. There seems to be a new trend that keeps showing up across the country and it is starting to take hold. New development and developers are starting to realize that the new generation wants to move back to that kind of environment – updated. Residential high-rise apartments and condos are being built in areas along with small retail space and restaurants within an easy walking distance. In some areas office space is even being incorporated into the development plan. In the December issue of the CCIM Commercial Investment Magazine in an article titled “Apartment Hunters” there is a section that talks about the Tenant of the Future.

Small Residential / Commercial Shopping areas

It talks about Generation Y and what they are looking for in housing and lifestyle. It talks about how they want to live work and shop all within walking distance. Smaller seems to be better and they want small homes, smaller families and smaller shopping. There is a trend for people of this generation to want to shop for fresh food every day and they would like to walk down the street and talk with their neighbors while they do it. I have heard rumors that both Wal Mart and Shopko are looking at building smaller stores in an effort to reach out to smaller market areas.

Downtown Salt Lake City is a good example on a larger scale. During the last 10 plus years the downtown area of SLC has gone through this type of change. A new light rail system goes right up Main Street and travels south to other communities along the Wasatch front. It also connects the airport and east to the university. Redevelopment of the surrounding area brought in high-rise apartments/condos and new office space. Complete renovation of 2 old and tired shopping malls now includes a super market. Yes there are large stores in the malls but the concept is the same and targets the Generation Y folks.

What about us Boomers? It may be too early to tell. We still like our space and our things. A car is the only way to get around and we like to go to Costco and buy for a month. We have homes stuffed with things that we have collected over the years and really are not ready to give them up. But I think that even the boomers, as they mature, will embrace this new lifestyle. As they have to park the car and down size they will look more and more to this kind of living.

 

Commercial vs the Residential Buyer – Why do they buy?

The commercial buyer and the residential buyer buy property with a totally different mind set. For many years, before expanding my business into commercial real estate, I was a residential agent. It was always a mystery to me why people would tell you one set of wants and end up buying something very different. In many cases the buyers would buy from curb appeal. The home didn’t need all of the features that were mentioned they just liked the way it looked. I am a slow learner and it took me a number years to discover that people wanting to buy a home are generally very emotional about it. They want and ask for the moon but I believe that most of the time they want something they can be proud to own – It all starts with the outside – curb appeal.

Apartments with great cap rates
My apartment investments

The commercial buyer on the other hand just looks at the numbers. If they are buying an investment property they want to start by looking at the income and overall expenses. What is the potential return and how soon can I receive it. If the property needs upgrading how much will it cost and how soon. The land investor is not looking for cash flow but for appreciation. He/she is gambling on the value increasing over time. This type of investor is looking for a more passive investment – no rent collecting. While a developer is a land buyer he/she generally want to look at adding value and making their profit through the new product. This is all about numbers – very little curb appeal involved. Which buyer is the easiest to work with? Once you figure out that you may be getting only part of the story they can both be a challenge and a lot of fun.

Commercial 3 and 4 letter words – No not that kind

Knowing and using the 3 and 4 Letter words. Today with all of the electronic devises there is a trend towards abbreviations using capital letters instead of full names. The government has been doing this for years with names like IRS, POTUS, FBI, TSA – You get the idea. Commercial real estate is no exception and unless you are using these every day you can become lost. Things like GRM, NOI, IRR, NPV, DCF, IRR plus many more will keep your head spinning. These are some of the more common ones but there are many more out there and it is a real challenge to keep up and remember them all. Web photos and graphs I was going through a list the other day and realized that about 1/3 of the abbreviations used in the commercial business I have never used or really had the need. That doesn’t mean that I won’t need them tomorrow.

It is a jungle out there! It is not enough to know what the letters stand for but what do they mean and when and how to use them. I won’t attempt to go over all of the ones listed above but an example would be – GRM (Gross Rent Multiplier) – is easy to calculate (gross revenue divided by asking price) but then you also need to know how to interpret the answer. Being informed about commercial real estate will allow a residential agent the opportunity to expand his or her business to include commercial property and increase their income.

 

Commercial listings – A way to increase your income

Residential agents can increase their income selling commercial property

If you are normal you are always looking for a way to increase your income. Selling or listing commercial property in your area might be just what you have been looking for. Generally a commercial real estate agent will work for a major company or one that deals with just commercial listings. Most of the time they like to deal with larger – high dollar properties. These properties are more complex and sometimes more difficult to deal with but they also pay a higher commission. That allows residential agents the opportunity to handle the smaller properties.

Just 10 minutes a day

One of the ways to get started is to find out just what is out there. Your local MLS is a good place to start. While most commercial agents do not list property across the MLS there are still a lot of properties on there that have been listed by residential agents. These agents are looking for help in getting this listings sold and that is where you come in. Take 10 minutes a day to search any new commercial listings on the MLS.  Call the listing agent to get any additional information about the property (see below). Whether residential or commercial, knowledge about the property and the market is very important. In most cases you will not have a need for that information today but over time a client will ask about commercial property. It is far better and you look more professional if you have knowledge about the market at your finger tips.

Questions to ask a seller about a property

Physical:

  1. Size of property – Acreage
  2. Size of structure and makeup (# of units or amount of office vs warehouse space)
  3. Age of structure- Any remolds or upgrades and when – Overall condition.
  4. Any special features or problem areas
  5. Parking – Number of stalls – Access
  6. Zoning – permitted or non-conforming use – Any restrictions
  7. Utilities
  8. Power – Size and capacity
  9. Sewer – Type
  10. Water – Public or private

 

Financial:

 

  1. Price
  2. Current loan balance – Terms – Any seconds
  3. Any seller financing
  4. How long has seller owned the property
  5. Reason for selling
  6. Leases (if any) – Number – Terms – NNN or Gross
  7. Utilities – Annual cost
  8. Property taxes
  9. Other operating expenses
  10. Investment Property
  11. One to 5 years of Gross income and expenses
  12. NOI – Net Operating Income (need this to figure a CAP rate)

 

Add Commercial Real Estate Sales and Increase Your Income

silhouette_city_home_01
Add Commercial Real Estate Sales

Add commercial real estate sales to increase your income. In some of the small or medium markets there is a need for a local residential agent to expand into the commercial side of the business. A lot of agents are reluctant to move in this direction because of a lack of knowledge and experience. Knowledge comes from taking the time to study the area you cover and become aware of the commercial transaction in the area. You will need to spend time reading industry magazine articles – learn the terms used in commercial transactions. There are many organization that deal with different elements of the commercial real estate business that are a great source of information. The Urban Land Institute (ULI) http://www.uli.org/  and the Certified Commercial Investment Member (CCIM) http://www.ccim.com/  are just two of many that you might look into for information.

Experience comes from just doing. When you first started in residential real estate you did not have any experience either. You get experience by just jumping in. You will certainly want to gather as much knowledge as you can before you start but sometimes the best knowledge come from just doing and maybe making a few mistakes along the way. Don’t be afraid to take on a mentor when you first start out to help you along.

Adding commercial real estate sales can increase your income but there are some potential pitfalls that you want to be aware. As a rule a commercial transaction will take much longer from start to finish. Even if you are an experienced agent they take longer than a residential transaction. The flip side is that generally they pay a higher commission because of the higher price. The type of buyer is also different. The residential buy will buy from emotion. They like the home, the school district or the neighborhood. The commercial/investor will look at the neighborhood and demographics but for the most part he/she will analyze deals strictly by the numbers. Just like putting money into the stock market he wants to get a return on that investment money.