Tips You Need to Know Before Investing in Commercial Real Estate

partnership-526413_1920Most people start their real estate career investing in residential properties. Some eventually look to commercial investing because it is much more profitable. Before you jump into commercial real estate there is very different information you need and a different approach compared to residential investing.

Six Tips to Get You Started in Commercial Real Estate

  1. Commercial real estate is valued differently than residential. Residential properties derive their value based on recent comparable sales of similar properties in the neighborhood. The value of commercial property is determined based on cash flow. Two buildings, each with 6,000 square feet and located on the same downtown block will have different asking prices. A single tenant small grocery store will have less cash flow than a four tenant office building for attorneys and CPAs.
  2. Market and sector knowledge is critical to your success. If you have personal knowledge about a particular commercial sector, stay with that sector. If you have no knowledge about a sector, gain the knowledge you need before investing. Even if you’re only the landlord, you don’t want to invest in a hotel if you don’t know anything about the hospitality industry. Same thing with the manufacturing sector. You don’t want to own an industrial strip if you don’t know the best use of the property to maximize cash flow.
  3. Different formulas are used in commercial real estate investing. Along with sector knowledge, you need to learn new profit and loss formulas before investing in commercial properties. In residential you may have only bought properties for 75% of after repair market value or rentals that cash flowed 20% above expenses. In commercial real estate, you need to understand cap rates, net operating income, and loan to value ratios. They’re not difficult but you need to fully understand what each means and how they affect your profitability.
  4. Patience is a virtue when investing in commercial real estate. You don’t always want to invest in whatever is currently on the market just because you have the money. First, you want to determine what you want to invest in based on tip 2 above. Next, build a network of professionals involved in the type of investment you want to make. Finally, wait for the right property to come along at the right price based on the formulas in tip 3.
  5. Consider the long term impacts before investing. Beside the immediate cash flow, you need to understand what is likely to happen to commercial real estate in the surrounding area in the coming years. Is it located in a city where the core infrastructure has been neglected for years? If so, businesses will slowly begin locating elsewhere in the years ahead. Look at things such as a major employer in the area struggling financially and it’s becoming questionable if they will survive. Look at the tax base of the community. Has it consistently been declining along with associated services?
  6. Don’t put all of your eggs in one basket. If you’ve had success as a residential investor, keep some on your holdings in residential. The commercial and residential sectors don’t always run in the same business cycle. Whether investing in stocks and bonds or real estate, smart investors always strive for a diversified portfolio.

Commercial real estate is a great way to invest to become wealthy and can provide a passive income stream for retirement. Following these commercial investing tips and building a strong network greatly increases your chances at success.

Author: Brian Kline

Original article can be viewed at: http://realtybiznews.com/tips-you-need-to-know-before-investing-in-commercial-real-estate-2/98730348/

Guest Blog: Commercial Leases – Reading them may be painful but not reading them can be worse

Commercial Leases - Hollywood FloridaIn all the years I’ve represented Landlords and Tenants it never ceases to amaze me how few Tenants actually understand what’s in their lease. While I can’t really address every issue that I think a Tenant should pay attention to here, I would point out a few of what I consider to be the most important:

  1. Operating Expenses – Most leases require a Tenant to reimburse for some portion of Operating Expenses.  Understanding how that term is defined is critically important.  Some leases include “management fees” or may include capital expenditures.  You’ll want to try to negotiate a cap on Operating Expenses and/or limit them to items outside of the Landlord’s control.
  2. Relocation Rights – Leases often provide that a Landlord has a right to move a tenant to another location.  We recommend that this be limited, removed or that at least the Tenant have a right to terminate.
  3. Personal Guaranties – Personal Guaranties don’t necessarily have to cover the entire lease term.  Try limiting it to a number of months or to a maximum number to bring certainty to potential downside.
  4. Renewals – Avoid renewal provisions that don’t have clearly defined rent or clearly defined mechanisms for calculating rent.  The uncertainty regarding renewal rent may effectively leave a Tenant with a renewal option that really isn’t much an option at all.
  5. Assignment and Subletting – Consider negotiating this to be subject to Landlord’s reasonable discretion instead of their unfettered discretion.

The best advice that I would give someone preparing to sign a long term lease is to seek the advice of a competent and experienced real estate attorney.  The value that his/her advice can bring you will dwarf the cost over the long term of your lease.


Eric A. Jacobs is a partner with the real estate focused law firm Nexterra Law.  Eric serves clients through the State of Florida on all matters relating to real estate including litigation.  The above is intended  for informational purposes only and is not intended to constitute legal advice.

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July Real Estate Humor

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June Real Estate Humor

March 2015 Landlord Tip

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Forms are Your Friends

The Internet abounds with sample contracts. Use them. The more you detail at the outset, the smoother your rental will run. One blogger uses the example of a renter trying to pay for a month with quarters. Not what you want? If you spell out your preferred payment method in advance, then you don’t have to worry. And if something should go wrong, such as a late payment, you can point to the contract that stipulates the renter owes a penalty fee.

May Real Estate Humor

Landlord Tip of the Month: March

landlord-tipWhen tenant is moving out, do your final inspection within 2 days after property is vacated. Only then send a refund check to the new forwarding address for the remaining deposit less any cleaning, damages, repairs, etc. You should almost always deduct at least enough for a professional cleaning of the property.

Memorial Cancer Institute Partners with Addario Foundation to Improve Standard of Care for Lung Cancer Patients

Bonnie J. Addario Lung Cancer FoundationBonnie J. Addario Lung Cancer Foundation designates Memorial Cancer Institute in Hollywood, Florida, as a 360 Community Hospital Center of Excellence

The Bonnie J. Addario Lung Cancer Foundation (ALCF) announced today the addition of Memorial Cancer Institute (MCI) in Hollywood, Florida, a part of Memorial Healthcare Systems, to its 360 Community Hospital Centers of Excellence Program, which aims to improve individualized standard of care for lung cancer patients in the community hospital setting.

The Memorial Cancer Institute in Hollywood, Florida is the first community hospital in the nation selected to the program, after the Foundation’s successful pilot program at El Camino Hospital in Mountain View, California concluded last year.

Read more here: http://www.fortmilltimes.com/2014/03/24/3369227/memorial-cancer-institute-partners.html

Tried and True Tips on Thriving in Commercial Real Estate Investing

The most beautiful property could be a part of the worst real estate investment you’ve ever made. Remember that commercial real estate investing is all about the deal, the terms, and the return on investment. Here are some tips for successful commercial real estate investing:

  • Be an investor instead of an accumulator of commercial properties. The whole idea of making investments is to produce an income or a profit. So, if you buy a property that produces no income or profit, you really just acquired a property (instead of making an investment).
  • Understand that every property has a lifetime. One of the biggest mistakes you can make as an investor is to ignore the fact that over time, you’ll have to spend money on the upkeep of the building. The building may need a new roof, and the electrical system may need to be updated. Every building goes through these phases; some more so than others. So make sure you have a long-term plan to handle such repairs.
  • Focus on one investment type at a time. Especially when you’re first starting out, you should focus on one type of investment: apartments, offices, retail, land, or whatever. Each deal needs and deserves your undivided attention. It’s better to be master of one than average over many. And who wants average-performing properties anyway?
  • Consider environmental problems. A huge potential concern when owning commercial property is hazardous waste problems. Property owners have the primary responsibility for fixing such problems, even if the current property owner didn’t cause them.If at some point you held an ownership interest in a property, you’re potentially responsible for paying for the cleanup of it. The costs for an environmental cleanup and disposal can run into the millions of dollars. Obtain an environmental report from environmental assessment companies as part of your due diligence if needed. The reports cost a bit, but it can save you even more.
  • Get a mentor so you can learn from his or her mistakes. Mentors can save you from making huge mistakes, identify when you’ve missed due diligence items, and connect you with resources that you otherwise wouldn’t have immediate access to.
  • Determine whether you and your assets are adequately protected. Unfortunately, as life happens, so do lawsuits. That means you need to do everything you can to protect yourself. Ask yourself the following questions to determine whether you’re protected:• What do you have at stake if you lose a lawsuit?

    • How is your property protected?

    • Is your personal property (for example, your home) protected?

    • Are your other investments totally separate from each other so that one lawsuit doesn’t affect the other investments?

    Don’t guess when it comes to the answers to these questions. Talk to a lawyer to ensure that you’re protected if you’re sued.

  • If you’re in a partnership deal, do your best to finance your deal with a non-recourse loan. Non-recourse means that you aren’t personally guaranteeing the loan. This gives you two distinct advantages: it allows you to be taken off the loan if the partnership goes sour and, if the property fails, it won’t be tied to you personally.

Landlord Tip: Don’t overlook niche markets.

For instance, by making your door openings 36-inches wide and installing grab bars and a ramp, you can rent to people in wheelchairs. It’s a great way to do some good — and you’ll always have tenants.