Is this a good time to buy a commercial real estate property?

Many people ask me this question and the answer is always the same: “You are not buying the whole market. You are buying a specific property in a specific market”. And no matter the market, the most important factors for success remain the same. The correct reasons for buying a commercial income producing property have nothing to do with the local comparable sales like residential real estate investing; they have everything to do with the size of the income and quality of the Tenant along with the lease and terms that go along with the deal.

In commercial investing you are the buying future streams of income that will be produced by the asset. So your success is almost guaranteed if you focus on answering the following questions during your due diligence:

1) How much is the property producing in net income?

2) How safe is the income? (Based on the Tenant)

3) For how long should I expect to receive that income? (Based on the Lease)

4) How much will the financing cost me? (Based on the Bank)

5) How easy will it be for me to keep the property? (Is the lease NNN- do I have deferred maintenance to deal with?)

6) How much positive cash flow will I make?

7) What is the potential for a higher and better use for the property? (Now and in the future?)

8) What other deals are out there? (To have an alternative option for the use of my resources)

9) Will I still have some money left over for cash reserves?

If you know how to go through these questions and based on your training can answer them with a high degree of certainty, then the market in general is absolutely irrelevant.

An untrained person looks at general data like “office space” occupancy levels in a city, and he/she sees that the number of vacancies have increased statistically so he/she panics before even looking at a specific property and who is renting, what is the asking price, what is the potential is etc.

I always say news is how you perceive it based on your mental models.

I find it a lot more predictable and accurate to forecast long streams of income on a commercial property with a quality Tenant who signed a long term lease with specific escalations than trying to speculate on a stock market fundamentals or futures, commodities, currencies, or residential cyclical investing.

What never ceases to amaze me is how little competition there is in commercial real estate worldwide. Most people are untrained and have no business model for this type of safe investing so they lose money in so many other ventures that are unpredictable or cyclical based on general market and political events.

On August 8, 2008, I bought a mix use property. It has 6 vacant apartments on the top levels and a leased space on the ground floor. I bought it because the leased space pays for the entire property. 

I looked at the income first versus the asking price, it looked great. I immediately checked the background of the existing Tenant and reviewed the lease. It all looked great and I couldn’t wait to close on the deal.

The Tenant leasing the space downstairs is a Korean company with millions of dollars in import export transactions yearly. Very solid balance sheet and they paid one full year to the previous owner as a deposit.

I bought the property for $1,900,000.

The Korean company pays $16,000 a month rent NNN (with 3% yearly escalations) and my payment is $13,000. I net $3,000 but I have to pay for the insurance portion and tax portion on the 6 apartments upstairs and they add up to approximately an additional monthly expense including cash reserves $2,000/mo.

I placed no money down, because I got a loan at 85% LTV and gave the bank extra collateral of another property I own with equity. The seller carried 15% note with 7% interest payments and he paid closing costs.

Some of you maybe thinking: All this hassle for just $1,000 a month in income?

There is no hassle whatsoever, this is a NNN lease. Every month I receive the rent directly deposited into my bank account. This reduces my debt, so I am building equity. I have 6 apartments that I can rent approximately $600 a month each (they are rather small but in good condition) if I furnish them I can collect even more. But I prefer to do what the city planning and zoning department has already approved, which is split them into separate units to sell them for approximately $250,000 each.

You probably wonder, is the seller crazy? No. He wanted to sell asap to get into a great mall with his family members. The mall is a $12,000,0000 and has only two Tenants:

Walmart and Walgreens. How about that for solid companies and long term steady increasing income? The cap rate, he said was fantastic and he wanted to go into his deal with the family as quickly as possible so he was extra flexible on our deal.

How do good deals like this happen? It is a matter of training and exposure. The question is: Are you trained? Are you making offers? Are you looking or posting deals on line?

Many people are scared to start their first deal because they want the economy to turn around first! They want everything to be 100% clear before moving forward. That is almost impossible. The picture gets clearer as you advance not the other way around. . Success comes when you start making offers, talking to sellers, looking at incomes, verifying the Tenants capacities and prices of assets.

Let the numbers speak for themselves, and am not talking about the numbers of the whole market or economy in general. That will confuse you and paralyze you. Only amateurs get lost in the generality and the chaos of big numbers. I am talking about a specific property, in a specific market. So be specific, be bold, be good, be rich and be free….

Wishing you the best all the time in any market

Cherif Medawar

ICRE, Founder

An entrepreneur is someone who can start and grow a business or an endeavor to a highly profitable level. The goal is to eventually sell it or pass it along to others as a successful business model that can keep growing and producing more profits and better results.

When an individual starts a business for himself or herself, the three things that could happen are:

1)      They fail and lose the money.

2)      They break even and just survive.

3)      They succeed and make good profits.

In business like it is in life, one needs skill, judgment and luck. No matter the business an entrepreneur starts; the preliminary outcome of failure, breakeven or success is not what determines the ultimate success or failure. It is how that entrepreneur reacts to the business changes and challenges that make all the difference.

Successful entrepreneurs almost always thrive on the challenges they’ve got to face. They have the spirit, the mind, and the energy to keep fighting and adjusting till they reach the level of success needed to stabilize the business and grow it to a higher more productive and profitable level.

Unsuccessful entrepreneurs feel defeated and exhausted when they realize that the challenges will keep coming and the obstacles are often overwhelming. They fail to keep the right attitude to confront and handle the problems of the endeavor they’ve undertaken.

I want to dissect this a bit further based on the initial three outcomes I mentioned above:    

If the business fails:

Successful entrepreneurs take full responsibility for the loss. They study what went wrong and with that valuable information they restart the business maybe in a different location, with better people, better product, different positioning etc. The lessons learned usually add to their arsenal of experience and wisdom to avoid similar failures and they become more cautious and careful in their next endeavors.

Unsuccessful entrepreneurs blame everyone and everything around them. They go out of their way to avoid any other business opportunities because the damage is usually overwhelming. They continue being affected by their loss so long as they refuse to take full responsibility for the failed outcome they experienced.

If the business breaks even and they just survive:

Successful entrepreneurs find a way to take the parts that work and grow them and eliminate the parts that don’t work to be able to take the business to the next level.

Unsuccessful entrepreneurs feel drained because of the daily business routine. They avoid taking any new risk or trying anything different methods out of fear of failure and potential loss. Eventually market will change some more and they get wiped out.

If the business succeeds:

The successful entrepreneur grows the business and expands using the same sound proven principles. He/She realizes that the growth must be monitored and nurtured. Preparing for the worst he/she will economize, keep cash reserves and will be careful not to over extend beyond the market needs.

The unsuccessful entrepreneurs will think good times will last. He/She will spend recklessly and may even make unnecessary changes to the business models that already work. They will not economize and will spend money expanding outside their area of influence and expertise leading to their eventual demise. 

Think of the above scenarios with different businesses. Take investing in real estate for instance. The first deal may be a failure or a break even at best or maybe the person got lucky and made a killer profit. What’s most important however is not the initial outcome but who the investor is and what they will do after the first, second and third deal. Do they have what it takes to really build a successful business out of what they are doing or will they ultimately fail because they don’t have what it takes to succeed.

No matter the endeavor; it is not what you know that determines your success or failure it’s who you are that will dictate your ultimate outcome.

.

Sincerely,

Cherif Medawar

ICRE, Founder

Commercial Lending in today’s market

One of the challenges facing commercial real estate investors in today’s market is finding the right bank to finance their acquisition.

Banks seem illiquid as the Federal Reserves tightened the rules and banks are being more cautious.

Rest assured however that if you have the right deal you can get the financing. So let’s define the right deal in the banks point of view:

1)      A vacant property that has a LOI from a National Tenant with good terms such as a Lease for over 5 years at a competitive rate and a strong guaranty.

2)      An occupied property like an apartment building with a good history of low vacancy and a good condition

3)       A property with a good Tenant that has been paying on time for at least the last two years.

The bank would want to see a down payment and an experienced buyer gives them peace of mind.

What if the above is not the property you have under contract and you need to get financing? Her are your options:

1)      Place a larger down payment

2)      Place more cash reserves in the bank to show them you have the needed funds for the turn around

3)      Give the bank extra collateral, such as another property you currently own.

4)      Just assign the deal

5)      Get a partner

6)      Create an LLC and get a few partners

I would also suggest to talk to a local commercial bank if all else fails, usually they could make exceptions for their own neighborhood and sometimes they run special programs to assist the local community.

Hope this helps the members that are wondering how banks work in today’s market.

Sincerely,

Cherif Medawar

ICRE, Founder
:

Many members heard me say on many occasions: “I want you to think that you will never sell the property. Buy it as if you will hold on to it for ever. One should never sell a good commercial property”. So periodically I get emails from members asking me: “So when do you sell your commercial property?”

 You should consider selling your property if one or more of the following conditions exists: 

1)      The property is too small to manage efficiently 

2)      The area has reached its growth and looks like it is shifting in direction hence growth maybe delayed or avoided for many years to come 

3)      The money/equity can leverage a bigger asset with better lending terms in a more favorable area 

4)      There is a better use for the money somewhere else. 

5)      You need the money for some emergency and cannot access it unless you sell  

6)      The property has become too much of a hassle for the returns 

7)      Area/neighborhood is changing and values are declining with no end in sight  

8)      You received a ridiculously great offer to sell that you probably cannot get such an offer again soon and could use the money elsewhere 

9)      There are some tax incentives making the sale today more profitable than sale in the future  

10)  If you could sell to your corporation to get some added tax advantages or re-start a new depreciation schedule 

In closing, if you must sell consider repositioning the property or upgrading it first, to get the maximum price and always consider reinvesting the money through a 1031 exchange to defer taxes. 

Wishing you the best ROI, 

Cherif Medawar

ICRE, Founder

Study the particular region you want to invest in, and know:

1)      The average selling price,

2)      The average DOM

3)      The average years it takes historically for properties to double in value.

4)      The available inventory sitting on the market for sale 

Once you figured that out, beat the averages by doing the following:

1) Buy below average price,

2) A larger home,

3) Closer to transportation,

4) Near top schools,

5) Where employment growth and businesses are booming

6) Finance it aggressively

7) Rent it for a long term  Buying in these great areas the best deals will ensure properties retain their values in the down times and increase in value at a faster rate in good time.

If you can hold on through at least one cyclical pattern of increase in value, steady prices, and decrease, then increase again, you will benefit a great deal from:

1)      Compounding of value

2)      Reduction of debt

3)      Tax avoidance 

Refinance anytime you can cash out money (non taxable) and have the tenants pay the on going expenses consisting of:

1)      Your monthly debt (principle and interest)

2)      Your property taxes

3)      Your property insurance

4)      Extra money for reserves (repairs and maintenance) 

Wishing you the best long term investing,

Cherif Medawar

ICRE, Founder

1)      Focus first on future streams of income

Figure out the current income and the potential income (called proforma)

2)      Debt must be manageable (low interest locked in for the longest possible term)

Debt is great if it is locked it at a minimum of 2 percentage points below the cap rate

3)      Cash reserves must be available and accessible

This will give you financial peace of mind. You may never need it but it will be there in case of emergencies and/or opportunities.

4)      Rental income must be competitive, guaranteed, escalating and long term.

The income is your oxygen for survival. Once it is guaranteed by a financially strong company and it escalates (preferably yearly) and it is locked in for ten years or so, you can have an element of predictability in your financial life.

5)      Rental income must be hassle free and all inclusive (NNN)

The idea of owning properties is to have leverage not only over your money and finances but over your time and freedom. Having a NNN lease offers you a terrific life style.

6)      Buy below replacement value

This type of investing ensures no matter what you can get your money out with some returns, since anyone trying to build a new and similar property will have to come up with more money, time and effort.

7)      Buy below comp sales and/or rents per square foot

In residential investing the focus is on comparable sales and the short term opportunity there usually comes in from that difference in price to buy below market and sell at market. When it comes to commercial the real long term opportunity is in buying and increasing the income whether by changing the Tenant, improving the property or just simply changing the lease (or a combination of these actions).

8)      Buy a property that could be used for different purposes (easily adaptable)

This concept will help you in the short and long term and will make the property more desirable for more tenants and different uses.

9)      Buy in unique and up-trending areas (preferably with barrier to entry)

Some people mastered that part of the game. They can see where the city is growing or where there is no more growth and the area is bursting with opportunities. Areas such as a downtown of any major city where there is no more room to build is not only profitable for a short term but the long term is incredible. 

 10)  Spend time on the due diligence and analysis of the income and expenses

I always say: Let the numbers speak for themselves. You can be fooled into buying the wrong property if you are listening to a story, but you cannot make a mistake if you are studying the numbers. Once you get good at that part of the game, group consensus or disapproval of your acquisitions will mean very little to you.

Cherif Medawar

ICRE, Founder 

In one of my buildings, a three story property that has commercial retail on first and second floors and a residential apartment on the third.
I separated the deeds by using a good architect who did all the plot plan drawings and had them approved and certified by the city. He then submitted them to the real estate attorney and the attorney wrote and submitted new separate deeds.

When I came to sell that residential apartment on the third floor I faced three challenges.

The first is: Since I was retaining the downstairs units, and the upstairs unit will be owned by someone else, we must create an association to manage and agree on paying for the on going expenses. This is not too complicated as you simply sit down and figure out what would be the on going expenses: such as the light in the common area stairwell, the cleaning of the stairs once a week, the painting of the building once every few years, the fire insurance once a year, some reserves money for roof or other repairs etc.

I asked the attorney handling the paper work for the sale to include a request for a deposit for the association that we are creating to manage the building and the buyers had to place some money in there on the closing date, matching the amount I also placed there. This way we could have funds from the get go and can meet quarterly (by phone) to discuss what expenses we would agree to pay that quarter. If more frequent communication would be needed we agreed to do it by phone and email.

The second is: I had to get a new appraisal for the first and second floors (the section that I was keeping). The bank would want to know the new value since they would have to discuss with me how much I should keep from the selling price of the residential unit and how much I should give them to pay down the existing loan. The collateral on the original loan was for the whole building (three floors).

Since when I bought the building it was vacant and now I have a great Tenant with a long term lease and guarantees on the first two floors. The value of the commercial spaces increased to an acceptable level for the bank to allow me to move the collateral to the first two floors and cash out the full amount of sale of the residential unit.

The third is: I had to pay minimum taxes on that sale so when I was asked to allocate my cost basis for each section that was separated by a new deed, I placed a higher value for the third floor unit I was selling and a lower cost basis for the two floors I was keeping. This helped my legally to reduce and almost eliminate my taxes and if I ever sell the downstairs units I will then show a higher profit. I have no intention to sell the downstairs and if I do I will use the 1031 exchange method to defer my taxes by acquiring another property of equal or higher value and defer my taxable gains to a later date.

I have bought several commercial buildings with these set ups where you can split a portion and sell it and I find this strategy extremely profitable to end up with more money than you started with and a great portion of the building that produces positive cash flow for years to come.

Cherif Medawar
ICRE, Founder

I bought a mix-use property that has a restaurant on the ground floor and several floors of office space above.

The office spaces were rented (a long term lease) to a large engineering company that had been there for years, had great credit and intends to be there for more than 10 additional years.

The ground floor restaurant’s lease had expired and the previous owner refused to renew that lease to allow the new owner to negotiate whatever price and terms he/she desires.

So the restaurant people were on a month to month basis, paying the old monthly rent of $3,500. This was grossly under market.

Realizing that the restaurant Tenant had a space of over 5000 sq ft that could easily rent in that location for $6,000 a month, I was excited about the upside.

The deal confidential, so immediately after closing, I finally had the chance to sit down with the restaurant owners, a nice couple who worked hard all their life. I explained to them that the new lease would be $6,000 a month and they were so surprised, they were speachless.

I do not usually deal with small Tenants, but this property was an exceptional deal in a terrific location. The loan was assumable, the office space rent alone was bringing me a nice cash flow and the restaurant rent was going to be all profit.

The restaurant owners explained to me that they had purchased the restaurant business in that location a couple of years ago, thinking that the rent wont change for a long time. They thought if the rent would go up it will only be 3% or 5% excalation. They never expected it to jump from $3,500 a month to $6,000 a $2,500 increase.

They showed me how they always paid on time, they said they understood my point of view but felt it was unfair to bring the lease to market value because it would hurt their business and bottom line a great deal.

I know that no one likes to pay more, and although I knew I could get another Tenant easily and quickly in that location, but I did not feel good letting these hard working people go and cause them to lose the money they had paid to acquire the business a couple of years earlier.

I told them I had to leave and will meet again the next day with them. I was a bit frustrated. The increase of $2,500 was to bring the lease income to market value. It’s a big space. Any new owner would do the same thing. The previous owner would have done it as well but he wanted to sell.

This increase would add up to $30,000 a year additional rent and it would raise the value of my new property by an additional $300,000 to $400,000. I could refinance and cash out $250,000 plus. Problem is, I was not excited about it because I felt I would be hurting the small mom and pop Tenants.

When I left the meeting that evening, wen were all concerned about the outcome. I told them to look at my new contract overnight (The lease refelected a new amount: $6,000/ month starting the following month and not $3,500). I promised them that I will try to come up with something creative like no increase in rent for 3 years or 5 years but wasn’t sure yet what my compromise would be.

I know from experience that when I reach an impasse during any negotiation, it’s better to wlak away, refelect of what creative ways we can come up with to make everyone acceopt the deal.
I thought about the dea and went to sleep that night. The next morning, I had a compromise. You would be amazed of the ideas that can come to you in real estate when you have the right training, support and attitude about these challenges and opportunities.

I went back to the restaurant Tenants and asked them if they would prefer to have their rent increased by only $500/month and make it $4,000 instead of $6,000? They listened intently: I proposed to take one of the entrance doors and separate it from the restaurant by erecting a wall that can divide/separate the spaces and create a small store for another Tenant on the side. That new space could easily be rented to another Tenant that can also sahre some of their utility cost. They loved the idea. They get to keep most of the space anyway and the rent increase is almost of offset by having a Tenant next door that can pay for their pro-rated share of unitlty expense.

They were so excited about the idea, they put me in touch with their contractor (a family member they knew well). He gave me a very reasonable bid to get the separation done within three weeks.

What’s more exciting is I changed their lease price and terms that afternoon and we signed a long term lease.

I advertised the new space with a sign on the building and an ad on the internet. I already have a Tenant committed to the space for $2,500/mo and a long term lease. It is a Jewelry company that wanted a small location to sell one new line of Jewelry they have from Spain.

I am so excited, the restaurant Tenant feels that my purchasing of the building has been a blessing to them and the Jewelry store are haooy with the opprtunity to display a one line item in that small space and we have a win, win , win.

Bets of all, not only have I gotten two great Tenants with long term leases, but instead of collecting $6,000 a month from just one, I now have $4,000 from the restaurant and $2,500 from the Jewelry boutique for a total of $6,500. This is more than I was hoping for and the property value now should increase by over $400,000, all due some creative thinking and an effort to be fair.

Now that’s great business.

Cherif Medawar
Founder, ICRE

When I was a kid I wanted time to go fast because I wanted to be a grown up

When I went to school I couldn’t wait to graduate and get busy making the big money, I wanted time to go faster.

When I fell in love, I wanted the relationship to move forward as fast as possible so I can get to know this wonderful person. She soon became my wife and best friend.

When I started investing, I saw that residential properties could double in value every 10 to 15 yrs depending on the economy and the location, so I wanted time to go even faster so I can pay down my debt and grow my net worth

But, when I finally got into commercial real estate and started understanding and applying the concepts that I eventually patented, I realized that I can finally slow down and enjoy life. Concepts such as taking a property to its highest and best use and by doing so I increase the property’s value dramatically and instantly. Or bringing a Tenant with a great credit and signing a long term lease with steady escalations and a strong guaranty.

These and other great concepts created a dramatic increase in my net worth and a growing positive cash flow. But most importantly it gave me financial peace of mind.

It’s a great feeling to know that you have a steady growing income, assets that are safe, tax deductions, no management hassles, and no exposure to liability, and best of all no problems passing the wealth through to your loved ones.

I say to you: “There is more to life than increasing its speed”. There is living and feeling alive. You must learn to accept and enjoy life’s challenges and opportunities as they come. Life is a game and the winners are those who know, accept and play by the rules.

Once you get trained in commercial real estate, you become more effective in your judgment and less effort produces more results.  

Many people told me that they started to enjoy life a lot more once they gained control of their finances. It allowed them more free time, better relationships and increased health and vitality.

My goal is to continue inspiring and empowering the members of the Institute of commercial real estate to reach a level of financial freedom and peace of mind. A level of success that compels people to count their blessings by giving back, contributing more and living life to its fullest.

That feeling is achieved when you are able to enjoy the abundance around you, grow and give back by contributing to others. Now that’s living!

How can you as a member figure out your confidence level, comfort zone and investing style, to achieve your financial goals without leaving your margin of safety?

There are mainly three types of investors:

The conservative-The moderate-The aggressive

And there are three ways to invest in real estate:

Buy nothing (just assign your contracts and deals to receive an assignment or finders fee)     

Buy and sell (do partnerships and split profits with members who bring money or credit)

Buy and hold (get loans-Either bridge loans and refinance or permanent loans at good terms)

Once you understand that, the lack of resources becomes less of an obstacle:

No Money-No Credit-No Time-No energy is no problem.

Choosing the right strategies and being resourceful become the keys to making it big in commercial real estate investing:

Knowledge, Training, Support and Network are necessary for your success.

I founded the ICRE to offer the resources that each member needs to succeed in this business:

We start with a three days live training to make certain everyone is clear on my patented system of how to Find, Analyze, Control, Time and Strategize.

Members are given access to the tools they need to conduct their business successfully. The legal forms, contracts, leases etc. are made available to everyone.  

The training is followed by a full year of access to our expert team of support advisors. We also offer financial conventions and an on line platform on ICRE’s proprietary website for all members to network together and share and/or offer deals to one another.

“It is not in the speed with which you move, it’s in the certainty with which you advance” that has been my motto since day one. You see, it does not take 100 deals for you to be rich, in commercial real state, a hand full of well selected properties, can set you free for life. You do not need to go outside your comfort zone or get involved in transactions over your head, as a member, you need to focus on increasing your knowledge, your safety margin and your contacts.

Use the resources of the Institute of Commercial Real Estate and walk your way to wealth with certainty and confidence.

Wishing you the best as ever,

Cherif Medawar

Founder of ICRE