When you’re first starting out as an investor, there are lots to learn and there are lots of mistakes to be made. Small property mistakes usually equals small pains. That’s why it’s smart to start off with a small cash flow property. But is very important is to understand the commercial investing industry “slang” and to be able to figure out deal listings on Loopnet.
I shared with you Part 1 of “8 Commercial Real Estate Terms Investors Should Know” on my previous blog so you will have all the right information you will need to make an offer on an apartment or commercial investment deal. Below are the remaining 4 of the commercial investing terms investors should know for doing real estate investing deals.
8 Commercial Investing Real Estate Terms
5. Price Per Unit
This term is at the heart of where to start in determining what a property is worth and also what to offer when you’re considering buying a property. At the heart of knowing how much you’re going to pay for the property is basically the price per unit and price per square foot. Let me define that. Price per unit, we usually used that for apartments, right? If you have a $500,000, let me get my calculator here and make sure I do the math correctly. If you have a $500,000 apartment building and you have 10 units in it, that’s $50,000 a unit. Price per unit.
Price Per Square Footage
You would do the same calculation on the square footage. Okay. We used price per square foot in office buildings and retail centers, industrial, things like that, but we tend to use price per unit or price per door for apartments. Here’s why it’s important to know, right? If you want to know how to gauge your offer price, where to start, you need to know price per unit or price per square foot. If you want to make sure you don’t over pay for your deal, you need to know price per unit and price per square foot. How do you know a seller’s asking price if it’s realistic? How do you know? You will know that if you understood price per unit and price per square foot. You see, price per unit and price per square foot are stamped on to your neighborhood, onto your market, right?
It’s going to be different if you go downtown, if you live in a suburbs. You must know what the price per unit or price per square foot of where you invest. Okay, got it? Knowing this price per unit figure and the price per square foot is how you’ll know quickly if you have good deal or not to wholesale commercial properties.
6. Building Classification
What I mean by building classification is you ever heard of a class building, b class building and c class? That’s the classification, that’s the box that we put properties into. I'll give you a quick briefing on class A, B, and C commerical type of properties:
A class A building represents the newest and highest quality, the best location, highest rents. They attract the highest quality tenants. It’s just a beautiful building in a beautiful neighborhood, right? The most expensive thing. B class is a next step down.
Class B buildings are usually a little odor, but they’re still good qualities. They’re good buildings. Oftentimes value added investors target these types of buildings as investments since well-located class B buildings can be returned to their A class glory, right? Here’s your goal. Your goal is to find a B class building in an A class neighborhood and then you will renovate that building to get that A class rents. That’s your goal.
Let’s go to C class. C class is the lowest official classification and the buildings are odor. You’ll find section 8 tenants in them. They’ll be subsidized buildings. There’ll be odor. They’re built in the ’80s and back, right? If you are an apartment investor, these days today class C is the way to go because the ratio between the price per unit and the rents are still good.
All right, so there’s another class. It’s called a class D, D as in dog. It’s not an official class, but some buildings do fall in the class and I want you to stay away from them because they need extensive renovation. A lot of them are vacant buildings and it’s not for the beginner, right?
The class D are for experts who have deep pockets, okay? If you’re a beginner, don’t even consider a class D building.
Which Class is For You?
Now another thing on class A, B, and C and in terms of who would buy them. For a class A, if you’re a beginner investor, don’t play here, right? Too high price, low returns and you get steep competition from the institutional buyers and the real estate funds. They’re okay with the low returns, right? They can pay all cash. Now class B beginning investors have good opportunities with class B. It’s where I recommend you start, right? Probably the most stable property, probably in a decent neighborhood, right? It’s probably the best place to start.
Class C, beginning investors can experience the highest returns here, right? It’s also the riskiest, right? The majority of commercial properties in the US are C class majority. There will always be C class opportunities, always. All right? Because you can’t build new C class properties, right? Too expensive to build. You couldn’t afford to pay for the building with the C class rents, right? B and C is where you want to play as a beginner, B and C. Do not mess with A. Do not mess with D.
7. Types of Leases
Imagine your heart and a major blood vessel is coming out, the arteries, right? If the heart is the property, then the leases are the arteries. Leases are the lifeline. They’re the life blood of a commercial property. Leases are written legal agreements between the property owner and tenant. Let me discuss with you the several types of leases.
We have one year lease, we have 9-month lease. We have month to month leases. They’re all written by our attorney. Okay, so they’re really, really strong leases. Why are they strong? Because you are in the income business. What gives you the right to collect rent and evict people? If you don’t have a strong legal instrument, a legal agreement, your tenants can just mess around and play with you and stay in your apartments rent free without paying rent. Okay, so the leases are really, really important.
Office Buildings and Shopping Centers
Now in office buildings and in shopping centers, we have this 3 types of leases. We have the full service lease where the landlord pays for everything. We have the triple net lease where the tenant pays for everything. Then we had a modified gross lease where it’s halfway between the full service and the triple net lease. Again, I go into much more detail in the type of leases in my other videos, but I’m not going to do that today. I’m going to reiterate why you should really understand the type of leases you’re getting into. Because again, leases are the lifeblood of any commercial real estate investment. I took a class and it was a long class. It was really tough class. It was inbred into us that the lease agreement is so important it’s as if you’re buying the building for free and you’re paying for the leases. If I bought a $2 million commercial property, the building is free when I’m buying out the leases. That’s how important it is.
Bonus Term: 8. Relationships
I have a bonus term I want to share with you. This is probably the most important term of all, right? This term will help you get the best deals. It will convince the seller to work with you instead of others. It will help you work with their broker that will send you his or her off market deals. You want to know what the answer is? The answer is commercial real estate is a relationship based business. The answer is relationships. That’s the bonus term. That’s number 8.
This is probably the most important term of them all. You see, none of these terms matter if you don’t get this part. Here’s the bottom line question. Who do you think will get you the best deals or what do you think will get you the best deals, knowing terms or knowing people, right? What will convince a seller to work with you instead of others, knowing terms or understanding the needs and motivations and building rapport of the seller, right? There’s a saying that you probably heard. “No one cares how much you know until they know how much you care.” Okay? That is so true in commercial real estate and I’ll repeat it. “No one cares how much you know until they know how much you care.”
That goes with commercial property owners, that goes with brokers, all right? Study the terms and know them, but I want you to start with the relationship first. Commercial real estate is a relationship based business. I want you to build relationships with brokers, with sellers, with mentors, and other successful people. That’s where success happens first.