I typically try to avoid anything close to a rant, but I had an extremely frustrating day that was due entirely to one of my clients not reading their loan documents.  They had purchased this property and signed these loan docs quite a few years before I met them.  It seems that they didn't read them when the signed them, and they definitely hadn't read them anytime since.  When you are searching for a loan, especially a commercial mortgage, it is imperative to read your loan docs!  I know that many investors are only interested in the interest rate, but there are several other mortgage clauses that can greatly impact the profitability of your investment over the long term.  Here are just a few things to think about the next time you're shopping for a loan: Interest rate: This one is us... 01/11/2011

As I mentioned in an earlier post, there are lots of terms used by commercial real estate investors that often confuse or intimidate novice investors.  I promised to define some of these terms in occasional blog posts.  Well today is your lucky day, because I decided to define four related terms: Core, Core Plus, Value Add, and Opportunistic.  These are the four investment strategies, and most commercial real estate investors will focus one or two of these strategies when investing.  Core:These are fully stabilized properties with credit quality tenants on long term leases.  These investments are well located in primary and secondary markets.  Usually these properties are purchased by institutional investors that are looking for a a safe reliable return.  Core investments in commercial ... 01/10/2011

I'm often asked the question, "Don't all commercial real estate agents do the same thing?"  This question usually comes from someone who is thinking about hiring their brother in law, cousin, family friend, or random acquaintance to sell their commercial real estate.  Many sellers assume that all you have to do is put the property online, put a sign up, and put some adds in the paper, and their property will sell.  Clearly if this was the case, any old commercial real estate agent would do.  Unfortunately it is not the case, and therefore, sellers shouldn't just use the first commercial real estate agent that they meet.  Here is a list of a few things that you should expect from a professional commercial agent Online Advertising:Of course almost all agents will list your property on the... 01/08/2011

In my post about calculating IRR, I promised to come back to the subject of making projections.  Like many other aspects of buying commercial real estate, making projections is more of an art than a science.  A friend of mine who works at a private equity firm likes to say, "All financial projections have one thing in common; they are all wrong!"  His point is that despite the complex math involved, all acquisition models involve some, and often several, guesses or assumptions about the future.  Some of these guesses are conscious, and some are not.  For instance, in my example of the small retail property in downtown Reading, PA, we guessed that we could get a commercial mortgage at a 6.5% interest rate.  This assumption was made consciously.  We also assumed that the tenant would stay... 01/07/2011

I spend a lot of time blogging about commercial real estate investing, but a friend of mine mentioned to me today that I don't spend enough time talking about leasing commercial space.  So I've decided to write at least one post about leasing each week.  Today, I'm simply going to introduce 8 basic clauses that are necessary to understand if you're interested in leasing commercial property in Reading, PA.  I'll try to go into more detail on each in future blog posts. Base Rent- This is the most heavily negotiated points.  Those of you who have studied negotiating probably understand the importance of a BATNA (Best Alternative To a Negotiated Agreement), and this is one area where a commercial agent can be very helpful.  If you are negotiating your Base Rent, but you don't know what the ... 01/06/2011

I was speaking with a group of real estate investors in Reading, PA yesterday.  Most of them are involved in commercial real estate, but one of them was just starting of in residential investing.  I guess this doesn't happen too often, because our discussion made me realize that there is really a whole separate language used in commercial real estate.  I'm not talking about technical terms like NOI, Cap Rate, DSCR, and IRR.  Those terms are obvious, but some of the slang that is thrown around is what I've never really noticed.  The one that stuck out to me yesterday was 'The Four Major Food Groups'. When one of the commercial investors said, "I look at all four food groups, and sometimes hotels", it was obvious that the novice investor in our group didn't know what he meant.  I've decid... 01/05/2011

Please visit http://www.bryan-cole.com/OurServicesPublications.html for more information. Contact Bryan Cole at Bcole@naikeystone.com or www.Bryan-Cole.com for Real Estate Related Services.     01/05/2011

You may have noticed that it's been a few days since my post on Cash on Cash Returns, and I haven't yet posted regarding Internal Rate of Return (IRR) as I had promised.  To be honest, thinking about addressing IRR in a single post is a bit daunting.  It is the most complex of the topics that I've addressed so far, and there is a lot of disagreement about the use of IRR.  There are many investors who prefer to use Net Present Value (NPV) calculations in lieu of IRR, some investors who use both, and many who don't use either.  My preference is towards IRR, but explaining why will have to wait for another time.  I'm also going to wait to give an exact definition of IRR, for now it will suffice to say that IRR is a useful number to compare two or more investments (all other factors being e... 01/04/2011

I received a few questions after I mentioned Sale Lease-Back transactions in my post yesterday, ‘7 Reasons to Call Your Commercial Real Estate Agent'.  Apparently this is a new concept for many business owners here in Reading, PA.  So I wanted to give a small list of companies that are well suited for these types of transactions. 1. Car Dealerships 2. Pharmacies 3. Distribution/Wholesalers 4. Funeral Homes 5. Doctor Offices 6. Restaurants This list is far from exhaustive, but these are some of the more common ones.  Really any business that owns and occupies a property in its entirety is a candidate for a Sale Lease-Back transaction.  Please feel free to email me or comment below if you have questions about how this type of transaction works. 12/31/2010

You Need Money - No, I'm not offering to make you a loan, but with today's credit markets, you might not be able to find anyone to make a loan to your business.  So how can a Commercial agent help you?  If your business owns real estate that it occupies, it may be possible to monetize your equity with a Sale/Lease-Back transaction.  This is when your agent finds an investor to purchase your property, but then leases the property back to you so you can continue to operate your business. You Need More Space - This is an obvious one, but it your business needs more space, be sure to find an agent that specializes in commercial properties, and fully understands the ins and outs of commercial leases. You Need a Connection - This is one thing that many of my clients don't think about.  Like ... 12/30/2010

I'm sure if you've read my earlier posts you may be wondering when this will all end, but today we are finally getting to the good stuff: Returns.  Why are you investing in commercial properties in Reading, PA?  I'm guessing it's because you'd like to make some money.  One measure of how much money you'll make on your investment is Cash on Cash Returns, also know as the Equity Dividend Rate.  Your Cash on Cash Return is a measure of how many dollars you receive on an annual basis for every dollar that you invested.  Let's continue the example of our small retail property in Reading, PA.  We know that our NOI is $19,598 and we also know that our maximum loan amount is $137,186.  We'll use Excel again to calculate our payment with the same assumptions for interest rate and amortization: S... 12/29/2010

Hopefully you now have a good hanldle on cap rates, and we can move forward with analyzing that small retail property in downtown Reading, PA.  Once you have an idea about what a property is worth, you need to figure out how you are going to pay for it.  For most investors this means getting a mortgage.  So how do you know how large of a mortgage your property will qualify for?  Notice this is about what the property will qualify for, not you personally.  For commercial properties, the property itself is often more important than the borrower when qualifying for a mortgage.  The two primary tests that your lender will use to determine how large of a mortgage your property can manage are Debt Service Coverage Ratio (DSCR) and Loan To Value (LTV). DSCR is exactly what it sounds like.  It ... 12/28/2010

I've decided to take a little break from my series on evaluating commercial real estate investments.  I'll continue with it later this week (I hope you don't mind waiting), but today I want to answer a question that I get all the time, 'Don't you need a lot of money to invest in commercial real estate?'  I heard this question today from a former coworker of mine.  This really surprised me coming from him, because he happens to be in the commercial mortgage business.  I'm sure that he's come across several transactions where one or more of the principals contributed little to no capital.  For some reason, this point has missed him completely, and like so many others that I've met, he believe that only real estate moguls invest in commercial real estate. This couldn't be further from the ... 12/27/2010

Hopefully you have a good handle on calculating NOI after my last post.  Now that you know what NOI your small retail property in Reading, PA is generating, you can begin to figure out what this property is worth to you.  One of the most common techniques for determining value is call income capitalization.  This technique uses a capitalization rate (cap rate) translate your NOI into a value.  The basic formula is:               I want to point out that although cap rates are usually expressed in whole numbers, they are actually decimals.  For example, if your broker tells you that properties trade at a 10 cap, he means 0.10.  So in our example if we divide our NOI of $19,598 by 0.10 we arrive at a value of $195,980.  Does this mean that you should pay $195,980 for the small retail prop... 12/23/2010

Whether you're investing in a 4,000 SF retail building in Reading, PA or a 400,000 SF office tower in Center City Philadelphia, there are a few key concepts that you need to understand.  These concepts are the basis for most, if not all commercial real estate analysis.  The most basic of which, is that the value of commercial real estate is a function expected future income from the property.  This one concept has led to the creation of several different calculations that every commercial real estate investor should know.  You must be able to calculate your NOI, Cap Rate, DSCR, Cash-on-Cash Return, and IRR.  Knowing each of these calculations, and how to apply them to your potential commercial real estate investments is a must for any serious investor. You need to know what an investmen... 12/21/2010

I was discussing commercial real estate financing with another agent this evening.  This agent is very experienced in real estate in general, but she mostly works with residential real estate.  I realized that many if not most real estate agents don't fully understand the difference between financing residential and commercial real estate.  I'm sure that this is true of most residential real estate investors as well.  Commercial mortgages do not fit into the neat little boxes that residential mortgages do.  Figuring out the best way to finance a commercial real estate deal is just as much an art as it is a science.  This may be why there aren't more investors that make the leap from residential to commercial real estate investment.  Credit scores and DTI become much less important, and ... 12/20/2010

Yesterday I mentioned in my blog that several residential real estate investors are not clear about what commercial real estate is.  I mentioned a few of the commercial real estate opportunities that exist in downtown Reading, PA, but my list was definitely not meant to be comprehensive.  One opportunity that I didn't mention yesterday was parking garages and self storage.  Downtown Reading, PA doesn't have the serious parking problems that I've seen in several of the cities that I've done business in.  In part this is because there are several investors that have small garages that they rent for parking.  These range from single car garages to full size parking structures, but it's the garages in the low double digits that I find the most interesting. For residential investors, these s... 12/19/2010

Earlier today I was speaking with a friend of mine who invests in residential real estate.  It's occurred to me that almost all of my friends invest in real estate, but that's not the subject of my blog today.  During our conversation, I realized that although my friend knew a lot about residential real estate, she didn't have a great understanding about what I mean when I talk about commercial real estate in downtown Reading, PA.  She thought that only real estate moguls invest in commercial real estate.  She thought that commercial real estate meant multimillion dollar office building and regional malls. I tried to give her examples of properties in Downtown Reading, PA that are considered commercial real estate, that would fit well into her investment plans.  One thing she didn't rea... 12/18/2010

I was talking to a would-be investor today.  He has been talking about investing in commercial real estate for years.  He looks at properties online regularly, and he seems to think that if he looks at enough properties, he'll eventually find the perfect deal.  He seems pretty bright, so I can't figure out why he hasn't changed his strategy after all these years with no success.  What this would-be investor doesn't realize is that good deals aren't found, they're made.  What you have to do is find properties that meet your basic investment criteria, location, size, product type, etc., and then you have to go out and make an offer.  The secret is that you make an offer that makes that property a great deal.  Maybe the seller will take your offer, and maybe not.  If you don't make the off... 12/17/2010

I was speaking with an investor today that owns a mixed-use property.  He has two apartments over a small retail space.  Like many mixed-use properties in downtown Reading, the apartments were rented, but the retail space was empty.  When I asked him about his plan to get the space leased, he said that he had run some adds, and he had a sign in the window.  It has been vacant for over a year, but he hasn't changed his plan.  This seems to be a pretty typical story. What I haven't heard from anyone yet is that they have a serious plan to get their retail space rented.  It is very easy to run a few adds, and put a sign in the window, but that just doesn't work in this market.  In addition to placing a sign and running some adds, he should be calling retailers and other businesses that may... 12/16/2010