Commercial Real Estate Investing From A-Z

Today we’re interviewing James Chung, he is the Executive Managing Director and Managing Principal for the Western US for Cushman & Wakefield's Retail platform. He has been with the company for 15 years and has worked with over 30 national tenants and over 9 million sf of retail across the Bay Area in Silicon Valley. Some of his clients are: AT&T, Chase Bank, Adidas, In&Out Burger, and Sur La Table. Read the full interview here: https://montecarlorei.com/leasing-retail-property-to-national-tenants-and-what-to-look-for-during-due-diligence-part-1-of-2/ Tips for Listing Retail Properties for Lease and What to Charge Tenants per Square Foot First you need to understand the health of the shopping center, and one way to do that is to understand the health ratio of the tenants. The health ratio is the relationship between gross sales and total occupancy cost. Then go through the health ratio tenant by tenant, and understand if the rent they're paying is equitable to their sales performance. The challenge with pricing is that geography will often dictate pricing. However, you can have an asset next door to you charging half the rent! Part of that reason is co-tenancy, part of it is how updated the center is, part of it is who anchors the center, as well as how accessible the center is. Retail is not commoditized in the way where we can say "By virtue of being on this block or that block, your rent should be X", it's like when you are getting comps for a home, the price/sf in that area gives you an indication, but it is within 10 to 20 to 30% of where things could be, depending on the home itself. Block-by-block can change dramatically. Are the tenants in place at highest and best use for the positions that they are in the shopping center? What are the lease expiration dates, who's lease is coming up and when, who is healthy or not, where we could reposition tenants, etc. What are Good Types of Tenants to Have in Your Center? It depends on the opportunity, if it's a neighborhood shopping center, the most coveted asset class would be a grocery anchored shopping center. One of the most desirable investment opportunities for people, especially in the Bay Area are grocery-anchored centers in the retail space. If you're in any neighborhood, if there is a strong national grocery tenant who is the hub of the center - that is typically the most desirable. Besides that, there are lots of asset classes like malls, lifestyle centers, outlet malls, and so many different types of shopping centers, but if he had to pick one, he would probably say grocery anchored. How Can We Make Money in Retail When the Cap Rates Are so Low in This Market, and What Should We Look For in a Deal? Low cap rates are actually not necessarily a bad thing if the income on the property is under market. Even if you're paying 3.5% cap on a deal but the rent is 50% of what it should be, that's when market intelligence comes into play, and understanding how things are being underwritten. There is currently a compression in cap rates just by virtue of geography and being in Silicon Valley, but there still are great opportunities out there, you just may not find them listed openly. It's about understanding how to unlock the value in whatever asset you're looking at because there are many ways to skin the cat, and oftentimes people are looking at it very one-dimensionally, when in fact there may be multiple ways to create value. Contact James Chung here: http://www.cushmanwakefield.com/en/people/james-chung --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this and final episode, I'll go over the financials and how I made the decision to move forward (or not!) with the purchase, and then we'll come to a conclusion at the end. You can read the entire episode here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-3-of-3/ When we made an offer on this theater that had been abandoned for 30 years, we had three options in mind: 1. Do a very basic remodel and sell it. 2. Go all the way with the remodel, bring the property up to an impeccable state, and run it as a business: running events such as corporate events, weddings, parties, etc. 3. Remodel as much as we should, rent it out to a tenant, and decide then if we would sell it or keep it. Since we were unsure how the economy was going to go by the time the construction was done, we had to be very conservative. At the time of purchase, the cap rates were at around 6% for the area, and we wanted to think ahead and in case the economy took a hit, so we also ran the numbers at an 8% cap rate. Why? When the economy tanks, cap rates to go up because people are able to buy less property (because interest rates are higher and banks are more conservative), and there are more "discounts" happening (because less people are buying), that's why we had to calculate an increase of 2% in the cap rate, just in case that there be something going on in the economy by the time that the property was fully remodeled. This is a very important calculation for all of us at this time in the economy. Calculation breakdown for construction costs: Construction costs: the best case scenario was $780,000 of renovation costs, the medium case scenario was $1,000,000 of renovation costs, and the worst case scenario was $1.5M of renovation costs, plus the purchase price of $430,000. At the worst case scenario, we could have ended up with almost $2M in total costs, in which case we’d definitely have to sell above that number. Options for what to do after renovations, and their associated costs: 1. With our first option of doing the very basic remodel of $780,000 of minimum renovation and selling the property for a worst case scenario of 8% cap, we would be making around $200,000 – at this number it was not worth the headache for us. 2. The number two option was to remodel incredibly well and run it as a business and do events. For this option, I contacted quite a few events places in the area and I found one place that was very comparable to ours. They were charging around $5,500/event which included security, tables, chairs, linen, staff, water bill, electricity bill. I estimated that out of that $5,500 we would probably end up keeping around $2,000-$3,000 per night. In the worst case scenario we would rent it for 40 nights per year, and in the best case scenario we would rent it for 60 nights per year. I was also adding a revenue for a church to hold services on Sundays for a few weekends during the year. At the end of the calculations, our net income on the worst worst case scenario would have been around $110,000/year, in the best-case scenario would have been around $160,000/year, however this was very conservative at a net revenue of $2,000/night. Out of these three options, we were calculating the least amount of construction costs that we were going to incur, as well as the highest amount of construction costs. Because we didn’t know exactly how much the construction cost would end up being until we started the construction, we had to understand the minimum cost, and the maximum costs we could end up incurring. --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this episode I'm going to share the things that we had to do on our own during the due diligence process of my first offer, as well as the things that our attorney looked at and objected to on the title report. Read the full details here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-2-of-3/ What did we on our own: 1. Checked Geotracker which is a website to see if there is contamination near the property. This helps us understand what our Phase I report will probably look like. The Phase I report is an environmental report that costs around $3,000-$4,000 and that you must do in order to see if the ground of the property is contaminated. If it is contaminated, it’s going to be very costly to decontaminate the property, and the city will make sure that you eventually decontaminate the grounds. It’s very important to know if your property is contaminated or not. When you search Geotracker, you’re able to have a preliminary idea if it is contaminated or not, based on existing data. 2. Checked the current assessed value of the property to see how much taxes they were paying. 3. Reached out to the City Department Services Division, and the Community Development Division and asked to see if there were any approved permits for the property. I also had to find out information on zoning in the downtown area to see if we could do what we wanted to or not. 4. Because we were potentially going to run this as a business and do events in the property, I had to check prices for the following: audio and visual installation, new chairs, how much it would cost to level the floor, how to dispose of the existing chairs (could we sell it or not?). I also had to find out how much we could charge per event and the costs associated with that (tables, catering, security, electricity, water, etc). Reports that we paid for during the due diligence process, and the contractors that we had come by to give us quotes: 1. Phase I Environmental report: the report came out clean (as we expected after checking Geotracker). 2. Roof survey: we found out that it was going to cost us around $127,000 for a new roof since the existing roof already had three layers on it, and we could not add another layer. We had to redo the roof from scratch. 3. Structural engineer: we had one come by to assess the structural damage and do a shear wall test – this meant that he was going to test how strong or how weak the wall was and he was going to tell us if we had to redo the wall entirely, or just reinforce it. 4. Architect: the architect came over to assess some of the costs that we were going to incur during the renovation. 5. I had to find a person that was working at Calwater (California Water Service) in order to find out where there was a water source for the building. Also, where was the line, and if there were fire hydrants near the property. During this process I learned that in California the businesses are the ones who have to pay for installing a public fire hydrant if the property does not have one nearby! This alone can cost at least $50,000. We had to understand how much it would cost for us to pull in water for the fire sprinklers because the property was not up to code and we would have to install fire sprinklers. 6. Fire sprinkler contractor: he came over to give us a quote on how much it would cost to install the fire sprinklers. We ended up finding out that we would have to bring water from the back of the building to the front, and that was going to cost quite a lot of money (I believe it was around $100,000). --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

In this episode I’ll go over my very first offer (which happened about 4 months into my real estate education).  You can read the process here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-1-of-3/ This will be broken down into a few episodes because it’s going to be a detailed explanation from beginning to end, and it will be as follows: How did we decide to make an offer on this property What did we ask the real estate agent to send us during the due diligence process Are we running this as a business or selling after remodeling, plus all the financial calculations Which items our attorney looked at and objected to from the title report What ended up happening and conclusion Things to note on the offer agreement We used the standard commercial offer agreement, and as noted above, we had to give the seller all of the inspections if we didn’t end up buying the property, so they could give them to the next buyer. A few other things that I highlighted on the purchase agreement were: 1. We needed to deliver the removal of contingencies or cancel the agreement within those 45 days, 2. If there was any problem with his purchase, we would have to resolve it through arbitration, 3. Both buyer and seller pay for escrow fees, the seller pays for County transfer fees, the seller pays for the city transfer fee, the buyer pays for all the reports, and the buyer also pays for the title insurance policy. These are just standard terms and we agreed to them. Things to ask the real estate agent to send during the due diligence process: 1. Recommendations for Structural Engineers, roof inspector, and contacts in the city of Salinas since she had been a broker there for a very long time, and she knew quite a few people. 2. The last structural report done on the property. 3. The blueprints so we can give them to our architect, otherwise if the architect did not have the blueprints we would have to pay around $10,000 to get have them redone. I needed those blueprints not only in paper format, but also in digital format since I wanted to forward it to our architect digitally via email. Both of these cost money so since she had the original blueprint (and it was about 11 pages long) she had to scan the blueprints and send them to me. 4. Rent comps, and sales comps in the area. Both of these are important in order for us to understand what we could rent the property for (and therefore what we could sell the property for), and what were people paying in that area once the property was fully leased and fully remodeled. All of this information was used in my financial analysis to do a best and worst case scenario so we could see what was going to be an ideal price for this property. Note that I asked for leased comps and sales comps from two different real estate agents and both of them provided me different numbers so I had to average them out to come up with the final number. You really want to make sure that you ask for comps from more than one real estate agent. 5. The lease for the nail salon, they were on a month-to-month lease and I wanted to understand if they were below market or not. It’s also important for us to have a copy of that. 6. Who the owner of the building next door was, because we were sharing a wall with them and we needed to understand if they did anything to the wall or not.  --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Today you will learn why I picked commercial properties for my real estate investments and not residential properties. But first, let’s learn what types of properties fall under “residential investments” and what types of properties fall under “commercial investments”. You can read this episode in detail here: https://montecarlorei.com/why-commercial-properties-and-not-residential-for-real-estate-investment/ Residential Properties: Residential are properties where people live in, where people have their bed and pillow to sleep on at night, so it’s not only single family homes, it’s also duplexes, triplexes, fourplexes, mobile home parks, multi family properties like apartment buildings, high rises, lofts, student housing, and senior housing – and each of these categories have their own pros and cons! Also, each of these categories can be good or bad investments depending on the state that you invest in because of things like property prices, local economy, and state and city laws (i.e. some states have laws that benefit the tenants and you cannot kick them out, some states have laws that benefit the property owners, so if a tenant doesn’t pay the rent, they are out of the property within days). Commercial properties: 1. Industrial: distribution center, warehousing, or manufacturing 2. Office: you can have a regular office that you lease it out to several companies, lawyers, etc, or you could have a medical office building (for example) where you lease to a hospital, or to dentists, dermatologists, psychologists, etc 3. Retail: within retail you can have a single tenant building, for example in the downtown area of where you live, you can own a building that is leased out to a coffee shop for instance, or you could have a restaurant in your building, so that’s a single tenant retail. Another type of retail is the small neighborhood service center, like the places that have 5-10 tenants where you go to the dry cleaner, and there’s also a nail salon, or a cash advance business for example. Another type of retail can be a strip mall with let’s say 20-40 tenants, like the place where you go grocery shopping and they also have a bank as a tenant, some food places like Burger King or a big box shopping center where they’ll have a Target, Macy’s, a food court, etc 4. Storage units: this is where people pay you a monthly fee to keep things they’ll never need in your building, and within storage you could focus on storing wine for instance, because people like to collect, but don’t have a lot of space to have a temperature controlled storage at home. If you have a lot of courage, you could store gold for people 5. Land: you could lease your land to all kinds of businesses. For example: for agricultural purposes, to wind farms, for RV’s to park for a few days, for truck drivers to park their trucks when they’re on the road Why commercial and not residential? 1. NNN: this means that your tenants will pay for property taxes, insurance and common area maintenance (also known as CAM), this doesn’t happen in residential 2. With commercial properties you also get better tenants, you can get big companies such as Jack in the Box, or a bank, or a supermarket, and if you can get big name tenants to lease from you, you can increase the value of your property significantly. Why? Because these big companies are unlikely to out of business and the rent is pretty much guaranteed to come in, and the next investor buying your commercial property values that 3. Commercial tenants also sign longer leases: commercial leases can vary from 10-20 years, and sometimes more, there are yearly price increases that are negotiated on those leases, the leases typically start to get increased after year 5 for commercial properties --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Welcome back to Best Commercial Retail Real Estate Investing Advice Ever! Today we’re going to be learning the questions that I ask a seller’s real estate agent after I take a look at a property on Loopnet and think that this could be interesting. You don’t necessarily need to ask all these questions every single time, but it’s a good idea to go over most of them when you call the seller’s real estate agent. Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/questions-you-should-be-asking-the-sellers-real-estate-agent-when-interested-in-a-property/ A brief breakdown of the questions you should be asking the seller's real estate agent is: 1. Introduce yourself 2. How long has the property been on the market? 3. What is the potential you see for this property from an investor's perspective? 4. Are you local? 5. How did you come up with the price? 6. Who is the seller and how long have they owned the property? 7. Is there any known contamination in the property? 8. Does anyone have the right of first refusal (aka ROFR)? 9. Are there any easement agreements? 10. Please send me the rent roll. 11. Is the building historical? 12. Has the building been retrofitted (if older building)? Do you have any estimates to retrofit the building if it hasn't been retrofitted yet? If you're finding this podcast useful, make sure to subscribe to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlo.home.blog/contact/ --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

Welcome back to Best Commercial Retail Real Estate Investing Advice Ever! Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/what-is-a-cap-rate-and-what-should-you-be-looking-at-on-loopnet/ In this episode you will learn what is a cap rate, which is a variable rate that varies per property, and is determined when you are selling the property. As a buyer, you will be looking at various cap rates, and the very basic explanation is that it is the net income on the property divided by the price of the property. For example, there is a property for sale for $400,000 and the cap rate is 8% – this means that your income on the property is $32,000 per year. There are other intricacies about cap rates when you are selling the property, but what you need to know is that cap rates can vary greatly. It can vary by location (state, city, and even where within that city!), by tenant, by current interest rates, etc. A high cap rate is not always a good thing as you will see in this episode. Cap rates also vary based on where the property is located in a particular city. If the property is in an incredible location, the cap rates are going to be lower, if the property is leased to a national tenant (for example Starbucks, Burger King), the cap rate will still be even lower because your rent is going to be guaranteed and you can easily sell this property. However, when you have a local tenant, and the property is not in such a great location, or is the location isn’t very visible, then your cap rate can be higher because the seller is incentivizing you to buy the property. Cap rates are also determined by the interest rates on loans: when interest rates are low your are able to lend more money to buy property – meaning you qualify for a higher mortgage – however, when interest rates are higher, you can afford less property because you’re getting a smaller loan. You need to look at all of these things not only when you’re buying, but also when you’re selling a commercial property because when you’re selling that’s when it’s going to determine what the cap rate for the property is. To elaborate more on cap rates varying by location: for example here where I am in California you can find cap rates as low as 2.5% in Santa Monica which means that you’re making a 2.5% income per year based on the price of the property. You can also find 7% cap rates in some areas of Berkeley for instance. However, in Alabama, you can find cap rates at 10% and that’s because it’s harder to sell the properties there than in California, so the sellers typically want to make the rate pretty attractive to the buyer. You'll also learn how to evaluate a commercial property for sale at first glance. We are reviewing a property for sale on Loopnet.com and going over all the details you should be looking at such as: how to evaluate what they are describing the property as, understand price per square foot, parking ratio per 1,000 sf, location of the property and how to "walk through" the outside of the property with Google maps, walk score, what to ask for if you think the property could be contaminated, Phase I report, and much more. Make sure to subscribe to this podcast to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlorei.com/contact-us/ --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

The very first episode of Best Commercial Retail Real Estate Investing Advice Ever! Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/the-journey-begins-retail-real-estate-investing-from-a-z-podcast/ In this episode you will learn a little bit about me: I have been living in Silicon Valley since 2000 and working in tech for the last few years. Being in the startup world, you definitely get enticed to become an angel investor in tech startups, and that is what I started doing – however –  when I spoke extensively with my friend who has been investing in commercial real estate properties for the last 20+ years, we came to the conclusion that real estate is the best form of investment, not only from a cashflow standpoint, but also from a tax perspective, and on top of it all, it’s a very secure investment: the worst thing that can happen is not making any money (versus losing tons of money as an angel investor). And if you are here, you already know all of that and need no convincing! You'll also learn how to setup your Loopnet alerts so that you can start watching your area and learn what is a good commercial property deal or not. Lastly, you'll also lean how to get started on biggerpockets.com which is a great resource to start meeting people in your community, and learning a lot about real estate investing. Make sure to subscribe to this podcast to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlo.home.blog/contact/ See you soon! --- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support

--- Support this podcast: https://podcasters.spotify.com/pod/show/best-commercial-retail-real-estate-investing-advice-ever/support