We are on to Blog 2 on investing in commercial real estate. This blog while fairly simple and somewhat obvious is very important for all of the future aspects of what we will discuss. Today we are going to discuss tools of the trade.
There are hundreds of real estate tools, books, apps, etc and any one of them can prove very useful for a variety of different things, but here I want to get in to some of the hard tools that we'll need.
The first tool we need is a financial calculator. I like the webgota 12c Financial Calclulator Premium App for my iphone. It is basically the app version of the Hewlett Packard HP12C calculator. For calculating mortgage payments quickly, I'll use zillow mortgage because it is simple, but the financial calculators allow us to calculate all of the items like capitalization rates, amortization, cash flows, net present values, internal rates of return, etc. If we were back in college or high school, you would need to know the math behind all of those, but really all we need to do is know which buttons to punch on the calculator, which we'll get to later.
You will become familiar with the calculators the more you use them, but there are online tutorials (HP has some) and even youtube can teach you a lot.
The second tool is the demographic data. This information tells us a lot about the areas that we are considering investing such as household incomes, growth rates, economic activity, etc. This data is simple to come by for appraisers, but we can go on loopnet.com or costar.com and find out a myriad of information about demographics as well as specific information on the buildings that we are considering. CoStar also tries to keep track of commercial leasing data allowing us to initially analyze many buildings without ever inquiring to the owners or realtors on a piece of property. However, the information is not always accurate, so the online information should be used as a starting point and not necessarily the basis for making decisions... the same goes with using information to look at what your home or a home you like is worth on Zillow. It is a very generalized picture of the value of the property and may leave out some very important other criteria that could increase or decrease the value.
The big item to remember about the usefulness of demographic data is that real estate is similar to buying futures in the investment world. You need to have a good idea of what is happening in the area of your investment, and you need to feel comfortable that your investment makes sense years from now, not just today. Real estate investments should always be considered long term because this is a game of staying power. If you or your investment has the wherewithal to stay put through the slumps, then you can do well. If you are banking on flipping a property and do not feel comfortable carrying a property for the long term, then you are playing a very risky game. This is not to say that you should not sell your property when the price makes a flip worth it, but do not make the investment with that mindset.
The third item is maps. Maps are an incredible tool to let you see properties from above and even the street view without every leaving your office or home. Google Maps and Google Earth are especially useful. I use them to look at street accesses, traffic patterns, count parking spaces, scout neighborhoods, what amenities are nearby, are there big economic drivers that could impact the investment, densities, etc, etc. Never underestimate the usefulness of maps.
Next is rather obvious, and you are already using this because of the previous two tools. But you need the internet. The internet allows you to research properties, tenants, investors and more. If you bought a commercial building, you would probably want to know in your due diligence if the tenants are having legal trouble, if their business is going up or down, and many other items that they may not readily tell or be obligated to disclose to a potential investor. The same is true for analyzing a potential investor or partner. The public records and property appraiser websites are especially useful for this, and even checking things out on the social media sites is important before laying your money on the line. All sorts of information from judgments to liens to news articles are all easily found if you know where to go.
Continuing on, we have software tools. I like the Google suite of products because they follow me everywhere, but Excel, Outlook, PowerPoint, or other systems are also just as useful. A real estate specific software is ARGUS. You can find it online, but it is a product that helps with all the ratios we want to look at but can also help with budgeting, sensitivities, and what if scenarios. It is not a necessary platform for the casual investor, but if you were to look at multi-million dollar projects or had a lot of properties, then it would be well worth the investment.
Finally, we need capital. Capital can be hard to come by, but to invest in real estate you will have to have some skin in the game. Banks will require downpayments, and investors will want to see your investment even if you are only a 5-10% owner in the project. It makes the investor understand that you are not being foolish with their money and the banks are especially skittish these days after taking such a beating through the recession. On a side note, when you think of capital for real estate investing this should not be the first and/or only investments and savings that you have. You should still have bank savings and investment accounts because every thing you do has risk associated with it, and you need some principal guaranteed savings/investments. However, as you will see, if you want to invest in real estate it takes a lot of effort and homework, but the rewards can be great.
Next week, I will get into figuring out your personal goals in investing to help you consider what areas you are interested in working to become an expert. I have also decided to use a book to guide these blogs and keep me on track. I will write these somewhat as summaries of good points in the chapters but add in real experience and local knowledge to make it pertinent for Northwest FL. I will post a link to purchase on Amazon in the Outpost section of www.livinrightrealestate.com/outpost. The book is How to Win in Commercial Real Estate Investing by R. Craig Coppola.
This blog is designed to provide competent and reliable information regarding the subject matter covered. However it is written with the understanding that the author and real estate company are not engaged in rendering legal and financial advice. If legal or other expert assistance is required, the services of a professional should be sought. The author and real estate company specifically disclaim any liability that is incurred from the use or application of the contents of this blog.