Commercial Real Estate Investing Guide: Learn the Language

open-house-1163358_1280Real estate is the most intriguing and time tested investment concept known to humankind. In fact, most people have been exposed to it since childhood when they first started playing the mega-popular board game Monopoly. Investing in real estate oftentimes leads people on the path of wealth accumulation; however, they need to realize that it’s a slow ride, and not an autobahn. Building a solid real estate portfolio takes time and patience. There is certainly a plethora of opportunities out there from which to choose, and it certainly does make financial sense to specialize in one particular area and then branch out from there. Once you become a solid real estate investor in one area, then diversify; otherwise you may end up spreading your time, and finances too short.

Many people begin their real estate investing career by purchasing single-family homes either for quick flips or a long-term rental strategy. Although this an excellent way to get your feet wet, moving on to larger, and more profitable commercial deals simply makes the most sense. You’ll find that a larger commercial deal requires almost the same amount of effort and due diligence as one single-family investment, which makes it even more attractive. For example, if an investor is planning to purchase ten rental units, it makes far more sense to buy a ten-unit commercial apartment building than ten separate single-family purchases. Not only will the purchase price per unit be significantly lower, the operational costs per unit will be reduced as well. That being said, there are a number of things to learn, consider, and decide upon when it comes to purchasing commercial real estate. This guide is a good resource to get you started thinking like a commercial real estate investor.

The very first item to cross off of your checklist is to learn the language of commercial real estate. As they say, if you want to walk the walk, you need to talk the talk. There is a tremendous amount of words and acronyms in commercial real estate that you may not be familiar with, and it is extremely important to learn them. The industry people that you will be working with, such as bankers, real estate brokers, and strategists, will assume that you know the commercial real estate vocabulary. You need to be taken seriously, and a lack of understanding their language will not accomplish that. Here are a few examples.

  • Ad Valorem: A tax based on the assessed value of a piece of property
  • Cash on Cash: Annual property income over how much you actually invested. The amount invested could be just the amount your down payment was.
  • Capitalization Rate (Cap Rate): Property income divided by the total value of the property.
  • Loan-To-Value (LTV): A ratio of how much money you’re asking from a lender to the total value of what you want to purchase.
  • Vacancy Rate: Percentage of properties that are vacant in a time period in a given area.

Written by GilverBook Team

Differences Between Single Family and Multifamily Home Investments

san-francisco-210230_1280Investing in residential real estate is always a good way to diversify your investment portfolio. The proper real estate investment option for you certainly depends on the time you can dedicate to managing and maintaining the properties along with your long-term financial goals. A good place to start is with either single family or multifamily properties. They have their own pros and cons, and are appealing to investors based on personal finances and investing preferences.

Single Family Investment Properties

There are many advantages to investing in single family properties over multifamily properties. The first being that many single family homes can be purchased below the fair market value. This is an important investment strategy because profits are made and lost at the time the property is purchased. When an investor purchases a property at a percentage below market value, they gain that percentage in equity from day one.

For example, a single family property is worth $100,000. An investor purchases it for $90,000 or ninety percent of the current market value. The investor gains a $10,000 or ten percent equity stake in the property as soon as it is purchased.

That being said, many multifamily properties are sold above their present market value due to the fact that they are less available in many areas. It all comes down to the law of supply and demand. In addition, the prospect that future improvements will result in higher rents tends to keep multifamily sales prices above current market value.

Property management expenses vary depending on the logistics of managing the properties, along with tenant population. It is certainly true that higher end single family properties with qualified tenants have less turnover on average than their multifamily counterparts. Renters of these homes tend to view their living conditions as more permanent, and have a far greater sense of pride in maintaining the property themselves. This results in less maintenance costs and repairs for the investor. Tenants of single-family properties typically do not outgrow the space nearly as quickly because there is usually a backyard, additional bedrooms, and, in most cases, a basement.

Multifamily Investment Properties

There are many benefits to investing in multifamily homes over single family properties. Multifamily presents a more reliable source of income. A vacant single family property generates absolutely zero income, while a multifamily commercial real estate property will rarely sit one hundred percent unoccupied. The units tend to be less expensive than a single family and therefore fill up faster. Many first-time real estate investors purchase multifamily properties so they can save money by living in one of the units. Living on the property also helps reduce the time and costs associated with management and maintenance.

Another huge benefit of multifamily properties is the fact that investors can own multiple units with less mortgage loans. For example, if an investor purchases ten single family homes, they are required to obtain ten separate mortgages. They are required to make ten separate monthly payments, along with ten quarterly property tax payments, and ten property insurance payments. Applying for ten loans can be frustrating, and, once obtained, all of the payments and paperwork is very time-consuming. On the other hand, if an investor purchases a ten-unit apartment building instead, they have the benefit of the same ten rental incomes with only one mortgage, one property tax, and one property insurance to deal with.

As you can see there certainly are differences between single family and multifamily residential property investments. If purchasing residential real estate is a good fit to your personality and investment strategy, then a combination of single-family, and multi-family units will help build a balanced portfolio.

Written by GilverBook Team

Is the self-storage sector moving toward consolidation? (Part 2/2)

Click here if you have not read part 1.

So, which companies have the potential to alter the self-storage landscape? Let’s look at the options.

National Storage Affiliates

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National Storage Affiliates is a REIT that was achieved by combining a variety of smaller companies to achieve better access to funding and lower corporate costs. As a result, the small companies received the benefits of larger companies, while retaining management of their original properties. It started with six affiliates (known as PROs) has become the sixth largest self-storage operator in the country. Their 2014 national ranking (with the exception of SecurCare) include: Northwest (16th), Optivest Properties (21st), Storage Solutions (29th), Move It (34th), Guardian Storage Centers (36th), and SecurCare (6th in 2013).

Today, National Storage anticipates adding more affiliates, which should act as an industry catalyzer.

Privately Owned Companies

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Two private companies, Simply Self Storage (founded in 2003 with headquarters in Orlando, FL) and StorageMart (founded by Gordon Durnam after selling his previous company, Storage Trust, to Public Storage in 1999) have the potential to alter industry dynamics. Currently, Simply Self Storage operate more than 160 facilities with over 12 million square feet of rentable space, while StorageMart operates 165 stores in Canada and the United States and has 11 million rentable square feet.

 

W.P. Carey

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Self-storage only accounts for 5% of W.P. Carey’s annualized base rent (ABR), yet they are still one of the top 10 self-storage operators in the US. With 3.5 million square feet of rentable space, they generate an ABR of $32 million. They have only one tenant, U-Haul Moving Partners and Mercury Partners, which makes them the second largest W.P. Carey tenant.

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Currently, W.P. Carey has an 88% interest in this venture and also operates industrial, office, retail, and warehouse space, which contribute greatly to their total revenue. Self-storage is a component of the company’s strategy to be diversified across different types of property.

U-Haul International

The shareholders of Amerco (U-Haul International’s parent company) decided not to pursue the conversion of its real estate assets into a REIT platform at their annual meeting in August 2015. As a result, it doesn’t appear that they will be repositioning the company in the short term.

 

Source: Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart Common Shares (NYSE:CUBE), Sovran Self Storage Inc. (NYSE:SSS), National Storage Affiliates Trust (NYSE:NSA), Amerco (NASDAQ:UHAL), W.P. Carey, Inc. (NYSE:WPC).

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Is the self-storage sector moving toward consolidation? (Part 1/2)

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In the United States, there are more than 50,000 self-storage facilities and 30,000 operators that account for $24 billion in annual revenue. While around 11% of the industry’s total rentable square footage are self-storage REITs, the other 89% are privately owned and run by operators. Although these statistics indicate that there is significant potential for consolidation in this profitable industry, it remains to be seen whether or not this will actually take place.

In all honesty, it will take considerable effort to make any changes in the industry. Outside of the ten leading operators, there is no single operator with the power to make big changes in the industry’s landscape. Any that do attempt growth will have to do so a little bit at a time through development or the acquisition of smaller players.

chart02Currently, Public Storage, a $43 billion market cap company, is in the industry’s top spot as the largest company. In the United States and Europe, they operate 142 million net rentable square feet of real estate. No other company is anywhere near this. Public Storage has aggressively gobbled up private operators, but, in recent years, due to increasing acquisition competition, they have ramped up a development process. Even if the remaining REITs combine together, they would have no chance of overcoming Public Storage.

In second, Extra Space Storage has an $11 billion market cap with 87 million square feet of rentable space. In September 2015, Extra Space Storage closed on the acquisition of SmartStop Self Storage, which had been the 7th largest operator in the industry, for $1.4 billion USD.

Additional players in the self-storage sector include REITs CubeSmart, Sovran, and W.P. Carey (minority self-storage), as well as recently publicly traded REIT National Storage Affiliates, Amerco (the publicly traded company that operates U-Haul International), and two additional private operators, Simply Self Storage and StorageMart.

So, which companies have the potential to alter the self-storage landscape? Let’s look at the options tomorrow.

Source: Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart Common Shares (NYSE:CUBE), Sovran Self Storage Inc. (NYSE:SSS), National Storage Affiliates Trust (NYSE:NSA), Amerco (NASDAQ:UHAL), W.P. Carey, Inc. (NYSE:WPC).

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

REITs Vs. Lease Option Investments

citiy-731216_1280When searching for a profitable real estate investment, it is always a smart idea to research various options. This article will provide you a comparison between Real Estate Investment Trusts (REITs) and a lesser known strategy referred to as Lease Option or Rent to Own property investing. Both methods have the ability to earn investors good returns; however, they are completely different from each other. That being said, you need to know exactly what you are getting yourself into. In order to increase the probability of success, it is crucial for the investment to fit your personality.

Let us start out by explaining exactly what a lease option contract is. The titleholder of the property agrees to lease the asset to a tenant that has an option to purchase the property for a price that is agreed upon at the start of the contract. Typically, the tenant has the option to purchase at any time during the contract term. Another aspect of this type of structured deal is that a portion of the monthly rental payment is applied towards the buyer’s down payment only if they end up purchasing the property. With a lease option contract the tenant is responsible for all maintenance issues, making life easier for the investor or owner.

Lease option investing is similar to flipping properties. It is crucial for the investor to purchase the property at less than market value in order to guarantee a profit when the tenant exercises the purchase option. If the tenant fails to purchase the property, there should be plenty of cushion to either sell the property to someone else, or lease the property with an option to purchase to another party.

For people that prefer a more hands off approach, investing in REITs is the perfect real estate investment strategy. As the investor, you are purchasing stocks in large real estate management companies that specialize in purchasing, developing, managing, and maintaining multiple properties. These assets include apartment building, office buildings, hotels, warehouses, storage, shopping centers, and other large facilities. Typically, REIT stocks are traded on major stock exchanges such as the New York Stock Exchange (NYSE).

Investors do not need to concern themselves with issues such as locating properties to purchase, making monthly mortgage payments, maintaining and managing tenants, liability issues, among a plethora of other items that property owners deal with on a daily basis. Instead, they are leaving all of those tasks up to the management teams of the companies they are investing in. Liquidating the asset is as easy as picking up the phone, or pressing a few buttons on your computer, smartphone, or tablet. In addition, most REITs pay dividends that add up over time.

We believe that any good real estate investment portfolio should include multiple REITs. Having said that, if lease option property investing sounds like something that you would enjoy, then try adding a deal or two to your overall strategy.

Written by GilverBook Team