Commercial Real Estate Investing for Dummies

The first question is what is commercial real estate commercial real estate is anything other than a

house for example an apartment building that is five units a greater is considered commercial office

building is considered commercial real estate a strip center a shopping center a mobile home park a

self-storage facility even land is considered commercial real estate.

And in my opinion apartments are probably for the beginner the easiest to get into because in so many

of them on the opposite end of the spectrum.

Again for a beginner the toughest to get into would probably be class A office buildings.

And the reason why is there is not so many of them and the big boys really go after those assets.

All right.

So let’s talk about Question number two which is why should you consider commercial real estate.

I have three reasons.

The first reason is cash flow and the potential to create long term.

Well all it takes is one commercial deal that you do that will change your financial life forever.

Just one deal just one to you.

The second reason is that commercial estate is a lot less emotional than say residential U.S. commercial

real estate is more a nuts and bolts business is more about dollars and cents.

We have a saying in commercial real estate and that is that you should fall in love with the deal and

not with the profit then repeat that in commercial estate.

You fall in love with the deal and now with the problem.

OK.

The third reason.

Well the third reason I would share with you a quick story of why I considered going into commercial

real estate.

I first got started in Real Estate Investing by buying and selling single family homes and I did quite

well and I highly recommend it for anyone.

The great way to get started on it.

One day my mentor sat me down he asked me a question.

He goes Peter would you rather have your 20s single family homes or would you rather have one 20 unit

building.

And I thought about Deford’s and my thoughts were the following.

I have three thoughts.

The first thought was wow if I only had one 20 unit building instead of that one single family homes

I would only have to make one mortgage payment and set up 20.

Secondly if I had only one 20 unit building as opposed to the 20 homes I would have to only take care

of one roof instead of looking after 20.

That was huge for me.

But probably the biggest thing was by having just one to one you know Dewdney as opposed to 20 single

family homes.

I would have one property manager rather than seven or eight.

So I was sold right then and there.

So that’s how I got started and that’s why maybe perhaps why you should consider a commercial estate

as well.

OK.

The third question is how do you valuate a commercial real estate deal.

Well I’m going to show you I’m going to evaluate very quickly very easily for you a 20 unit apartment

building.

So let’s get started.

OK.

So again I’m going to evaluate a 20 unit apartment building which I consider commercial real estate

remember in apartments five units greater is considered commercial.

So really they wait.

Once the units are built.

OK.

It can be.

It can be anywhere in the U.S.

and we’re going to say that the asking price is five hundred and fifty thousand dollars.

OK.

And each unit is a two bedroom and each unit is four or five hundred twenty five dollars per month.

Five hundred twenty miles per month.

OK.

And before I go further I’m going to break down to you how to evaluate the commercial property in Acre

with using property with three quick steps.

All right.

Step one is would you have to do is get the income going to that very short step to get the expenses

will do that surely.

And number three get the mortgage payments.

We’ll do that as well.

All right.

So let’s do step one first step one is get it done.

So we have.

Each unit is five hundred twenty five dollars per month.

Ten times we have 20 units.

Right.

Twenty units equals ten thousand five hundred dollars per month.

OK.

How many months in a year.

We have 12 months times 12 months equals a hundred and twenty six thousand dollars that is per year.

Now let me tell you something there’s no way that your apartment building is going to say 100 percent

full every single month out of here.

Chances are you’re going to help so people move in some will move out.

And we call that a vacancy.

So I agree introduce a 10 percent vacancy factor and reduce this number by 10 percent.

OK.

Because you are going to have some people move out and take away a 10 percent vacancy factor which is

basically twelve thousand six hundred dollars.

OK.

Ten percent of that.

OK.

So nine 10 percent.

One hundred twenty six thousand four thousand six.

Do the math here comes out to be one hundred thirteen thousand four hundred dollars.

That’s per year.

OK.

So I have now all the income.

All right.

What’s up do you remember.

Step two is get the expenses now.

This is a possibility.

Are you following.

I may leave some out forgive me but you got to have insurance.

You’re going to have taxes you’re going to have repairs and maintenance you’re going to have reserves

you’re going to have accounting you’re going to have property management you’re going to have utilities

like electrical gas and it’s got to be about this number here right.

So number two is the expense.

All right.

We’re going to take the census to be 57000 170 for a year.

What I did was I added up all the expenses previously all the insurance taxes repairs and everything

else that came up.

Fifty seven thousand one said.

All right.

So now I have stopped Number one day which is getting income right here.

I have Step number two we just get expenses right here.

Do you remember what Step Three was that was to get the mortgage.

All right.

So now your purchase price is finally $50000 in commercial real estate.

You see he may have a down payment on a commercial property is about 20 percent.

So you can expect to pay a downpayment of minimum of 20 percent.

It could be 25 30 sometimes 35 percent.

For example use the minimum which is 20 percent what is 20 percent of $550000 it is $110000.

OK.

So let me do you is it the price is $550000 right and you figure out what the principal balance is going

to be some of it reduce it by the 20 percent down payment comes out to the $440000.

OK.

That’s what the more he says to me based upon now I’ll be conservative here I’m going to say that the

the mortgage interest would be 6.5 percent.

And again just the conservative something I’m going to assume a 6.5 percent interest rate with it 30.

And Asian Asian Could my payments come out to be mom.

Two thousand seven hundred forty dollars per month.

OK.

Now again we have for a year on a book like this by 12 months or you follow me so far that comes out

to be thirty three thousand three hundred seventy two dollars a year.

OK.

So again real quick the purchase price is 550000 put down.

We don’t pay with 110000 that we use a mortgage balance of 140000 at 6.5 percent insurance and a 30

year amortization that US them up to be 2700 $40 per month time for musses 32000 372.

OK.

So again this is number three.

All right.

Step one was to get the income I have come here.

Step two was to get the expenses of expenses here.

Step three was to get the mortgage payments for the entire year Hannity right here.

Now all you have to do is track the expenses and mortgage payments from your income and you have your

cash.

OK.

So I’m going to put you here the mortgage payments

OK.

So you have your income minus your expenses minus your mortgage payments equals twenty two thousand

eight hundred and fifty dollars per year.

All right.

This is your cash flow.

OK.

Twelve thousand eight hundred dollars per year is you can this is what goes into your pocket to get

the big.

How about for $550000.

I have the income I have the expenses and the mortgage payments.

The cash flow is twenty two thousand eight hundred fifty eight.

I put in $110000 now for you more advanced folks.

If you were to wonder what the return of this will will be.

All you have to do is divide your 22 year cash flow by your down payment and it comes out to you about

over 20 percent cash in cash return in order of over 20 percent.

That’s pretty good.

All right.

So here we are.

Right so you have to just evaluate your first commercial deal.

That wasn’t too difficult right.

Again get your income get your expenses get your mortgage payments and do the subtraction.

And there you are.

There’s the cash flow.

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