Office Building Investing for Beginners

You’re about to learn what most beginner investors will never know about investing in Office Buildings and hopefully you are reading this before you have purchased your first office property. In this detailed training, you’ll discover 4 powerful reasons to invest in Office Buildings, the big difference between office and residential real estate, 3 Office Building basics, the different types of Office Buildings and which one you should avoid, 10 key Office Building investing terms that you must know, the ABCs of office leases, possible Office Building pitfalls to watch out for, the most important thing when choosing a Tenant and the top 3 trends affecting office buildings today.

 

Office Building Investing for Beginners PodCast

PART 1: 4 Reasons to Invest in Office Buildings

#1. Long Term Income

When you rent out your property, you are most like to get a 6,9,0r 12-month lease for that unit. You will get a minimum of 3-5 years on the lease, up to 15-20 years. This will lead to long-term income and cash stability for you.

#2. Triple Net Leases (NNN)

Investors love triple net leases. How does this work? Investors will buy a building and lease it out to a triple net tenant. That tenant will pay for all the expenses included with the building, but all you pay for as an investor is the mortgage. This a great form of passive income in investing.

#3. Depreciation Tax Shelter

You may get a huge depreciation tax shelter from investing in an office building. By legally setting up a tax shelter, you can offset some of the income you have made and pay no taxes. In commercial real estate, you can write off depreciation for commercial properties over 39 years.

#4. Strategic Location

Some office buildings have what we call a “strategic location”, meaning they are located in an area where the economy is flatlining, investors of these buildings are guaranteed a significant profit if they can hold on until the area comes back up.

PART 2: Big Difference Between Office Buildings and Residential Real Estate 

The value of Office Buildings are determined based on Income which can be improved by Tenant selection, Leases, Reduced Expenses, etc.

The value of Residential Real Estate are determined based on comparable sales

PART 3: 3 Office Building Basics 

20% of all Commercial Real Estate in the United States are Office Buildings but it is the most volatile property type of all commercial properties.

#1.  Economy

When investing in office buildings, it is important to understand the job growth and economic growth in the area. When considering what jobs are available, look at White Collar Jobs, not factory or food service workers, but office workers. To get job data, go to the United States Bureau of Labor Statistics

As the economy grows, companies tend to hire more full-time workers and will need more office space, hopefully choosing your office building.  To get local economic data, go to the Local Chamber of Commerce Business Development Department.

#2. Supply and Demand

You must understand supply and demand to truly understand the basics of investing in office buildings. Think about if there is a demand for office buildings in an area. Secondly, what is the supply of buildings in the area? Is there an over or under supply? Be sure to ask yourself these questions when investing in office buildings.

The Vacancy Rate for the Area is self explanatory. It is the amount of unoccupied space in the area you are investing in.

The Absorption Rate for the Area is similar to that of a sponge. It is the ability of your office building to absorb new space in the market.

The Local Market Supply is research 101. Pick up the phone and call other office buildings in the area to find out what their rates are, what they are offering, and what they do. They are your competitors, so it is crucial to see how you compare to them.

#3. Real Estate Cycle

The Real Estate Cycle performs a little different for office buildings. Office cycle mirrors the economic cycle but lags by 4-5 months.

PART 4: Different Types of Office Buildings 

3 Main Different Types

• High-Rise: Skyscrapers
• Mid-Rise: 3- 24 floors
• Low-Rise: 1 – 3 Floors

Types of Tenants/Properties

• Government
• Medical
• Business Park
• Research and Development (R & D)
• Office Condo

Office Building Classes

• A Class: Trophy, High Rents (Not for us individual investors)
• B Class: Older, Good Quality Tenants (Ideal for individual investors like us)
• C Class: Oldest, Least Desirable (Not for Beginners, Ideal for Value Add Investors)

PART 5: 10 Key Office Building Investing Terms You Must Know

• 1. Gross Area: This is the gross floor space of the office building.
• 2. Rentable Area / Gross Leasable Area (GLA): The floor space that is actually going to be rented.
• 3. Price Per Square Foot: The dollar figure that you are charging you tenant per sq. ft.
• 4. Gross Rent: The figure that you are charging your tenant. Price per sq. ft. multiplied by your rental area.
• 5. Lease Type (Gross Lease, Modified Gross Lease, Triple Net Lease): The 3 most common types of leases you might come across.
• 6. Reimbursements: Depending on the lease, some landlords are entitled to be reimbursed for certain expenses. The clause will detail which expenses can be reimbursed.
• 7. Common Area Maintenance (CAM) Charge: Repairs, Hallways, Cleanings, etc: A Landlord can be reimbursed for common area expenses.
• 8. Tenant Improvements (TI): Allowance landlord gives the Tenant: An allowance the landlord gives the tenant when they are leasing out the property or renewing a lease.
• 9. Operating Expenses: Insurance, Taxes, Repairs, Roof, etc: New investors often miss out on not calculating or underestimating operant expenses.
• 10. Capitalization (CAP) Rate: Net Operating Income / Sales Price: Your net operant income divided by your sales price.  A cap rate gives you a percent that tells you your return on investment if you paid all cash for an investment.

PART 6: ABCs of Office Building Leases

In office buildings, there are 3 types of leases that can happen when investing.

#1. Gross Lease: Benefits the tenant the most. The tenant only has to pay rent, while the landlord handles the lease and repair costs.

#2. Triple Net Lease (NNN): Benefits the landlord the most. The landlord only pays the mortgage, whereas the tenant pays for everything else. Very popular amongst investors because it is a great way to achieve passive income.

#3. Modified Gross Lease: This is somewhere in between Gross Lease and NNN. It depends on how you write it up.

3 Quick Tips

#1. Leases are the lifeblood of Office Buildings.

#2. Hire a professional when negotiating a lease.

#3. Everything in a lease is negotiable.

PART 7: Possible Office Building Pitfalls

There are a few things to watch out for when investing in office buildings. First of all, rental rates go up and down significantly with the economy. Monitor the real estate cycle and try to catch an office building on its way down, riding it up as the cycle flows upwards. Secondly, tenants with the largest square footage could cause you financial burden if the choose to leave. To protect yourself from this pitfall, establish a reserve fund so that you have the money to pay the mortgage, insurance, and taxes that will fall on you when they leave. Third, expiring leases for your tenants can sometimes fall around the same time, which is dangerous for you. Try to monitor the leases and stagger the times in which they will expire. And lastly, obsolescence can make what seemed like a good office investment deal, a bad one.

PART 8: Most Important Thing when Choosing an Office Building

Credit Worthiness is the MOST important thing when choosing a tenant for your office building investment. The stronger the company is financially, the less risk you will have. The stronger the company, the lower the cap rates.

Here are 2 websites where you can check a company’s credit worthiness:

• • DnB.com (Private or publicly traded companies)
  • Standardandpoors.com(Publicly traded companies)

PART 9: Top 3 Trends in Office Buildings

#1. Workplace Density has been changed. Today companies allot 185 sq. ft. per office worker, 10 years ago, it was 250 sq. ft. per office worker.

#2. Untethering of Office Workers has resulted in 30-40% of dedicated workspace being vacant in a given day. Mobile devices, tablets, and laptops are the root cause of this, as it allows them to work away from their building and not directly in it. This does allow for greater space utilization.

#3. Telecommuting is OUT and Collaboration is IN. Yahoo! nearly stopped all telecommuting and wanted everyone not only in the office but in rooms together to give a start-up small company feel.