The Secret to Commercial Real Estate Success
Let me start off with this, do not buy or invest in any commercial real estate of any type without knowing what I'm going to share with you, just give me a few minutes and you'll see why. Let me start off with three questions.
Have you ever over paid for a property? Do you know of anyone who have ever over paid for commercial property? It's not a good feeling, and it's not a good position to be in.
Do you know how to properly value a commercial property comfortably in any city, in other states? That's a necessary skill, and it's a required skill to be excellent at commercial real estate investing.
Number three is, do you know of anyone who had plans and dreams of cash flowing massively on their commercial property, but it never happened? It's not a good feeling, it's not a good position to be in.
Everything here, there's a secret to it. What I'm going to show in this video, the bits and pieces of it are out there in the internet world, and in various books. In this video I'm combining it all into one training to put you in the best position to make the best decision in your next commercial real estate deal.
Let's get started. Here's the secret, the secret is you must be in blank in your sub market. What's a sub market? A sub market is your neighborhood. If you are investing in a commercial property down town, your sub market is down town, it's your neighborhood. Here's our secret, you must be an expert in your sub market.
It's foolish not to be an expert in your sub market, how do you know where the opportunity is? Based on what, right? I'm going to share with you four things that you must know to be an expert in your sub market. You must know these four things before buying any commercial real estate.
Four Things You Must Know in Order to Be an Expert in Your Sub Market
Let's say that someone that you trusted sent you a great commercial deal, and you believe it to be a great commercial deal. It's a cash flowing, twenty four unit apartment building that's in an excellent neighborhood, right? Three great things going for it.
Number one, it's cash flowing. Number two, it's a decent size, it's twenty four units. Number three, it's in an excellent neighborhood. A decent deal, it seems, right? Let me ask you this, how do you know if it's cash flowing? How do you know? That's based upon what, right? How do you know that expenses that the broker gave you are true and accurate. How do you know that the sellers information they gave you, the expenses are true and accurate? Based upon what? You have to know that.
Number two we said that this was a decent size. How is it decent compared to their price, and their neighborhood? A twenty four unit in different neighborhoods at the same price may be overpaying, or may be a great deal, right? Twenty four units is a decent size, based upon what? Lastly, it's in an excellent neighborhood. How do you define excellent? If a neighborhood is not excellent, how do you define it? How do you measure it? What I'm going to do in the next few minutes, I'm going to share with you how to determine all these things. These four things, I'm going to share with you how to determine in a typical deal, all right? Again, do not buy or invest in any commercial real estate without know first these four things that will make you an expert in your sub market. I'll see you there.
All right, the four things needed to become an expert in your sub market, right here. Before I start though let me share this with you, this truth. There is no such thing as a national real estate market that's relevant and useful for us. What we need to know, what you need to know is what's happening in our own sub market, what's happening in our own neighborhood? From a national perspective, it doesn't help us much. We need to know locally, what's happening in our sub market, okay? Got it? All right.
Number One: Price Per Unit
Let's move onto these four. Number one on the four things to become an expert in your sub market, is you need to know what the price per unit, or per door is. Now, in these four examples I'm going to use a large apartment as an example. They're easy to understand, there's a lot of them out there. Number one, know the price per unit, or per door in your sub market. For example, let's say you have a ten unit apartment building, and a hundred thousand dollars purchase price. That's ten thousand dollars per door. In your sub market, you need to know what the price per unit is, price per door is, in your sub market, it does exist.
Number Two: Cap Rate
Number two, you need to know the cap rate for your sub market. You see, every sub market in a city, let's see there's two sub markets in a city, let's say that one sub market is very expensive, and one sub market is lower to middle income. The cap rates for the rich neighborhood is going to be here, the cap rate for the poor neighborhood is going to be here. You can see you have different cap rates for the different sub markets. Whatever sub market you're located in you need to know the cap rate, got it?
Number Three: Sub Market Rent
Number three is you need to know the sub market rent. For your given sub market, what is the rent for a typical one bed room? What is the rent for a two bedroom, what is the rent for a three bedroom? In your sub market you need to know those ranges for the one, two, and three bedroom rents. Okay, got it? All right.
Number Four: Expenses Per Unit
Number four is you need to know the expenses per unit or per door for your sub market. This is where a lot of people mess up because they just don't know. This is where a lot of properties don't cash flow because this was either miscalculated, or never known. If you want to give yourself the best chance of not overpaying, of cash flowing and having a good long term deal in your sub market, you need to know these four things.
Why You Need to Be an Expert at These Things
Price Per Unit
Here's number one, why you need to know the price per unit or price per door in your sub market. The reason number one is you need to know what to offer. If this prop is worth making an offer on, and you come up with an offer price, what is it based upon? It should be based upon the price per unit, or per door in that somewhere, all right? What this does, this prevents you from overpaying. A few weeks ago I talked about if you know anyone who overpaid for their commercial property, they probably overpaid because they didn't know the price per unit, okay? Got it?
Now, here's something for you whole sellers out there. You need to know what the price per unit is because for you whole sellers, how do you know if you have a good deal or not? If you have a probability under contract for thirty thousand dollars per door, right? We know that price per unit, the price per unit or price per door is forty thousand in that sub market and you have it under contract with thirty thousand dollars a door, we know we have a good deal, okay? Got it. That's important. That's why you need to know that.
How Do You Find This Information?
Next is how do you get that information? How do you get the price per door, right, or price per unit. Here's the answer, you need to get comparable sales data. Just like when you buy a single family home, you need to compare it to something. What we're going to do here is we're going to get comparable apartment buildings in this sub market, and we're going to compare the price per unit or price per door to each other. Now, the key word here is comparable. They must be comparable. That property that you compared it to that is fifteen miles away is not comparable. If your prop is built in 1980, and the property that you're comparing it to was built in 2000, that's not comparable, okay? The key word is they must be comparable.
How do you get it? What are we you going to do? You're going to ask two or three commercial estate agents for a sales comparibles, and you're going to average out the information. Okay, got it? Now you know why, it's important to know in your sub market what the price per door, or price per unit is, and now you know how to get it. All right? Okay.
Let's next move onto the why we need to know the cap rate in your sub market. See you there. Number two, why you need to know the cap rate in your sub market. Remember, this is all about becoming an expert. Here's what you need to know, every sub market has it's own cap rate stamped upon it. A neighborhood that's considered a very rich neighborhood, would have maybe a five or six percent cap rate stamped upon it. Whether a poor neighborhood would have a cap rate of nine or ten stamped on it, so you can see the difference there. If you were to do an evaluation of this type of property using this cap rate, guess what's going to happen? You're going to mis-value the property because all commercial real estate is based upon the cap rate. You must know the cap rate in your sub market to properly value the real estate, got it? Okay.
In my previous videos I talk about the cap rate, and how to calculate it, and the importance of net income, all of that. Look at my other videos, but I can't go over here in this video for the sake of brevity. Here's a third reason why you need to know the cap rate in your sub market, the higher the cap rate, the lower the price. You got it? Now conversely, the lower the cap rate the higher the price. It's really important that you know the cap rate in your sub market so that you don't overpay, or over value, or in good cases if you can purchase an A class property in a C class neighborhood, that's a good thing, all right? Okay.
Now let's move onto how to get this information, how to get the cap rate information. Well, it's pretty simple. Number one, you need to look at a lot of deals. You need to do a lot of evaluation of deals and do your own cap rate calculation, some of the deals that you look at on Loop Net for example, or from brokers, the cap rates are already calculated. If you can look at a certain sub market and look at a lot of deals, you'll see what cap rates they are projecting, okay? You have to look at a lot of deals, what's a lot? Not five, not ten, minimum of twenty five deals just to get a feel for what cap rates are in your sub market, okay? Not five, but twenty five, got it?
You can also ask two or three commercial estate agents, just call up and ask them, "Hey, what's the cap rate for B and C class apartments in this neighborhood?" Let them give the answer, call two or three, then average them out. Cap rates don't move that much, and they're not that dynamic. They pretty much stay put for a long time. Number three, there's several online resources that you can use. Now you know the importance of knowing the cap rate in your sub market, okay? Let's move onto the next category, okay? I'll see you there.
Sub Market Rents
Number three, why you need to know the sub market rents. If you recall a few minutes ago, every sub market has rents, a rental range for the one bedroom, for a two bedroom, and a typical three bedroom. You need to know what those rents are for one, two, and three bedrooms in your sub market. The reason why is, it will help you determine if there's any upside potential in the rents. If the agent, real estate agent says that you can increase the rents by fifty dollars on your one bedroom, what is he basing that information on? For you to vent that out, for to see if that's true and accurate you need to know what the sub market rents are yourself. Don't believe the agent, know this information yourself so that you can spot it yourself.
The other important thing is if you're dealing with the seller directly, and let's say the seller is elderly, is ninety or a hundred years old, and is property free and clear, and most likely he hasn't raised the rents, what you need to know if you're dealing with him is how high can you raise the rents, or how much upside potential do you have? Now, the reason why you want to know how much upside potential you have is because as the net operating income goes up, guess what goes up? Your property value. The more upside potential you have, the more potentially the property value can go up. That's why it's really important to know what your sub market rents are, it all starts here. All right, got it? Okay.
Next is, how do you get this information? It's very simple, there's several online resources that you can go to immediately and get the information for one bedroom, two bedroom, and three bedroom. Just look online, they're all there. Now here's a special note, when you go online and you look for that information on comparable rents for the apartments, make sure you're not compare your rents with single family homes. A rent on a two bedroom home will be completely different and higher than a rent on a two bedroom apartment. Make sure when you're looking online you're not looking at single family homes, got it? All right.
Expenses Per Unit
We're going to jump into the last one, right? Number four, and that's why you need to know what the expenses are per unit or per door. Number four and the last thing you need to know to become an expert in your sub market, the fourth part of the secret. It is knowing the expenses per door.
Why do you need to know that? Well the number one reason why is, it's the biggest reason why beginners do not cash flow is because they don't know what the expenses are per unit for their sub market. They end up not cash flowing because they underestimated what it took expense wise to operate the property. That's the biggest reason why beginners fail to produce cash flow in their property. Single family, commercial, you have it.
Number two, agents and sellers, they never give you accurate information. In my experience, when we plug the agent or seller information into the property and operate it, and we look back a year at what happened, our actual expenses will be higher than what they gave us. Okay? My experience is they never give you accurate and clear information, all right? Number three, the reason you need to know is because this is what experts know and do. Sub market experts, people who are experts in the sub market in the apartment business, they know what it takes expense wise to run their apartments. They know expenses per unit, got it? All right.
Next thing is how do you get this information? Again, you have to look at a lot of deals. Repetition, repetition, practice, practice, look at a lot of deals and you will come to a conclusion on what the expenses are per unit or per door for that sub market. Also, you can ask a local property manager. That's what I did because I didn't understand what the expenses should be, so I went to a very established property manager and had him lay out the budget for me. He showed me what expenses are. What I did was I gathered all the expenses, and I divided it by the number of units, and I got my calculation expenses per unit moving forward in that sub market for all the deals, okay?
Lastly, you can get a mentor, get someone who's been there and done that so they can look over what you're doing so that you do not experience what most beginners do, which is a negative cash flow. Okay, you got it? That's number four, so what I want to do now is I want to give you a quick summary and compelling reasons why, again, you need to become an expert in your sub market.
All right we're finally here, here is the summary of the secret to commercial success, and the four things you need to know to become a sub market expert.
- Number one, you need to know the price per unit in your sub market.
- Number two, you need to know the cap rate in your sub market. Remember, every cap rate has a ... every sub market has a cap rate stamped on it.
- Number three, you need to know the market rents for a one bedroom, two bedroom, and three bedroom, and what the typical rent ranges are in your sub market for those bedrooms.
- Lastly you need to know, and this is probably the most important thing, is you need to know what the expenses are per unit, right?
Now, here are the benefits for just understanding why you need how to get them, here's the benefits. You won't overpay on your commercial property any longer, your cash flow will be predictable, you're going to learn how to properly value commercial property, and lastly you're going to meet your investment objectives. That's what it's about, that's what it's about in creating wealthy commercial real estate is meeting your investment adjectives, right? Through knowing this secret, knowing these four things and becoming an expert in your sub market, hope you got it.
All right, so you want more videos like this? Please visit my website, CommercialPropertyAdvisors.com, or just simply subscribe to my YouTube channel. Thank you so much for watching the secret to commercial real estate success, I'll see you at the next video.