COMMERCIAL REAL ESTATE
• What is commercial real estate
• Classes of CRE
• Why Invest
• Types of Leases
• Key CRE Metrics
• Why/How Do You Make Money with CRE
Presented By: Lindsay Caruso with The Agency Charlotte
WHAT IS COMMERCIAL REAL ESTATE
Overview
-Commercial Real Estate is property used for business-related OR 5+ unit living spaces
•Leased to tenants for income generation
•Types:
-Office space
-Hotels/resorts
-Retail
-Multifamily (i.e apartments), industrial, mixed use (retail+residential)
-Anything from 1-4 units up to a quad is considered residential, with financing it is, 5 and above is commercial
CLASSES OF CRE A B C
•Class A
-Best aesthetics/amenities
-Newer construction
-High quality infrastructure
-Great location
•Class B
-Older construction
-Smaller stature
-Average common areas
-Average rents for the area
•Class C
-Lower/lowest rents available
-Little to no amenities
-Older construction
-Average to below average location
WHY INVEST IN CRE?
•Portfolio Diversification
-Hard asset backed by something tangible
-Not tied 100% to stocks
-Properties are unique
•Cash Flow & Equity Appreciation
-Ongoing rents = cash flow
-More income = more equity
-Forcing appreciation
•Can be Passive
-Syndications you can be a partner of
-Limited Partner
-High quality management
-Types of Leases (NNN)
•LONG Term Wealth Building
-CRE is a long game
-Most projects are 2+ year holds, some can be 10 year, some generational
-Allows you to ride economic waves
-Can also be a double edged sword if you can’t sell it
•Recession Hedge
-CRE is less correlated with the market
-Location & Tenants are important
-McDonald’s vs Mortgage Tenant
TYPES OF LEASES
•Leases are usually quoted in $/sf per year
-$25sf x 10,000sf = $250,000 / 12 months = $20, 833.33 per month
•Single Net Lease
-Responsible for rent and taxes
•Double Net Lease
-Taxes & insurance
•Triple Net Lease
-Taxes, insurance, maintenance
•Gross/Modified Lease
-Only pays rent
-Landlord pays for taxes, insurance, & maintenance
KEY CRE METRICS
Net Operating Income
•NOI = Gross Income - Operating Expenses
Capitalization Rate aka Cap Rate
•Cap Rate = NOI / Market Value of Property Cash on Cash Return
•CoC = Annual Pre Tax Cash Flow / Total Cash Invested
Internal Rate of Return aka IRR
•IRR estimated the interest you’ll earn on each dollar invested in a rental property over its holding period.
•It’s the rate of growth that a property has the potential to generate.
•The Calculation goes Beyonce net operating income and purchase price to estimate longterm yield.
WHY/HOW DO YOU MAKE MONEY WITH CRE? - METRICS
•Income (Cash Flow) & Equity
•Net Operating Income
-NOI = Gross Income - Operating Expenses
-Before income taxes and interest (mortgage)
-Essentially EBITDA
-Best metric to assess the financial health of a property
Operating Expenses:
•Management Fees: $5,000
•Property Taxes: $25,000
•Repairs/Maintenance: $15,000
•Insurance: $1,000
Example Revenue:
•Rental Income: $100,000
•Parking: $25,000
•Laundry: $5,000
Total: $130,000
Total: $46,000 NOI = $130,000 - $46,000 = $84,000
Cap Rate
-A measure of profitability of a property relative to its cost.
-Essentially your return on investment aka ROI
-Investors use this to compare properties’ returns
-Lenders use this to metric as well as others
Cap Rate = NOI / Market Value of Property
Example: Property Cost = $1,400,000
= $84,000
Cap Rate = 6% NOI / Cap Rate = What to pay
Value Add
•Investors buy this to make light to significant property upgrades
•What Kinds of Upgrades?
-Physical
A.Landscaping
B.Improving the Units (multifamily)
-Operational
C.Cutting Costs
D.Changing Management
E.Billing tenants differently (utilities, etc)
-Combo of Both (mostly)
•Goals
-Increase Rents
-Decrease Vacancy
-Improve Management
-Increase NOI (Force Appreciation)
Example: 11 units
= $84,000 Cap Rate = 6%
= $1,400,000
-We raised rents by $100/month per unit after improvements
-We reduced operating costs by $250/month
-$100 x 11 x 12 months = $13,200 in additional annual revenue
-$250 x 12 = $3,000 in reduced annual expenses
Income = $130,000 + $13,200 = $143,200
Expenses = $46,000 - $3,000 = $43,000
NOI = $100,200 Cap Rate = 6%
My quick thoughts: Commercial investing is playing with the big boys and big girls, this is not for your part time gig - huge insurance companies buy these deals, wall street, highly financialized product, disposition to acquisition, capital gains can 1031 that, to sum up a long discussion this is what rich people do. Increases the stakes.
Presented By: Lindsay Caruso with The Agency Charlotte