1 Fundamentals of CRE TH

Commercial Real Estate Master Class: Part 1 - Commercial Introduction

Overview

  • Presenter: Terry Hale

  • Content Structure: The session is divided into 12 segments; this is the first segment focusing on the foundational aspects of commercial real estate.

Types of Commercial Real Estate Properties

  • Recessionary Proof Property Types: Due to cyclical nature of the market, it's crucial to invest in properties that remain stable during downturns.

  • Key Property Types to Focus On:

    • Multi-Family Properties

    • Self Storage Facilities

    • Mobile Home Parks

Multi-Family Properties

  • Definition: Properties comprising multiple housing units, essential during economic downturns as displaced homeowners seek affordable housing.

  • Classes of Multi-Family:

    • Class A: New builds in prestigious areas.

    • Class B: Older, well-maintained units in good locations.

    • Class C: Older units in underdeveloped or lesser-known areas.

  • Investment Focus: Target small, mom-and-pop multi-family facilities rather than high-capacity developments which typically exceed $100 million.

    • Benefits include extensive market demand and ongoing need for affordable housing.

Self Storage Facilities

  • Importance: These properties serve as storage solutions for individuals downsizing or needing extra space.

  • Market Overview:

    • Over 50,000 self-storage facilities in the U.S., with 90% owned by small operators.

    • Many lack digital presence or effective marketing strategies leading to lower occupancy rates.

    • Market Occupancy Rate: 85% is considered stable; potential for growth to 90%, 95%, or 100% full.

  • Recessionary Proof Nature: Storage facilities thrive during economic downturns as individuals and businesses seek storage.

Mobile Home Parks

  • Overview: Affordable housing options that also provide good investment returns but require more management than self-storage.

  • Ownership Types:

    • Tenant-Owned Homes: Tenants pay pad rent while maintaining their homes.

    • Park-Owned Homes: The park owner maintains the properties.

  • Investment Challenges: Some areas impose moratoriums on new mobile home parks, limiting options for expansion.

Other Commercial Property Types

  • Categories include:

    • Assisted Living Facilities and Senior Living: High operational responsibility, potentially lucrative but contain various regulatory complexities and elder care considerations.

    • Retail and Office Spaces: Less favored due to lower recessionary resilience. Most interested in owning the real estate itself and hiring management.

Key Principles in Commercial Real Estate

  • Core Understanding: All commercial real estate ultimately represents "boxes on dirt," emphasizing the importance of land and zoning strategies in investment growth.

  • Zoning Classifications:

    • Agricultural: Initially the default state of land before transitioning to other uses.

    • Residential, Commercial, Industrial: Categories that determine property use and corresponding value increases.

Financial Insights

  • Land Valuation:

    • 43,560 square feet in one acre; this measurement plays a role in how property transactions are structured.

    • Zoning Effects: Changing land use to commercial can dramatically increase value (e.g., $1 per square foot to $20).

  • Transaction Insights:

    • Most commercial real estate investors take 3 to 5 years to realize profits.

    • Focus on investing amounts between $300,000 to $2,000,000 with down payments ranging from 5% to 20%.

    • Important factors to consider for return calculations include:

    • Cash Reserves: For unforeseen costs.

    • Deferred Maintenance: Keeping an eye on necessary repairs to avoid future losses.

    • CapEx (Capital Expenditures): Traditionally needs to be factored into overall expenses (average 30% total with 20% expenses and 10% vacancy).

Property Acquisition Strategies

  • Record the current condition and performance of properties using as-is value rather than speculative future valuations.

  • Target lower occupancy properties (20%-50% occupancy) for potential high-margin deals and utilize market insights to gain a competitive edge.

Conclusion

  • Next Steps:

    • Future segments will elaborate on specific acquisition strategies, financial frameworks, and management practices.

    • Encouragement to pursue available commercial property deals while learning practical transaction techniques to maximize success.

  • Equipped Knowledge: You will learn how to create income streams, manage properties effectively, and partner in investment opportunities that yield stable cash flows and build wealth over time.

  • Final Thought: Focus on sectors that yield immediate income, such as multi-family or self-storage units, rather than waiting for appreciation in value or higher-risk investments.