Best Tips for Finding the Right Assets in an Emerging Market

I constantly hear of people that want to invest in an emerging market, the proverbial golden goose of the real estate industry. I believe much of this has been stoked by the somewhat resent opportunity zones that many are trying to invest in. To find the right area, there are many factors to take into consideration. Some of these are time-proven techniques that developers have used for decades to forecast rent growth and desirability to a neighborhood, others are more common sense, and straight economics. 

1) Risk Appetite - Being part of the first wave into a new market can be daunting, you will need to be prepared for the long haul.  Are you willing to be the first trailblazer into a sub-market, where you may get the lowest cost, but also potentially the longest time to see the change, if at all?

2) Look for City programs - Most cities are seeking ways to drive business to these communities, check with your city to see what programs are in place to drive business to this community, there are cities that have programs that incentivize non-profits to help turn an emerging community around.

3) Has there been a dramatic change in the demographics for the immediate neighborhood? Is there new residential construction that is driving higher prices, and denser neighborhoods? If so, it is likely that the commercial market will follow within a few short years.

4) Check the affordability - Can the community afford higher rents at this time, if not, you will want to consider the upgrades to your property and how much you spend on them.

5) How is the job market - If jobs are coming to the community you will then see growth and it will create need for more housing, retail and services to support the community.

6) Other buildings coming to the market - Are you seeing several other properties coming to the market or have there been more permits pulled to upgrade properties. You will want to check these by talking to the city and of course driving the area that you are looking to buy. Also, this may give you insight into what types of properties are in demand and where yours might fit into attracting the right tenants that may be willing to pay higher rents.

7) Vacancies and how fast they lease up - Look at the existing properties in the area, check their lease rates, condition of property and how long they stay on the market. If the vacancy rate is lower than the industry standard then it shows that there is room to raise rents, as the area is in high demand.

8) Infrastructure - You always want to check and see if there is enough infrastructure in place to handle the amount of people that you are expecting to move into this community, are there grocery stores, hospitals and schools.

9) Nightlife - Depending on your asset class, if you are looking at multifamily you may want to see if there is any sort of nightlife that your potential new residents may find appealing, after all, people generally like to eat, and go out in the neighborhoods in which they live.

I hope these tips help, please check out our blog https://www.joekillinger.co/joekillingerblog for more real estate investing tips

Finding The Best Rate Of Return On Your Commercial Property

Capitalization rate, or cap rate for short, is a measurement used by all real estate investors, whether they are commercial or residential investors. It shows them the potential rate of return on a property. Knowing the cap rate is advantageous in deciding whether or not a property is worth investing in or purchasing. 

In this article, we wanted to go deeper into everything you need to know about the cap rate and what a good one is.

How the Cap Rate Works and Why It Matters

The cap rate is a formula, and a very simple one as well:

            Cap rate = net operating income / current property value

The rate is based on a one-year period, and this simple measurement is usually enough for most investors to determine how valuable a property is.

Naturally, something so simple can’t always be enough for determining the value of a building. For that reason, we highly advise you to use the cap rate together with a few other evaluation tools. By doing that, you can get a more clear picture of how valuable a property truly is.

We advise this because the cap rate is based on annual returns, which can't always reflect the actual value of a property. Sometimes they only have a single good year, and you can end up investing in a property without the full picture. Plus, cap rates don’t take into account things like mortgage payments, lender fees, closing costs, and more. 

Despite its flaws, the cap rate is still an essential part of determining the value of a property. A long-term investor should always look into the cap rate of a residential or commercial property. On the other hand, those looking to flip the property quickly need not rely on it at all as they won't be renting it.

Cap rates matter mostly because:

• A rising cap rate shows that there is a rise in the income of the property relative to its price

• A falling cap rate indicates that the income of a property is lower compared to its price.

What Is a Good Cap Rate?

Now that we’ve covered everything important you need to know, we can give you an adequate answer to this vital question. 

A good cap rate is usually very subjective, but many investors tend to agree that it is somewhere between 4% and 12%. In high-demand areas like Southern California and New York, a 4% cap rate is usually the norm. In less demanding cities and rural neighborhoods, it's usually well above that.  Just remember, generally speaking, the higher the return the higher the risk associated with the investment. 

Naturally, it always depends on how you’re using the cap rate, but this answer should satisfy most investors not looking to delve too deep into cap rates. 

If you do want to delve deeper, you need to consider the amount of risk you are willing to take, as cap rates are proportional to the amount of risk involved. The lower the cap rate, the lower the risk, and the higher the cap rate, the higher the risk. So, when you start to think about what a reasonable cap rate is for you, it's necessary to determine how much risk you are willing to accept. By determining that, you'll know precisely what cap rate will be suitable for you. 

Tips For Investors That Want To Invest Out Of Their Area

Tips For Investors That Want To Invest Out Of Their Area

Many Investors feel they can expand their portfolio by acquiring assets out of the area they are currently operating. There are numerous reasons for this (higher rates of return in secondary markets, better tax benefits, etc…). Now, this may be true but it can also be a good way to lose your investment. I have experienced both wins and losses from investing in other areas and I had some tough lessons to learn that I will pass on to you. I will say that many of the assets we have acquired out of the area were also owned by other absentee owners and these assets were being sold because they were not profitable for the past ownership, the management companies had run these assets into the ground and were taking revenue that was not rightfully theirs.

1)          Find a reputable property management company and due your due diligence, lots of references and check their online reviews.

2)          Be sure you have a good accountant that can watch over the books every month, know where every penny is going and that all reconciliations have been done.

3)            Make sure you are aware of all of the local and state laws that may be different in the new area.

4)           Be aware of insider tips for reducing expenses (i.e.: hiring local specialist that can appeal taxes, utility costs, etc…)

5)            Before buying out of your area be sure to budget regular visits to your investments (I am currently on a plane from Los Angeles to Dallas to check on one of ours).

6)            I recommend that some of your visits are surprise visits, not every one of them, as you don’t want your property management team to think that you don’t trust them, but do make a few.

7)            When you show up at your property have a specific plan and what you want to see while you are there, tour the property and makes notes so on your next inspection you can refer to them.

8)            Talk to your tenants, ask them how they feel the management team is doing.

9)            Take the time to get to know your management team, take them to lunch and know as much about them as you can.

10)            Go to the surrounding properties and introduce yourself as the owner and make sure they have your contact information in case of any emergencies, or maybe they may want to sell at a later date and you’ll have an opportunity to expand your portfolio.

11)            Conduct team meeting and discuss how the property is functioning with the team, what can they be doing better or should there be changes.

12)          Daily reports are a must; short form is OK but just be sure it includes the information you need.

 A good property management company can make your investment work very well for you, just be sure you remember to treat your property like it’s your business…because it is your business!

Experts Weigh-in on the Potential Future of WeWork

Company WeWork has officially pulled their IPO offering – Now Commercial Real Estate Experts Weigh-in on the Future of WeWork as they prepare to lay off thousands of employees.

The parent company of WeWork, The We Company, will file to withdraw its public offering with the Securities and Exchange Commission, the company announced on Monday.

Lots of questions about the future of the IPO when the company moved to delay an investor roadshow. Shortly after, then CEO Adam Neumann, resigned as the company’s leader.

With the latest moves, the future of WeWork continues to grow.

With over 31 years of real estate experience, Chief Executive Officer George Pino of Commercial Brokers International says the company is just months away from closing their doors for good.

“WeWork as a company and a brand is currently in a position that will define its existence in the next few months. One of the main attractions of WeWork to the investment community has been their tremendous growth. With their recent plan to cease new lease signings this will heavily impact their unprecedented growth,” says Pino.

Pino believes for WeWork to continue as a brand they will need to address the profitability of the company. Compared to other larger suite companies such as Regus, their revenues are lower and they have yet to show profitability. This is one of the reasons why the IPO stalled and valuations of the company have tremendously fallen.  

Historically, businesses have two options to increase profitability: Increase income and revenue while maintaining expenses, or cutting expenses. As reported by multiple news outlets, WeWork will stop all new lease agreements with property owners as the company looks to cut costs.

One of their options in cutting expenses is laying off employees, which they are currently planning to do. This will affect several WeWork locations in the Los Angeles area, many of whom directly work with property owners and landlords. This begs the question of how it may impact their customer service and what their members have come to expect. With so many changes, WeWork spaces may end up looking like any other Coworking/Executive Suite company, and how will that appeal to investors?

WATCH what the proposed IPO meant for Landlords and Tenants:

What Should You Do When a Tenant Asks for a Rent Reduction?

If you own commercial real estate, at some point in time a tenant is going to ask you to reduce the rental rate for their lease. This is never a fun situation to find yourself in so you want to be prepared for when the time comes and you have to deal with your tenant asking for a reduction. The number one thing is to remember it’s a business transaction and try to keep emotions from getting in the way, then investigate as to why your tenant is asking you for the reduction. There are cases where the tenant may be looking down the road and sees a potential for a slowdown in their sales and wants to prepare or they may just want to try and get a reduction. No matter the reason it’s best for your investment if you can create a winning proposition for both yourself and your tenant.

The first thing you want to do is perform your due diligence, make sure you know the current market rates for your asset class and pull their lease to know how long of term they have left and if there any increases in rent set for the near future. The operating statement from the past two years broken out by month and a current Balance Sheet should give you the story of what has been happening and where the company is today. Check to see if this may be a seasonal change, bad business decisions, etc.; and be prepared to offer them advice on what you see may help them get back on track. If you have decided to work with them and try to keep them in your building you want to do your best to help them get their business back on track and performing at peak level. You might be able to offer insights to improvement as when they are in the middle of operating their business they may sometimes not see the full picture and if you can help them it’s best for everyone.

If you make the decision to offer a rent reduction and work with them to keep them in place you can offer them a few different options. (depending on their lease term)

• Temporary rent reduction for a certain amount of time;

• When looking at your lease rental increases, consider not increasing this year;

• With the rental increase maybe forgo this year and double the following year;

• Consider not increasing their rent, or even reducing it, but take a percentage of their sales for a certain amount of time

• Blend and extend- forego some rent for a certain amount of time and extend the lease and add the reduction to the extension.

Keep in mind - your goal is to create a winning proposition for yourself and your tenant. Understanding their business helps go a long way.