by Peter Conti and Peter Harris

CommercialReal Estate Investing

FOR

DUMmIES‰

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CommercialReal Estate Investing

FOR

DUMmIES‰

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by Peter Conti and Peter Harris

CommercialReal Estate Investing

FOR

DUMmIES‰

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Commercial Real Estate Investing For Dummies®

Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.com

Copyright © 2008 by Wiley Publishing, Inc., Indianapolis, Indiana

Published by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as per-mitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior writtenpermission of the Publisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600.Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing,Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http://www.wiley.com/go/permissions.

Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for theRest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related tradedress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the UnitedStates and other countries, and may not be used without written permission. All other trademarks are theproperty of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendormentioned in this book.

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REP-RESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THECONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUTLIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CRE-ATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CON-TAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THEUNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OROTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF ACOMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THEAUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATIONOR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FUR-THER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THEINFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAYMAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORKMAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN ITIS READ.

For general information on our other products and services, please contact our Customer CareDepartment within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.

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10 9 8 7 6 5 4 3 2 1

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About the AuthorsPeter Conti and Peter Harris are known as the World’s #1 GreatestCommercial Real Estate Mentors. They partnered years ago by combiningtheir existing Mentoring practices. They have both started from modestbeginnings, Peter Conti was an auto mechanic, and Peter Harris was an intro-verted engineer. The portfolio of properties they have purchased nationwidewith their Commercial Mentoring Program students continues to grow at anaccelerated rate.

Peter Conti is the CEO of MentorFinancialGroup.com and lives on theChesapeake Bay with his wife and kids in Annapolis, Maryland.

Peter Harris has purchased and put together commercial and residential realestate deals across the country for years. He has taught, mentored, andinstructed many of the most successful investors across the nation. Harrisand Donald Trump are coauthors of Three Master Secrets of Real EstateSuccess. He also sits on the board of advisors on several private and nationalreal estate investment and development companies.

Many years ago, Peter Harris received the gift of a great mentor in his careerand in his every day life, who guided and encouraged him to always get out ofhis comfort zone and play a bigger game. Mentoring one-on-one or to hun-dreds at a time around the nation is Peter’s way of giving back and impartingthe message of hope and faith in the dynamic and rewarding world of realestate. Even though Peter’s first career was a physicist, holding several U.S.patents on outer space simulation, the school of hard knocks was where hegot his real education in the business world.

Besides his business life, Peter’s passions include hanging out with his sonPJ, serving at his church, smiley faces, and riding his bike hundreds of milesat a time. Peter Harris lives in the heart of San Francisco with his son, PJ.

You can e-mail the authors at mentor@mentorfinancialgroup.com, oryou can call them at 800-952-9585.

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A Free Gift from the Authors: Your BonusCommercial Quick Start Training Package

Here’s your chance to join the authors for over six hours of training that justwouldn’t fit in the book so that you can hit the ground running with yourcommercial real estate investing. You’ll get to listen in, watch, and respond asthey guide you in putting together highly profitable commercial deals.

Here’s what you get:

� Over 6 hours of audio and video commercial investing trainingsessions

� Special form “Addendum A,” which gives you up to 90 days todecide if you want a deal or not

� A Quick Start exclusive: The Money Raising Workshop

� Audio interviews with leading commercial real estate investingexperts

You’ll discover:

� The fastest way to get started investing in commercial realestate

� How to retire in five years or less

� Insider secrets to finding deals

� How to buy commercial real estate with no money

� Three steps to quickly fund even the biggest deal

� How to explode your net worth with land development

You’ll also receive this special report: “The 3 Best Places to Buy CommercialProperty Today”

Get your Commercial Quick Start Training Package (a $299 value) by registering your copy of this book at www.commercialquickstart.com.Enter code CFD101.

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DedicationPeter Conti: This book is dedicated to Peter Harris. You are an incredibleblessing in my life.

Peter Harris: I dedicate this book to God first and foremost. I thank Him for His faithfulness, His love and grace, and for all of the amazing people He blesses me with. I also thank my great mentor, a great man named NickTsujimoto. Thank you, Nick, for your wisdom and love, for our many “closeddoor” sessions, and for helping me set and achieve awesomely scary goals.Lastly, I want to thank my partner Peter Conti for being the man and friendthat he is and always will be. And to everyone else: The best is yet to come!

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Authors’ AcknowledgmentsFrom both authors:

To every one of our Commercial Mentoring Program students. This book,along with all of the fun we’ve had and all of the properties we’ve boughttogether, would not be possible without you. Your courage motivates usevery day. To Tim Gallan and Mike Lewis at Wiley publishing, we don’t knowhow you do it. Thanks for giving us a little breathing room.

From Peter Harris:

To PJ, for always hanging in there with Dad. You are the greatest son a fathercould ever ask for. I love you, dude.

To Steve, Gary, Abe, Marge, June, Beck, Lela, Stone, Steph, and wonder boyKyle, for always cheering for me.

To Da’ Girls, you know who you are! Thanks for being warriors in your livesand mine. I am the wealthiest man on earth because of who and what weshare together. The best is yet to come!

From Peter Conti:

This book wouldn’t have happened without the awesome changes I’ve seenin my life over the past few years. Thank you, God, for such a great life andespecially for surrounding me with so many wonderful people. Joanna, I loveyou. I miss you girls. You grew up so fast. Son, our time together is preciousto me.

To everyone at MentorFinancialGroup.com: Marilyn, Angela, and Jeff. Wow!You are the most incredible and fun people I’ve ever had the privilege to workwith. To Deb, Elizabeth, Kevin, Elaine, and Molly, you are the backbone of theMentor Family. All of you have proven that nothing is impossible for the manwho doesn’t have to make it happen.

To all of our coaches, Peter Harris, Cheryl, Rob, Stephen, Emily, Juli, Cleve,Jeff, Matt, and David. Your daily support and encouragement for ourMentorship students is changing the world.

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To Mr. X in one of the southern states. Your passion for helping all of our stu-dents to profit from every single deal they do with us is the keystone of theMentor System. You deserve the credit even though you wish to remainanonymous.

To my friends in Christ: Brett, Rob, Peter, Baden, Tom, Thomas, Stephen, andRobb. Thank you for your leadership and guidance. And Rob, that prayingover your wife thing you taught me is awesome!

To Mom, Dad, Lisa, Debbie, Linda, John, Paul, and Matthew, I love you.

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Publisher’s AcknowledgmentsWe’re proud of this book; please send us your comments through our Dummies online registrationform located at www.dummies.com/register/

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and Media Development

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Publishing and Editorial for Consumer Dummies

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Debbie Stailey, Director of Composition Services

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Contents at a GlanceIntroduction .................................................................1

Part I: Getting to Know Commercial Real Estate Investing ....................................................7Chapter 1: Just Imagine . . . Commercial Real Estate and You! .....................................9Chapter 2: A Crash Course in Commercial Real Estate Investing ..............................19Chapter 3: Evaluating Commercial Real Estate ............................................................33

Part II: Getting Started Making Deals ..........................57Chapter 4: On Your Mark, Get Set, Go Find Deals ........................................................59Chapter 5: Strategies for Making Offers and Negotiating............................................75Chapter 6: Due Diligence: Doing Your Homework........................................................97Chapter 7: Closing Your Deal ........................................................................................117

Part III: Funding Your Deals: Financing and Lending..............................................137Chapter 8: Conventional Financing Options ...............................................................139Chapter 9: Getting Creative with Financing ................................................................163Chapter 10: Raising Capital and Forming Partnerships ............................................177

Part IV: Day-to-Day Ownership and Operations...........189Chapter 11: Property Management: Who’s Minding Your Ship? ..............................191Chapter 12: Protecting Your Assets .............................................................................213Chapter 13: Why Properties Fail...................................................................................223

Part V: Kicking Your Investing into High Gear ............241Chapter 14: Making a Success Out of Commercial Fixer-Uppers .............................243Chapter 15: Land Development: The Heart of Commercial Real Estate..................267Chapter 16: Expert Tax Advantages and Strategies ...................................................289Chapter 17: Leaping into a Commercial Real Estate Career .....................................309

Part VI: The Part of Tens ...........................................327Chapter 18: Ten Ways to Increase Your Property Value ............................................329Chapter 19: Ten or So Easy Ways to Network.............................................................335

Index .......................................................................341

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Table of ContentsIntroduction..................................................................1

About This Book...............................................................................................1Conventions Used in This Book .....................................................................2What You’re Not to Read.................................................................................2Foolish Assumptions .......................................................................................2How This Book Is Organized...........................................................................3

Part I: Getting to Know Commercial Real Estate Investing ...............3Part II: Getting Started Making Deals ...................................................3Part III: Funding Your Deals: Financing and Lending .........................4Part IV: Day-to-Day Ownership and Operations .................................4Part V: Kicking Your Investing into High Gear ....................................4Part VI: The Part of Tens .......................................................................5

Icons Used in This Book..................................................................................5Where to Go from Here....................................................................................5

Part I: Getting to Know Commercial Real Estate Investing.....................................................7

Chapter 1: Just Imagine . . . Commercial Real Estate and You! . . . . . .9What Is Commercial Real Estate?.................................................................10What to Think About As You Get Started....................................................11

Can I make money at commercial real estate investing? ................11What type of investor am I? ................................................................12Do I have to be a genius to crunch the numbers?............................13What investing opportunities are available? ....................................14How does financing work? ..................................................................15

Understanding the Risks of Commercial Real Estate ................................15Avoiding lawsuits, the most feared risk ............................................16Risk-proofing your investment plan...................................................17

Chapter 2: A Crash Course in Commercial Real Estate Investing . . . .19How Is Commercial Real Estate Different

from Residential Real Estate?....................................................................20Why Invest in Commercial Real Estate? ......................................................21What Types of Investments Are Available?.................................................22

Apartment buildings (also known as residential properties).........22Offices and warehouses.......................................................................22Retail centers ........................................................................................24Hotels and resorts................................................................................24Land development................................................................................25

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What You Need to Get Started......................................................................26No real estate license required...........................................................26A few technical skills............................................................................27

Myths and Questions about Investing in Commercial Real Estate ..........28Timing the Commercial Real Estate Market ...............................................29

Knowing whether to buy, hold, or bottom-fish ................................30Trends are your friends .......................................................................32

Chapter 3: Evaluating Commercial Real Estate . . . . . . . . . . . . . . . . . . .33Talking the Talk: Terms You Need to Know ................................................33Figuring Out What a Property Is Worth.......................................................35

Not-so-obvious tips on analyzing .......................................................35Breakeven analysis...............................................................................38Establishing and following guiding principles..................................40

Running the Numbers on Some Properties ................................................40Analyzing an apartment deal ..............................................................42Analyzing a retail shopping center ....................................................43

The Professional Approach to Valuing Properties.....................................47Approach #1: Comparable sales.........................................................47Approach #2: Income...........................................................................48Approach #3: Cost to replace the property ......................................49

Understanding What Creates Value .............................................................50Use: How the property is used gives value .......................................50Leases: As the lease goes, so goes the value ....................................51Location: The unchangeable factor ...................................................53

Differentiating a Good Deal from a Bad Deal ..............................................53Cash-flow investors..............................................................................53Long-term investors .............................................................................54Short-term investors ............................................................................54

Part II: Getting Started Making Deals...........................57

Chapter 4: On Your Mark, Get Set, Go Find Deals . . . . . . . . . . . . . . . . .59Discovering the Secret to Finding Great Deals ...........................................59

Defining your property search ...........................................................60Developing relationships.....................................................................61

Getting Leads on Commercial Property Investments................................61Newspaper ads and publications .......................................................62Internet sites of commercial real estate ............................................62Government agencies ..........................................................................62Realtors and brokers............................................................................63Property owner associations..............................................................64Real estate investment clubs ..............................................................65

Looking Locally and Nationwide..................................................................66Surveying the pros and cons of local investing................................66Investing outside of your community................................................67Determining your location with demographics................................68

Commercial Real Estate Investing For Dummies xiv

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Locking Down Deals: Don’t Leave Home without These Tools ................69Allowing the Great Deals to Find You ..........................................................70

Attracting owners with reports ..........................................................70Making unsolicited offers ....................................................................71Discovering properties that have been relisted...............................72Unlisted properties: Hidden fish in the streams ..............................73

Chapter 5: Strategies for Making Offers and Negotiating . . . . . . . . . .75Increasing Your Chances of Getting Your Offer Accepted ........................75

Starting with the end in mind .............................................................76Sizing up the sellers and what they really want ...............................76

Sealing Deals: The Instant Offer System......................................................77Step 1: Build rapport with the broker or seller ................................78Step 2: Establish an upfront agreement.............................................80Step 3: Build the broker’s or seller’s

motivation level for selling ..............................................................80Step 4: Determine the financial details

of the deal (The Money Step)..........................................................82Step 5: Find the critical pieces to a

winning deal (The What-If Step) .....................................................85How to Meet the Seller When Submitting Your Offer ................................86Writing Up the Offer.......................................................................................87

Letter of intent ......................................................................................87Commercial contract to buy and sell real estate .............................88Liquidated damages clause.................................................................89Memorandum of agreement................................................................90

Presenting Your Offer in the Best Light.......................................................90The Five-Step Deal Filter ...............................................................................91

Filter 1: The five-minute test ...............................................................91Filter 2: Sign it up! .................................................................................91Filter 3: The quick view........................................................................92Filter 4: The “realists” check ...............................................................93Filter 5: End users determine the value.............................................93

The Seller Has Accepted My Offer! Now What? .........................................94

Chapter 6: Due Diligence: Doing Your Homework . . . . . . . . . . . . . . . .97What Is Due Diligence? ..................................................................................97

Making due diligence a team effort ....................................................99Getting to the truth about due diligence.........................................100

The First Things You Need to Do ...............................................................102Scope out the property......................................................................102Get a title commitment ......................................................................102Look at the property’s numbers.......................................................103

Creating Checklists for Effective Due Diligence .......................................104Physical due diligence checklist ......................................................104Financial due diligence checklist .....................................................105Legal due diligence checklist ............................................................107

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Managing the Whole Process .....................................................................109Opening an escrow.............................................................................109Getting a preliminary title report .....................................................110Keeping an eye on contingencies .....................................................112

You Found Problems, What Now?..............................................................114Renegotiating with the seller ............................................................114Making the final decision: Stay in or run away? .............................115Setting the sails for the closing date................................................116

Chapter 7: Closing Your Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117The Anatomy of a Close ..............................................................................118Closing 101: The Basics of Closing a Deal .................................................118

What is an escrow and who is an escrow officer?..........................119What is title insurance? .....................................................................119Do I need an attorney for my closing? .............................................120Do closing costs differ in commercial real estate? ........................121Is it better to close at the end or beginning of the month? ..........121How long does it take to close a commercial deal? .......................122

The Big Picture Show: Questions to Ask Yourself Before You Pull the Trigger ......................................................122

What are my exit strategies?.............................................................123Are my investment goals being met? ...............................................123

Sweating the Details before Signing on the Dotted Line .........................124The title work......................................................................................124The closing instructions and closing statement ............................125The lender ...........................................................................................126

Closing Day: What to Expect.......................................................................126What’s on a closing statement? ........................................................127What exactly will I be signing?..........................................................128What should I do before signing? .....................................................129When am I officially closed?..............................................................131

Taking Legal Ownership ..............................................................................131You’re the Boss Now: What Next?..............................................................132

Stage 1: Assess the situation.............................................................133Stage 2: Assemble the team ..............................................................133Stage 3: Secure the site ......................................................................134Stage 4: Use the info that you discovered.......................................134

Part III: Funding Your Deals: Financing and Lending ...137

Chapter 8: Conventional Financing Options . . . . . . . . . . . . . . . . . . . . .139The Commercial Lending Process in a Nutshell ......................................140

Seeing the process through your lender’s eyes .............................140Keeping things moving without incident ........................................141

Differences between Commercial and Residential Lending ...................142The property’s merits matter more than

the borrower’s qualifications ........................................................143The down payment requirement is higher......................................143

Commercial Real Estate Investing For Dummies xvi

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How Lenders Evaluate Properties..............................................................144Determining the property’s income.................................................144Revealing the quality of the property..............................................146Assessing the strength of the borrower ..........................................148

Getting Your Lender to Say “You’re Approved!”.......................................149What’s needed from you....................................................................150What’s needed regarding the property............................................150What lenders like in a deal ................................................................151What lenders don’t like in a deal......................................................152

Choosing the Best Loan for You.................................................................152Getting to know conventional lenders.............................................153Understanding the available conventional loans...........................154Selecting a lender for your deal........................................................156Deciding what you want out of your property ...............................157Determining how much the loan will cost you...............................158Knowing the costs of getting out of a loan......................................159Controlling the interest rate (to some extent) ...............................160

Assuming the Seller’s Preexisting Mortgage.............................................161

Chapter 9: Getting Creative with Financing . . . . . . . . . . . . . . . . . . . . .163Creative Financing Techniques ..................................................................164The Master Lease Technique......................................................................165Getting Someone to Carry Secondary Financing .....................................166Getting the Owner to Carry Seconds and

Other Secondary Financing.....................................................................167Why secondary financing works ......................................................167Finding sources of secondary financing..........................................168Understanding common pitfalls of secondary financing ..............169Getting the owner to help you out by financing

all or part of the purchase.............................................................170Dealing with seller objections ..........................................................171

Operating the Wraparound Mortgage Like a Surgeon.............................172Using an Option to Buy ...............................................................................173Leveraging the Equity in Your Portfolio....................................................174

Employing blanket mortgages ..........................................................174Drawing on 401(k)s or IRAs...............................................................175

Chapter 10: Raising Capital and Forming Partnerships . . . . . . . . . . .177Identifying the Keys to Raising Private Funds..........................................177Building Your Rolodex of Potential Investors...........................................178

Creating relationships with potential investors.............................179Using executive summaries to nab potential investors ................182Connecting with your investors .......................................................183

Deciding Whether to Go It Alone or Use a Partner or Two.....................184Creating the Right Teams and Partnerships.............................................185

Structuring your partnership ...........................................................186Knowing how much to pay your investors .....................................186

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Writing up the agreements to use with your investors .................187Considering how long you want to partner with someone...........187Interviewing a potential partner ......................................................187

Part IV: Day-to-Day Ownership and Operations ...........189

Chapter 11: Property Management: Who’s Minding Your Ship? . . . .191I’m the Boss: Managing Your Commercial Property Yourself.................191

Improving your management skills with a few basic tips .............192Developing basic business systems.................................................193A do-it-yourselfer’s checklist ............................................................194Training your tenants to respect you and the property ...............195Operating successfully day-to-day with

the proper people and tools..........................................................197Letting Go: Using Professional Property Management Companies .......199

Understanding the ins and outs of professional property management....................................................................200

Deciding to hire a professional property management company...................................................................201

Searching for property management candidates...........................202Interviewing your prospective managers .......................................202Checking credibility and capability .................................................203Drafting the property management agreement ..............................205Getting your reports: Monthly and weekly accountability ...........207

Knowing How to Be an Effective Absentee Owner ..................................210

Chapter 12: Protecting Your Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .213Taking Asset Protection Seriously .............................................................214

Create a plan to avoid lawsuits ........................................................214Plan for the worst and be happy if it doesn’t happen ...................215

Building a Legal Fortress for Personal Assets..........................................215Making use of entities ........................................................................216Don’t throw your entities under the bus.........................................217Gathering essential fail-safe documentation...................................219

Common-Sense Protection Tips .................................................................219Treat others as you would like to be treated..................................220Meet any potential problems head-on.............................................220Always have proper insurance coverage ........................................221

Chapter 13: Why Properties Fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223What Is a Property Failure?.........................................................................224How You, the Investor, Can Cause Failure.................................................224

You made a bad deal ..........................................................................225You have too much debt....................................................................227You’re in denial regarding problems................................................228

How Management Can Cause a Property to Fail ......................................229How the Market Can Cause Failure............................................................232

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The ups and downs of real estate cycles ........................................232The influence of demographics ........................................................233

Folding Up and Walking Away.....................................................................234Knowing when to fold ........................................................................235Choosing to walk away honorably ...................................................235

Tried and True Tips on Surviving and Thriving.......................................236

Part V: Kicking Your Investing into High Gear .............241

Chapter 14: Making a Success Out of Commercial Fixer-Uppers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .243

Just What Is a Commercial Fixer-Upper? ..................................................244Distressed and poorly performing property...................................244Distressed and poorly performing owner .......................................245

Uncovering Diamonds in the Rough..........................................................246How to find fixer-uppers....................................................................246Where to buy.......................................................................................249Taking action before those great opportunities disappear ..........249

Figuring Out What a Fixer-Upper Is Worth................................................251Determining your cash flow..............................................................251Figuring your NOI, cap rate, and sales price...................................252Running the numbers on an example property..............................253

Mapping Out a Fixer-Upper Game Plan .....................................................255Perform due diligence........................................................................256Before fix-up and after: Bridging the gap to payday ......................258Determining your break-even point .................................................259Creating checkpoints for the renovation process..........................260

Avoiding Headaches and Pitfalls (Or at Least Minimizing the Pain) .....263Recognize hopeless situations .........................................................263Hire good contractors (and think like one

when you do projects yourself)....................................................264Timing Your Fixer-Upper for a Quick Sale.................................................266

Chapter 15: Land Development: The Heart of Commercial Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .267

The Pros and Cons of Investing in Land....................................................267The pros...............................................................................................268The cons ..............................................................................................268

Understanding What Makes Land Worth More ........................................269Knowing Whether You’re in the Right Market..........................................269

Getting an outside expert’s opinion.................................................271Examining the path of progress........................................................271

Identifying the Three Ps for Successful Projects .....................................272Investing in Land with a Team....................................................................273Finding the Best Places to Invest in Land .................................................274

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With Land, Time Really Does Equal Money ..............................................274Using contracts to get more time.....................................................277Buying time with options ..................................................................277

Changing the Property’s Zoning and Getting Approved to Develop .....278Determining what to build on your land .........................................278The approval process and why it frustrates

many would-be investors...............................................................281Getting the Green Light on Your Deal........................................................283

Dealing with bureaucrats ..................................................................284Avoiding neighborhood opposition .................................................286

Chapter 16: Expert Tax Advantages and Strategies . . . . . . . . . . . . . .289An Overview of Money-Making Tax Strategies .........................................290

Appreciation........................................................................................290Depreciation........................................................................................291Paying down the mortgage ...............................................................291Rolling over .........................................................................................292

Being an Investor or a Dealer: The Difference Is Huge............................292Holding real estate long term as an investor ..................................292Buying and selling quickly as a dealer.............................................293

Naming Yourself a Real Estate Professional: It Pays................................293Choosing Your Entity: An Important

Tax Preparation Before You Buy.............................................................295Sole proprietorships ..........................................................................296Corporations .......................................................................................296Limited liability companies...............................................................297Limited partnerships .........................................................................297

Digging into Depreciation............................................................................297The magic of depreciation.................................................................299Don’t “recapture” your depreciation ...............................................299Cost segregation: Saving thousands more

by separating your property parts...............................................300The 1031 Exchange: Avoiding Taxes by

Trading In for Another Property.............................................................302Before anything else, get expert help ..............................................303Surveying the exchange rules...........................................................304

Taking Advantage of Some Commonly Overlooked Deductions............305Accounting expenses .........................................................................306Consulting expenses ..........................................................................306Home office expenses ........................................................................306All property-related expenses ..........................................................307Transportation to and from your properties..................................307Expenses for your technology gizmos.............................................307

Chapter 17: Leaping into a Commercial Real Estate Career . . . . . . .309Becoming a Commercial Sales Agent.........................................................309

Four myths of commercial real estate sales ...................................310Four truths of commercial real estate sales ...................................310

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Real estate agent versus real estate broker....................................311Getting your foot in the door ............................................................312Living the life of a commercial sales agent .....................................313Being a successful independent broker ..........................................316

Making a Go of It as a Property Manager ..................................................317A quick look at the different property

manager hats you can wear...........................................................317Choosing the type of property you want to manage .....................318Starting out as a property manager .................................................319Finding a job as a property manager ...............................................320

Cashing In on a Commercial Mortgage Business Career ........................320Choosing a role to play......................................................................321Jumping in ...........................................................................................322Becoming a lending machine ............................................................323

Arriving As a Commercial Appraiser .........................................................324Finding appraisal work ......................................................................325Working as an appraiser ....................................................................325

Part VI: The Part of Tens............................................327

Chapter 18: Ten Ways to Increase Your Property Value . . . . . . . . . . .329Raise the Rents.............................................................................................329Budget Your Way to Wealth ........................................................................330Give the Property a Makeover....................................................................330Change the Property’s Use..........................................................................331Add Goodies to the Property......................................................................331Stand Up to the Tax Man .............................................................................332Pass Utility Expenses to Tenants ...............................................................332Renegotiate the Leases................................................................................333Bring in a New Management Team.............................................................334Split Up Your Land .......................................................................................334

Chapter 19: Ten or So Easy Ways to Network . . . . . . . . . . . . . . . . . . .335Get Your CCIM Designation.........................................................................335Put Power in Your Search Engines .............................................................336Go Directly to the Investment Firms..........................................................337Read the Trades ...........................................................................................337For Apartment Owners: Join the NAA .......................................................338For Office Building Owners: Get Involved with BOMA............................339For Shopping Center Owners: Enlist with the ICSC .................................339For Property Management Professionals:

Become Affiliated with the IREM............................................................340Stay Current and Connected.......................................................................340

Index........................................................................341

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Introduction

Welcome to Commercial Real Estate Investing For Dummies! We both lovecommercial real estate and are thrilled to be able to share our passion

with you. In this book’s chapters, we provide you guidance by showing youour experiences and the combined experience of thousands of our Mentorshipstudents who have invested with us across the country since 1995.

Investing in commercial real estate allows you to:

� Make much larger amounts of money while putting in almost the sameamount of work that smaller deals, such as single-family houses, require.

� Establish multiple streams of income that are generated by propertiesthat almost run themselves. In fact, you discover how to be in commandof everything right from your home office.

� Retire in five years or less. Sounds impossible, doesn’t it? Well, it really isn’t!

The downside of investing in commercial real estate is that it does take sometime to get up to speed. Plan on getting a good education before you jumpinto your first deal. Oh, and if you’re frightened by the prospect of makinghundreds of thousands of dollars from just one deal, investing in commercialreal estate is probably not the right path for you.

About This BookThis book is your complete how-to guide for investing in commercial realestate. You may want someone who’s already investing to help you overseeyour first deal or two, but our goal is to give you enough information so thatyou’ll be able to go out and find, structure, and negotiate profitable, money-making deals on commercial properties.

In these pages, you have all the answers to complex issues broken down intoan easy-to-read format. Start at the beginning, in the middle, or simply pick asection that interests you most. It doesn’t matter where you start becausethe most important thing is that you begin today. You may have been lookingfor your opportunity to become your own boss, make more money than yourstockbroker, or simply be able to retire fast by investing in commercial realestate. Now, with this book, you finally have the opportunity and the informa-tion you need to take charge.

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We mention our students a lot in this book, and that’s because we do 82 per-cent of our investing with our Commercial Mentoring students across thecountry. We hope that by sharing the success of others who are just like you,we’ll be able to encourage you to do whatever it takes to live the life of yourdreams.

Conventions Used in This BookWe include the following few conventions to help you make your waysmoothly through this book:

� Important terms are shown in italics, with definitions following theterms.

� Boldfaced words highlight the keywords in bulleted lists and numberedsteps.

� Web sites are printed in monofont.

When this book was printed, some Web addresses may have needed to breakacross two lines of text. If that happened, rest assured that we haven’t put inany extra characters (such as hyphens) to indicate the break. So, when usingone of these Web addresses, just type in exactly what you see in this book,pretending that the line break doesn’t exist.

What You’re Not to ReadIf you’re in a hurry as you read through this book, you can skip over some ofthe anecdotes and sidebars (the text in the gray boxes). These bits of text areinteresting, but not essential to your understanding of the basics of commer-cial real estate investing. However, most of them contain interesting and help-ful info that you’ll likely want to go back and read when you get a chance.

Foolish AssumptionsWhen writing this book, we kept a few assumptions in mind about you:

� You’re interested in real estate but you’re probably not as rich as DonaldTrump. However, we assume that you aren’t broke and looking formoney to make your next house payment either.

� You have some experience in business, management, or real estateinvesting, whether it is in commercial real estate or not.

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� You’re sharp enough to be investing in commercial real estate, so youaren’t going to rely on us for legal, tax, or other professional advice.After all, one of us is a former auto mechanic, so you should take every-thing we share with you as our real-world experience. That means youneed to combine that experience with the counsel from your own attorney and your tax professional.

How This Book Is OrganizedThe text of this book is organized into self-contained chapters that you canread in any order. Think of this book as a reference that you can pick up andread bits and pieces of whenever you have the time. (Of course, we’d love iteven more if you read the thing from cover to cover.) The chapters arearranged in parts, and here’s what each part covers.

Part I: Getting to Know Commercial Real Estate InvestingThis part is where you might just fall in love with commercial real estateinvesting. Understanding what types of property make up commercial realestate and getting past some of the biggest myths about it will provide astrong foundation that you can use to support all the other in-depth informa-tion you get in this book. In this part, you also discover just how simple it isto quickly determine the value of any commercial property. After you under-stand this formula, you’ll be able to confidently hold your own while negotiat-ing your way to your newfound fortune.

Part II: Getting Started Making DealsIn this part, you discover the four essential steps to every commercial dealyou put together. For instance, you find out where the best sources of bro-kers, sellers, and properties can be found. Then we jump into some seriousdeal making by sharing with you our Instant Offer System, which shows youhow to make successful offers. And because all big commercial deals need tobe checked out before you make the final move to buy them, you need tounderstand how to use due diligence and the closing process to uncoverhidden problems, negotiate prices down, or determine when the best deal foryou is not to buy. We end this part, appropriately enough, by showing youhow to close a deal.

3Introduction

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Part III: Funding Your Deals: Financing and LendingOkay, so you’ve hooked a big deal and are reeling it in. Making sure that youhave all the funding you need is critical at this point. In this part, you find outhow to get approved for conventional financing. Or, if you like the idea of get-ting creative and buying commercial real estate without using any of your cashor credit, check out Chapter 9. We close out this part with a chapter in whichyou discover the secrets of raising private capital from outside investors. In itwe also show you how to put together profitable partnerships.

Part IV: Day-to-Day Ownership and OperationsNow that you have bought a property, who’s going to mind the ship? You maybe amazed to find out that it isn’t always going to be you! In this part, wecover important points such as how to pick commercial properties that canafford to pay for outside management. And we help you keep tabs on yourimportant investments by revealing our simple “manage the manger”process. In this part, you also uncover the secrets of protecting your assets.Unfortunately in today’s world it isn’t what you make but what you keep thatreally counts. Finally, you get an insider’s look at something you won’t find inmost investing books: the reasons why some properties fail and how you canavoid making the same mistakes.

Part V: Kicking Your Investing into High GearWhen you start feeling like a pro and you’re ready to jump into the fast lane,this is the part for you. These are the chapters where we really get you up tospeed. For instance, we introduce you to commercial fixer-uppers. We alsohelp you discover the insider secrets to taking a piece of land through theapproval process so that it can be developed. Owning commercial real estatecombined with the ideas Chapter 16 can save you tens of thousands of dol-lars in taxes every single year. Finally, in this part you find out how to jumpinto a commercial real estate career for extra income or to get an insider’sedge on the deals you’re putting together.

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Part VI: The Part of TensIn this traditional For Dummies part, you quickly discover some importantinformation. For example, we provide the top ten ways to increase the valueof your commercial properties. We also include ten great organizations thatyou should consider joining.

Icons Used in This BookIn this book, we highlight certain types of information with icons so you canfind what you’re looking for fast. Here are the icons we use and what theymean:

The text highlighted by this icon usually consists of helpful ideas and strate-gies to make your investing easier.

This icon highlights important points that are essential to your successfulinvesting.

Investing is fun but it also has pitfalls that you need to watch out for, so thisicon does the job.

When we attach this icon to text, you know that you can be sure to get thereal-world scoop from stories and investing ideas that come from Mentorshipstudents and our own deals.

This icon reminds you to do more research, hire an inspector, or consult withan attorney or tax advisor.

Where to Go from HereThis book is written so that you can jump into the shallow end or you can gooff the high dive, depending on your experience level. You can begin any-where you want — none of the chapters need to be read before any of theothers. So, if you need a refresher course, start with Part I. If you’re moreexperienced and want to kick your investing into high gear, check out Part V.

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Otherwise, simply peruse the table of contents or the index to find whatyou’re looking for. To understand what commercial investing can do for you,check out Chapter 1. Whatever you do, don’t let this book get out of yourhands without reading Chapter 15, which is all about land development. Inthis chapter, you can find out how some of our most passionate studentshave made millions — yes, that’s millions of dollars — doing big land devel-opment deals.

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