COMMERCIAL MASTERING REAL ESTATE INVESTING the Art Of
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MASTERING the Art of COMMERCIAL REAL ESTATE INVESTING How to Successfully Build Wealth & Grow Passive Income from Your Rental Properties DOUG MARSHALL, CCIM NEW YORK LONDON • NASHVILLE • MELBOURNE • VANCOUVER Mastering the Art of Commercial Real Estate Investing How to Successfully Build Wealth and Grow Passive Income from Your Rental Properties © 2019 Doug Marshall, CCIM All rights reserved. No portion of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, scanning, or other—except for brief quotations in critical reviews or articles, without the prior written permission of the publisher. Published in New York, New York, by Morgan James Publishing. Morgan James is a trademark of Morgan James, LLC. www.MorganJamesPublishing.com The Morgan James Speakers Group can bring authors to your live event. For more information or to book an event visit The Morgan James Speakers Group at www.TheMorganJamesSpeakersGroup.com. ISBN 9781642790153 paperback ISBN 9781642790160 eBook Library of Congress Control Number: 2018936396 Cover Design by: Mia Broder Designs Interior Design by: Chris Treccani www.3dogcreative.net In an effort to support local communities, raise awareness and funds, Morgan James Publishing donates a percentage of all book sales for the life of each book to Habitat for Humanity Peninsula and Greater Williamsburg. Get involved today! Visit www.MorganJamesBuilds.com To all the real estate investors I’ve met through the years who have struggled with building wealth and growing passive income from their rental properties. This book is for you. What Is a CCIM? In 1999, Doug Marshall received the prestigious CCIM designation, which many consider the PhD of commercial real estate. A Certified Commercial Investment Member (CCIM) is a recognized expert in the disciplines of commercial and investment real estate. The designation is awarded by the CCIM Institute. Today almost 70 percent of designees hold the title of owner, partner, principal, or president, representing an exclusive worldwide referral network of thirteen thousand members in thirty countries. CCIMs must be proficient in the areas of investment analysis, market analysis, user decision analysis, and financial analysis for commercial real estate. Of the more than 150,000 commercial real estate professionals in the United States, only an estimated 7 percent hold the CCIM designation.1 vi Contents How to Achieve Financial Freedom ix Part 1 Buying Commercial Real Estate 1 1 Why Invest in Commercial Real Estate? 2 2 The Right Time to Invest 7 3 Time-Proven Principles of Investing 17 4 Do You Want to Be an Active or Passive Investor? 36 5 Selecting Your Advisory Team 44 6 An Introduction to the Numbers of CRE Investing 53 7 How to Successfully Close on Your CRE Purchase 66 Part 2 Financing Commercial Real Estate 71 8 How to Get the Best Possible Loan for Your Property 72 9 Option 1: Use a Lender You’ve Already Done Business With 74 10 Option 2: Shop the Market on Your Own 77 11 Option 3: Employ the Services of a Commercial Mortgage Broker 84 12 Think Like a Lender to Get the Financing You Want 91 Part 3 Managing Commercial Real Estate 111 13 On-Site Management Decisions That Help You Avoid Costly Mistakes 112 vii viii | Mastering the Art of Commercial Real Estate Investing 14 Off-Site Management Decisions to Optimize Your Property’s Performance 121 Part 4 Selling Commercial Real Estate 135 15 When Selling Your Property 136 Part 5 The Road Map to Financial Freedom 147 16 The First Five Steps to Financial Freedom 148 Appendices 155 1 Answer Key to “How Knowledgeable a CRE Investor Are You?” 156 2 Success Principles to Live By 165 ¾ The Boy and the Starfish 165 ¾ Three Life Lessons Learned from My Father 167 ¾ Three Life Lessons Learned from My Mother 169 ¾ Do People Trust You? The Thirteen Behaviors of High-Trust People 171 ¾ Three Principles Steve Jobs Lived By 174 ¾ Sixteen Common Sense Principles to Live By 176 ¾ The One Thing: The Surprisingly Simple Truth behind Extraordinary Results 178 ¾ Pending Recession? Eight Survival Tips for the CRE Professional 179 3 The Twelve Best Business Books of All Time 184 4 Some Essential Sources 188 5 Glossary of Commercial Real Estate Terms 192 Notes 200 About the Author 202 About the Marshall Commercial Funding Website 203 How to Achieve Financial Freedom How do you become good at something? Firstly, learn how it is done. Secondly, learn how others do it. Then do it your own way. —Kyos Magupe, philosopher o you want to supplement your current income by investing in commercial Dreal estate (CRE)? Better yet, would you like to someday quit your day job and devote your energies exclusively to your rental properties? If that’s your plan, then this book is for you. This book is for the commercial real estate investor who is either new to investing or has been at it for a while but realizes he or she needs help learning the time-proven principles of real estate investing. With more than thirty-five years of experience financing real estate, including a decade of personally investing in rental properties, I have learned how to successfully invest in commercial real estate, sometimes unfortunately by doing it the hard way. My clients and I have learned the do’s and don’ts of CRE investing, but there is no reason you have to go through the same learning process of trial and error. By sharing my knowledge with you, the hope is that you can avoid the pitfalls I’ve made so you can grow your CRE investments more successfully and with significantly fewer setbacks along the way. I have divided this book into four sections: buying, financing, managing, and selling investor-owned commercial real estate. Each section is filled with real-life examples and common sense advice on how to build wealth and grow passive income from your rental properties. For example, in the buying section of the book, you’ll learn: ix x | Mastering the Art of Commercial Real Estate Investing ¾ Why buying real estate is better than owning any other type of investment. ¾ What the real estate market cycle is, and what phase it is currently in. ¾ What the six immutable laws of real estate investing are. In the financing section, I will explain, among other things: ¾ How you can get the best possible loan for your property. ¾ What six things you need to do to make your property lender friendly. ¾ What nine underwriting guidelines lenders use to qualify borrowers. In the managing section, I will disclose: ¾ What the number one mistake most property owners make managing their apartments. ¾ What are the three most important things to consider when choosing a property management company. ¾ What seven hidden costs of managing apartments can cost you big-time. And finally, in the selling section, you will discover: ¾ What five things you must do before you list your property for sale. ¾ Three traps on the purchase and sale agreement that the seller should negotiate away. ¾ What the benefits are of doing a 1031 Exchange. As an investor myself, I have written Mastering the Art of Commercial Real Estate Investing for those investors needing assistance getting started. I believe this book will go a long way toward helping you take charge of your future. If you like easy-to-follow, solid advice and step-by-step instructions, you’ll love this life-changing guide. You can bolster your income and begin the process of building wealth today! The Book’s Title From my many years of commercial real estate experience, I’ve come to the realization that those who excel at CRE investing understand there is a lot more How to Achieve Financial Freedom | xi to it than crunching the numbers. Yes, you need to have a firm grasp on how to value real estate, how leveraging a property with debt will influence the property’s return, and so on. But CRE investing is much more than that. I’ve come to realize that the most successful real estate investors I’ve had the privilege to have as clients develop a subjective, intuitive feel about a property. They don’t look at the potential acquisition as it is at the moment. Rather, they create a vision for the property. They envision what it would be like if it were renovated and managed correctly. They also realize how important it is to understand market trends, perceive how a neighborhood is trending, develop an awareness of where we are on the real estate market cycle … to name just a few factors worth knowing. These parameters are far more subjective than objective in scope. And that is why I titled my book Mastering the Art of Commercial Real Estate Investing. This type of investing is genuinely more of an art than a science. Some may say that the subtitle, How to Successfully Build Wealth and Grow Passive Income from Your Rental Properties, is redundant—that building wealth and growing passive income are really the same thing. I beg to differ. Building wealth is all about increasing the investor’s net worth over time. As an investor’s CRE portfolio grows, so too should his or her net worth. Growing passive income, on the other hand, is all about maximizing cash flow after debt service. Whether passive income slowly grows over time depends a great deal on how a property is leveraged with debt. I’ve known investors who focused exclusively on building equity (increasing their net worth) to the detriment of generating cash flow. My CRE investing philosophy maintains that successful real estate investing should do both: it should build an investor’s net worth, and it should grow his or her passive income.