Archive for April, 2009
The $15 Million Dollar Commercial Real Estate Challenge: Setting The Stage
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Just watch me....win or lose!
This is the first time we are announcing this publicly!
My partner, Rob Powell, is working on buying a $15 million deal in Texas, and we want you to follow along in real time as he works this project.
Follow on Twitter: http://twitter.com/RobAPowell and Subscribe to this blog for more detailed updates!
We don’t know if this deal will close… we’re doing this in real time without a safety net. But we’re going to be sharing what happens step by step and we want you to be a part of it.
As an extra incentive, we’ll be providing special “bonuses” like some of our closely-kept property documents as a gift to you to help you follow along and to assist you as you work your own commercial real estate deals.
Heck, you may even have a chance to participate in this as team members… we’ll have to see how things play out.
CAVEAT: The Internet is a big, exciting and PUBLIC place. Our only limitation is that we don’t want to give away too much insider information that could get back to parties that are not as nice as you, so some identifying details will be left out of the public conversation. Shhh! However, we strive to give enough information that you can follow along just like you were doing the deal with us!
The Deal Itself:
This commercial real estate deal is a $15 million apartment building in Texas with approximately 500 units. It is a “C” class property in a “C” area with an 80% occupancy rate.
Where We Found It:
Just like we’ve taught our private coaching students, some of the best deals are to be had through creating relationships. We call them “Wealth Lifelines.” This deal was found by networking with real estate agents who knew Rob was a serious buyer looking for a good opportunity.
The Numbers:
When Rob found this apartment complex, it was hovering around 80% occupancy after some management transition had increased the vacancy from it’s historically lower levels.
He was attracted to the deal because it cash flowed at that level, so there was good upside potential.
Even though the cap rate was in the “7″ range when he first saw the property, Rob was able to negotiate $1.5 Million off the purchase price to get it locked up 
at an 8-cap.
If nothing changes when they do the financial review, Rob should be able to get an 15% cash-on-cash return on this deal.
What’s Next:
Rob is just starting the due diligence phase of the process. He has 45 days for due diligence and it started yesterday (4/20/2009).
He is hiring an asset management firm, and a property management company he’s worked with in the past to cooperate in doing the research necessary to complete the due diligence.
Want to know what he’s working on NOW?
Follow him on Twitter to find out!
http://twitter.com/RobAPowell
This is an exciting deal and I am looking forward to revealing more as we get further into the process!
Passive Income—The Goldmine of Commercial Real Estate Investing
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Passive Income Makes Me Want To Dance...or something. photo by corey robinson
Passive income is the money generated from real estate or business transactions in which the investor is not actively involved. There are several ways to generate passive income from investments in commercial real estate. To understand the value of passive income, it is important to understand how income is generated from commercial real estate.
Commercial Real Estate Income—Understanding Valuation
Commercial real estate is valued in a different way from residential real estate in that the property produces income directly proportionate to its 
worth. This means the property is worth more if it creates more income. Residential real estate is valued based on comparable real estate in the area, otherwise known as market comps.
Generating Cash Flow
Commercial real estate investment also generates greater liquidity through larger cash flow. For example, if you were to invest $250,000 in a residential home, you would expect to rent that house for $1,800 while the underlying mortgage payment would be around $1,600. This would leave you with only $200 in profit with all risk resting on one tenant. If you were instead to purchase a 10-unit two-bedroom apartment building at an investment of $25,000 per unit and rent each unit for an average of $500, you would generate $5,000 per month while spreading the risk among 10 tenants. That is a little over three times the amount of cash generated for the same amount spent.
Forced Appreciation
With commercial real estate valued at its ability to produce income, you can increase the value of the property (appreciation) through increasing income. If you cosmetically upgrade a property through inexpensive updates, you can increase the value of the rents. If you decrease costs of maintenance or pass some maintenance expenses to the tenants, you increase the income from the property. Many small tweaks can generate a much higher income and value of the property.
Passive Income
Commercial real estate investment generates passive income when a person acts as a silent partner, invests in an investment pool or invests in a Real Estate Investment Trust (“REIT”).
A silent partner investment can provide high reward but can carry a high degree of risk. Silent partners usually provide cash or access to capital but do not manage or participate in the daily operations of the property. Generally silent partners may not mandate business decisions but can require accountings of their investments. Silent partner agreements exist at many levels from limited liability corporations, limited liability partnerships or partnerships. These can be extremely lucrative business ventures but require a substantial amount of research to find the right fit for the investor.
Investment pools are created when a group of investors pool their assets to own property. The investors do not participate in managing the property or any activities associated with the property. Income dividends are paid directly to the investors minus fees and other stipulated costs. Some investment pools are heavily structured while others have more fluid rules. These can generate substantial income for investors depending on the structure and policies of the pool.
REITs provide a regulated market for investors to purchase securities sold on national exchanges that directly invest in real estate via mortgage or properties. REITs offer tax considerations that can eliminate or substantially decrease corporate income taxes. They can be public or private. Some REITs invest in multiple types of commercial real estate and some focus solely on one area. REITs are required to pay investors, at applicable tax rates, 90% of the income.
REITs are designated as mortgage, equity or a hybrid. Mortgage REITs focus on ownership and investment in property mortgages with revenues generating from mortgage loan interest. They purchase mortgage-backed securities, existing mortgages or provide loans to real estate owners. Equity REITs own and invest in property, which means the investors retain the value of the real estate asset. Income is generated from rents. Hybrid REITs provide a combination of mortgage and equity REITs.
Would you like to know more about Passive Investment Income Opportunities?
The principals at Grassland Investments, aka The Real Wealth Company, are active investors continually looking for profitable investments. If you would like to know more about future deals or participate in one of the investment opportunities available, please enter your email address in the box. You will receive up-to-date information about the market as well as property valuation tools to help you make the best investment decisions.
Commercial Investing: Leases Defined – Triple Net Lease And Other Investment Definitions
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True NNN lease or Gross or Capital...or....what else did you say?
The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. Terms like “triple net lease” are not intuitive. Rather, a triple net lease refers to a lease where the lessee (person leasing the property) pays rent, insurance, maintenance and property taxes. Triple net leases usually involve single-tenant retail properties leased to tenants with high credit ratings on “NNN” terms.
As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment 
terms and definitions provided by many sources including www.investorwords.com and www.creonline.com. This posting will focus on types of leases.
Double Net Lease
A double net lease is a written agreement or contract where the lessee (person, people or entity acting as tenant) pays rent, taxes and insurance expenses to the lessor. The lessor pays maintenance feels.
Capital Lease
A capital lease is considered a purchase of the property by the lessee (person, people or entity acting as tenant) when at least one of the following items occur:
- The lease includes an option to purchase the property for less than fair market value.
- The lease term is greater than ¾ of the property’s estimated economic life.
- The lease transfers ownership of the property to the lessee at the end of the lease term.
- The present value of the lease payments exceeds 90% of the fair market value of the property.
Direct Lease
A direct lease is a financing contract that requires the lessor to purchase the property directly from the manufacturer and lease the property to the lessee. In direct leases, the lessor is usually a financial institution or bank.
Gross Lease
A gross lease is a written agreement or contract that requires the landlord to pay all expenses normally associated with ownership like utilities, repairs, insurance and taxes.
Land Lease
A land lease is a written agreement or contract that specifies only the land or ground is the rented property.
Lease
A lease is a written agreement or contract where a property owner allows use of the property to a named tenant for a specified time and rent.
Leaseback
A leaseback is a written agreement where one party sells property to a buyer and the buyer immediately leases the property back to the seller. Leasebacks allow the buyer to have full access to the asset without capital constraints. Leasebacks can also provide tax benefits.
Leasehold
A leasehold is a legally recognized property interest that gives the leaseholder the right to hold or use a property for a fixed period of time at a stipulated price without transfer of ownership under a lease contract.
Lease-Purchase Agreement
A lease purchase agreement is a written contract under which the lessee can apply lease payments toward the purchase of the property.
Lessor
A lessor is the person, group of people or named entity who is leasing a property to a tenant under a written agreement for a specified time and rent.
Lessee
A lessee is a person, group of people or named entity acting as tenant for a specified time and rent.
Leveraged Lease
A leveraged lease is a written contract that requires the lessor to supply some of the capital required to purchase the property and borrow the remainder from a lender. The lender is given a mortgage on the asset and an assignment of the lease and lease payments. In a leveraged lease, the lessee makes payment directly to the lender.
Open-End Lease (Finance Lease)
An open-end lease is a written contract that requires the lessee to pay an additional sum, with the amount of the additional sum dependent on the value of the property when it is returned.
Sandwich Lease
A sandwich lease is a written contract where an entity leases property from one party and leases the same property to another party. Under this type of lease, the entity is both a lessee and a lessor, which means the entity both pays and collects rent on the same property.
Step-Down Lease and Step-Up Lease
Both types of leases are written contracts that stipulate specified increases or decreases to rents on certain future date. With step-down leases the rents decrease at future dates; with step-up they increase.
Synthetic Lease
A synthetic lease appears as a lease from an accounting viewpoint, but as a loan for tax purposes. This allows for an off-balance sheet account of the
financing and tax benefits that accompany the financed asset.
*Please note, TheRealWealthblog.com cannot guarantee the accuracy of the information of the following article as it pertains to individual leases. The above information is provided as an overview. When considering what lease options to pursue, please seek the advice of an attorney, accountant or other professional as it pertains to your individual circumstances.