C OMMERCIAL R EAL E STATE I NVESTING E ASY STEPS TO GETTING STARTED 12 JACK CUMMINGS John Wiley & Sons, Inc. C OMMERCIAL R EAL E STATE I NVESTING C OMMERCIAL R EAL E STATE I NVESTING E ASY STEPS TO GETTING STARTED 12 JACK CUMMINGS John Wiley & Sons, Inc. Copyright © 2005 by Jack Cummings. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For more information about Wiley products, visit our web site at Library of Congress Cataloging-in-Publication Data: Cummings, Jack, 1940- Commercial real estate investing : 12 easy steps to getting started / Jack Cummings. p. cm. Includes index. ISBN 0-471-64714-4 (pbk.) 1. Commercial real estate. 2. Real estate investment. 3. Commercial real estate—United States. 4. Real estate investment—United States. I. Title. HD1393.55.C86 2004 332.63'24—dc22 2004042221 Printed in the United States of America. 10987654321 (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be www.Wiley.com. v CONTENTS FOREWORD xi INTRODUCTION xiii CHAPTER 1 How to Get Started Investing in Commercial Real Estate 1 Commercial Real Estate Defined 2 Investment versus Use 3 Comfort Zone 3 Setting Realistic Goals 4 How to Get the Most out of This Book 6 CHAPTER 2 Why Commercial Real Estate Is a Dynamic Investment 9 Invested Amount = Cash + Debt + Time 10 Other People’s Money 11 Leveraged Cash Flow 12 Equity Buildup 13 Appreciation You Can Accelerate 13 Management Postures 1, 2, 3, and 4 15 Supply and Demand 16 The Seven Dynamics of Commercial Real Estate 17 How Not to Be Intimidated by Commercial Real Estate 25 The Four Real Estate Myths That Need to Be Unveiled 26 CHAPTER 3 What Makes Real Estate Value Go Up or Down 31 Community Planning 32 Departments of Transportation 33 Fire and Health Codes 34 Lack of Concurrency 35 Land Use Changes 36 Condemnation and Eminent Domain Proceedings 37 Building Moratoriums 37 Economic Obsolescence 38 The Rule of Small 39 Six Primary Factors That Make Real Estate Value Go Up or Down 42 CHAPTER 4 How to Build an Effective Commercial Real Estate Comfort Zone 55 Listing Services 56 FSBO 56 Active Listings 57 Tax Assessor 57 MapQuest 58 Zoning Maps 59 Elements Common to All Initial Comfort Zones 60 Key Factors to Becoming an Expert in Your Own Backyard 62 Learn How to Let Your Computer Lead the Way to Your Success 66 How to Choose Your Comfort Zone 68 CHAPTER 5 How to Accomplish Effective Due Diligence 75 Due Diligence by Definition 77 Letter of Intent 78 Formal Agreement 80 Inspection and Review Period 81 Environmental Inspections 81 Easements 81 Encroachments 82 Code Violations 83 Zoning Use 85 Allowed Use 85 CONTENTS vi The Eight Most Important Elements of Due Diligence 86 The Four Elements to Prepare for Due Diligence 93 Eight Things You Can Do When You Find Problems 96 CHAPTER 6 The Effects of Leverage 101 How Positive Leverage Works to Your Benefit 102 Cheap Money + Cash-Flowing Investments = Opportunities 104 Three Magical Factors to High Positive Leverage 104 How Constant Rates in Mortgages Work 107 How to Use the Annual Constant Rate Chart 108 How to Determine If Negative Leverage Is Bad 108 Six Elements for Maximum Leverage 114 Pitfalls in Highly Leveraged Mortgages 118 CHAPTER 7 How to Maximize Your Financing 121 Seller-Held Financing 122 Loan Officer 126 Wall Street Financing 128 Acquisition and Development Loans 129 Income and Expense Projections 130 Loan Draw Schedule 131 Seven Important Factors to Maximize Your Financing 132 CHAPTER 8 How to Become a Commercial Real Estate Insider 141 A Real Estate Insider Defined 142 Local Governmental Control over Real Estate 143 The Board of Adjustment 144 The Planning and Zoning Board 145 The Nine Stages of Becoming a Real Estate Insider 148 Contents vii . xiii CHAPTER 1 How to Get Started Investing in Commercial Real Estate 1 Commercial Real Estate Defined 2 Investment versus Use 3 Comfort Zone 3 Setting Realistic. Dynamics of Commercial Real Estate 17 How Not to Be Intimidated by Commercial Real Estate 25 The Four Real Estate Myths That Need to Be Unveiled 26 CHAPTER