Real Estate 101
Real Estate 101
Real Estate 101
Investing 101
RealCrowd
www.realcrowd.com [email protected]
Commercial Real Estate 101 is the first of many short and easy to follow eBooks published by RealCrowd with the intent
of demystifying commercial real estate. The primary goal of the book is to give investors the knowledge to invest in, what
we believe, is the greatest wealth creation asset class in the world - commercial real estate investments.
RealCrowd
www.realcrowd.com [email protected]
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In fact,
commercial real estate income stream can produce three times the average stock dividend yield and four times
the average bond yield. The chart below demonstrates the income each asset class produces based on a $1 million
investment.
Stock Dividends
Suburban Office
$78,000
Retail
$72,000
DT Office
$59,000
Multi-Family
Dow 30
S&P 500
Bond Yields
$58,000
$29,000
$21,000
AAA Bond
$19,100
US Treasury
$18,500
Average Cap Rate Source: Real Capital Analytics 2012 / Average Stock Dividend Q1 2013 / Average 10 Year Bond Yield Q1 2013
Investors use cap rates to measure returns. More detail on cap rates
is provided in RealCrowds Commercial Real Estate 201 eBook.
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Te n a n t s p a y re n t , u s u a l l y
Maintenance
Admin
Building Expenses
Mgmt
are Paid
Utilities
Janitorial
Insurance
=
After expenses are paid, the
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7.5%
28.9%
285%
273%
Debt
Equity
$8,000,000
$7,000,000
28.9%
$5,000,000
$4,000,000
7.5%
9.5%
11.8%
14.3%
Equity
$6,000,000
Year 16
Year 21
$2,000,000
$1,000,000
$0
Debt
$3,000,000
Year 1
Year 6
Year 11
Although this is a very simplified analysis, this shows the dramatic effect leverage can have on returns. Assumes
a 20 year fully amortizing loan, a conservative 2% annual Net Operating Income increase, and 65% LTV.
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below.
cash and sell the asset in the future at $11 million, you
debt payments), then sell the asset, you have also made
Although this is a very simplified comparison, the analysis shows the dramatic effect leverage can have on returns.
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High Fees - A private REIT can charge up to 17% up front before your investment even touches the real
estate. A recent REIT prospectus disclosed the following fees - sales commissions=6.5%, dealer manager
fee=3.5%, organization and offering expenses=2.42%, acquisition fees=1.75% and acquisition
expenses=0.96%!!! For every $100 you invested, less than $85 actually went towards the real
estate! Additionally, a REIT is only required to distribute 90% of the income generated by its properties
back to investors, significantly lowering overall returns.
Lower Average Returns - The average publicly traded REIT dividend is 3.4%, significantly lower than
average returns from direct commercial real estate ownership. Many individual properties can distribute an
cash return ranging from 6% to 12% annually.
High Volatility - Given that REIT shares are stocks traded in the stock exchange, they are subject to the
high volatility and market shifts of the stock market as a whole.
Lack of Control - The REIT structure is designed to provide an investment similar to what mutual funds
provide for stock investing. Although there is a diversity of assets, there is also a lack of control over which
assets are being purchased. Just as many investors have control of investing in individual stocks on
platforms like E*TRADE and Scottrade, they now have similar control over their commercial real estate
portfolio through RealCrowd.
Less Transparency - Although REITs have strict reporting guidelines, most investors know very little about
the properties in a REIT portfolio. Direct real estate ownership increases the overall transparency of the
If your primary objective is to participate in the numerous benefits that real estate has to offer discussed
Debt
Equity
investments.
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Asset Category
Multi-Family
(Apartment
Complex)
Oce Buildings
agriculture to a service focused economy. The tech world thrives in offices and
collaboration is key. More companies are opting to bring their workforce back into the
offices versus letting them work from home (e.g. Yahoo).
Industrial
Buildings
Retail
Properties
Obviously there are more reasons to purchase each asset class, but this should give you a good start to forming your
own philosophy in investing in real estate. Many investors diversify their investments across all asset classes.
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Deal Type
Core
Property Attributes
Investor Opportunity
Core-Plus
They may also have below market rental rates and leases
that expire shortly (within 1-3 years) - These assets can be stabilized yields as the asset gets leased up.
located in primary and secondary markets and may
Value Add
70% leased and may require physical improvements to be These assets produce lower initial returns
able to compete for new tenants. These assets are
Development
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Generation
Baby
Boomers
Investment Goals
Investments
income stream.
rates. Baby Boomers could consider wellleased multi or single tenant assets that
Born
1946-1964
commercial real estate. Generally, this generation has retirement portfolio and lower liquidity of
including a self directed IRA, checkbook IRA, or Solo development assets could be considered
401K plan which would allow them to have
significantlygreater flexibility to invest in asset classes the real estate long term and paying off the
other than mutual funds.
1980-2000
There have been few things in my life which have had a more genial
effect on my mind than the possession of a piece of land.
-Harriet Martineau
Commercial Real Estate Investing 101
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committed to offering the highest quality investments with the best real estate operators across the United States.
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Cash-on-Cash Return
The cash-on-cash return is the percentage of funds you invested in the building that comes back to you annually after
making financing payments. Your cash-on-cash return is often higher than your cap rate if favorable financing is put in
place.
Contract Rent
Contract rent is the current rent being paid by the tenant according to their lease. Contract rents are measured by
square footage in commercial real estate. For example, if an office tenant is paying $21,000 a year for 1,000 square feet
of space, their contract rent is $21.00 per square foot per year. Contract rents may also be quoted monthly.
Market Rent
Market rent is the rental rate that a specific location could achieve if it were available to lease today. Like the contract
rent, market rent is quoted per square foot. Investors compare market rent to contract rent to see if there is an
opportunity to increase rental rates once a suite becomes available.
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Occupancy
Occupancy is the percentage of occupied suites in a commercial real estate property or market. For example, if a
100,000 square foot building is leased and occupied by 95,000 square feet of tenants, the buildings occupancy is simply
95%. Occupancy can be measured in buildings and in entire markets.
Vacancy
Vacancy is the percentage of unoccupied suites in a commercial real estate property or market. For example, if a
100,000 square foot building is leased and occupied by 95,000 square feet of tenants, the buildings vacancy is 5%.
Like occupancy, vacancy can be measured in buildings and in entire markets.
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