Commercial Real Estate For Beginners | Step By Step Tutorial

Summary

In this informative video, Marco from Whiteboard Finance demystifies commercial real estate for beginners, covering property types, classes, and key metrics like NOI, Cap Rate, and IRR. He discusses strategies for wealth building through portfolio diversification, cash flow, and equity appreciation, while highlighting the importance of understanding the financial aspects and the competitive nature of the market. The video also introduces Fundrise, a platform for investing in private real estate deals, emphasizing the potential for passive income and long-term wealth creation.

Takeaways

• 🏢 Commercial real estate (CRE) includes property used for business activities or living spaces with five or more units.
• 💼 CRE is invested in for income generation through leasing to tenants and includes various types like office spaces, hotels, retail, and industrial properties.
• 📈 The speaker has experience in commercial leasing, development, analysis, and lending on large-scale projects.
• 🏬 Class A properties are the most desirable with the best aesthetics and amenities, while Class B and C properties are older with fewer amenities and may be located in less prime areas.
• 💰 Investors are attracted to CRE for portfolio diversification, cash flow and equity appreciation, passivity, long-term wealth building, and as a recession hedge.
• 📝 Leases in CRE are typically quoted in dollars per square foot per year, with different types including single net, double net, and triple net leases.
• 🔢 Key metrics for evaluating CRE deals include Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on Cash Return, and Internal Rate of Return (IRR).
• 📈 NOI is calculated by subtracting operating expenses from gross income and is a crucial metric for assessing the financial health of a property.
• 🏗️ Value-add strategies in CRE involve making significant upgrades to properties to increase rents and NOI, thereby forcing appreciation in the property's value.
• 💼 The speaker emphasizes the importance of understanding the financial aspects of CRE, as it is a highly competitive market with professional players.
• 📚 The video concludes with a teaser for a potential commercial real estate analysis course, indicating the depth of knowledge required in this field.

Q & A

What is the main focus of the 'Commercial Real Estate 101' video by Marco?

The main focus of the video is to provide an introduction to commercial real estate for beginners, covering different types of property classes, strategies for making money through forced appreciation and equity, and key metrics used to evaluate commercial real estate deals.

What are the different types of commercial real estate mentioned in the video?

The video mentions office space, hotels and resorts, retail, multi-family, industrial, and mixed-use as the main types of commercial real estate, with brief mentions of health care facilities and other types.

What are the three main classes of commercial real estate properties discussed in the video?

The three main classes of commercial real estate properties discussed are Class A, Class B, and Class C, with Class A being the most desirable and Class C being the least in terms of amenities and location.

What is the purpose of investing in commercial real estate according to the video?

The purpose of investing in commercial real estate is for income generation through leasing the properties to tenants, as well as for portfolio diversification, cash flow and equity appreciation, passive income, long-term wealth building, and as a hedge against recession.

What is a triple net lease and why is it considered the most passive form of lease for landlords?

A triple net lease is a lease agreement where the tenant is responsible for property taxes, building insurance, and maintenance costs, in addition to the rent. It is considered the most passive form of lease for landlords because it minimizes the landlord's responsibilities and financial burdens related to property ownership.

What are the key metrics used to measure commercial real estate deals mentioned in the video?

The key metrics mentioned are Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on Cash Return, and Internal Rate of Return (IRR). These metrics help investors evaluate the financial performance and profitability of a property.

How is NOI calculated and why is it important in commercial real estate?

NOI is calculated by subtracting the operating expenses from the gross income of a property. It is important because it represents the property's net earnings before taxes and interest, serving as a key indicator of the property's financial health and a primary metric for assessing its value.

What is the significance of the Cap Rate in evaluating commercial real estate investments?

The Cap Rate, or Capitalization Rate, is significant because it measures the return on investment (ROI) relative to the property's cost. It helps investors compare the profitability of different properties and makes informed decisions based on the income-generating potential of the property.

What does the video suggest as a way for individual investors to participate in commercial real estate deals without managing the properties themselves?

The video suggests using platforms like Fundrise, which allows individual investors to invest in private real estate deals through syndications, offering exposure to larger commercial real estate deals without the need to manage the properties directly.

What is a value-add strategy in commercial real estate, and how can it increase a property's value?

A value-add strategy involves making significant property upgrades or operational improvements to increase the property's income potential. By improving the property's amenities, reducing operating costs, or increasing rental income, the NOI can be increased, which in turn can raise the property's value and cap rate.

What is a 1031 exchange in the context of commercial real estate, and how can it benefit investors?

A 1031 exchange, also known as a like-kind exchange, allows investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds in a similar property within a specified time frame. This strategy can be used to defer taxes on appreciated properties, allowing investors to compound their returns over time.

Outlines

00:00

🏢 Introduction to Commercial Real Estate Basics

Marco, the host of 'Whiteboard Finance', introduces the topic of commercial real estate for beginners. He outlines the video's content, which includes various property classes, strategies for equity and income generation, and key metrics for evaluating deals. The script emphasizes the educational intent and the speaker's background in commercial leasing and development. The video promises to deliver substantial information concisely, using PowerPoint for visual aid, and encourages viewers to stay tuned for practical insights.

05:01

📈 Understanding Commercial Real Estate Types and Leases

This paragraph delves into the different types of commercial real estate, such as office spaces, hotels, retail, multi-family, industrial, and mixed-use properties. It also touches on the purpose of these properties for income generation through leasing. The script explains the concept of property classes (A, B, C) and introduces different types of leases, including single net, double net, and triple net leases, highlighting their implications for landlords and tenants. The importance of understanding these lease types is underscored for effective property management and investment.

10:01

💰 Key Metrics in Commercial Real Estate Investing

The speaker discusses essential metrics for evaluating commercial real estate investments, such as Net Operating Income (NOI), which represents the property's profitability after operating expenses. The Capitalization Rate (Cap Rate) is introduced as a measure of return on investment, comparing NOI to the property's market value. Cash on Cash Return and Internal Rate of Return (IRR) are also mentioned as critical financial indicators for investors. The script stresses the importance of these metrics in Excel for financial analysis and decision-making.

15:03

🚀 Strategies for Making Money in Commercial Real Estate

This section focuses on strategies to generate income and equity in commercial real estate. The speaker explains how value-added investments can lead to property appreciation by improving the property's net operating income (NOI). Examples of value-add strategies include physical improvements, operational upgrades, and efficient management to increase rents and reduce vacancy rates. The goal is to enhance the property's value and sell it at a higher price or refinance it for tax-free cash-out, leveraging the increased NOI.

20:03

🤝 The Competitive Nature of Commercial Real Estate

In the final paragraph, Marco reflects on the competitive landscape of commercial real estate, where investors often face competition from seasoned professionals and large institutions. He emphasizes the importance of understanding financing differences between commercial and residential real estate, such as smaller loan-to-value ratios and balloon payments. The speaker also discusses the benefits of networking and deal-making in this field, including the use of 1031 exchanges to defer capital gains taxes and the potential for significant wealth building over time.

Keywords

💡Commercial Real Estate

Commercial real estate refers to property used for business-related activities or residential spaces with five or more units. It is a central theme of the video, which aims to educate viewers on the basics of investing in this type of property. The script mentions various types of commercial real estate such as office spaces, hotels, and multi-family units, emphasizing their role in income generation through leasing.

💡Equity

Equity in the context of commercial real estate is the difference between the market value of the property and the amount still owed on its mortgage. The video discusses how investors can 'force appreciation' or increase the equity of a property, which can then be leveraged for financial gain, such as through a cash-out refinance or by selling the property.

💡Property Classes

The script introduces different classes of commercial properties, namely Class A, B, and C, each with varying levels of quality, amenities, and location. Class A properties are the most desirable with the best aesthetics and amenities, while Class C properties are older with fewer amenities. Understanding these classes is crucial for evaluating potential investments in commercial real estate.

💡Net Operating Income (NOI)

NOI is a key metric in commercial real estate, representing the income a property generates after operating expenses are deducted from the gross income. The video uses NOI to illustrate the financial health of a property and as a basis for calculating other important metrics like the capitalization rate.

💡Capitalization Rate (Cap Rate)

The cap rate is the ratio of the net operating income to the market value of the property, expressed as a percentage. It is used to measure the return on investment for a property. In the script, the cap rate is calculated using the NOI of a property and its purchase price to determine the property's profitability.

💡Cash on Cash Return

Cash on cash return is the annual pre-tax cash flow from a property divided by the total amount of money invested in the deal. It is a measure of the immediate return on investment and is highlighted in the video as an important metric for investors to consider.

💡Internal Rate of Return (IRR)

IRR is a financial metric used to estimate the profitability of investments. It is the discount rate that makes the net present value of all cash flows (both positive and negative) from a project equal to zero. The video mentions IRR as a more advanced metric for evaluating the performance of a commercial real estate investment.

💡Leases

Leases in commercial real estate dictate the terms under which a tenant rents a property. The video discusses different types of leases, such as single net, double net, and triple net leases, which vary in terms of who is responsible for property taxes, insurance, and maintenance costs. Understanding lease terms is essential for both landlords and tenants.

💡Value Add

Value add is a strategy where investors purchase properties that require significant improvements or changes in management to increase the property's value. The video provides an example of how making physical and operational upgrades can lead to higher rents and reduced expenses, ultimately increasing the NOI and the property's value.

💡1031 Exchange

A 1031 exchange, named after the section of the tax code, allows investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds in a 'like-kind' property. The video explains how this strategy can be used to avoid paying taxes on the increased value of a property, allowing for wealth accumulation over time.

💡Syndications

Real estate syndications involve a group of investors pooling their funds to invest in larger commercial real estate deals. The video mentions Fundrise as an example of a platform that allows individual investors to participate in such deals, providing an opportunity to gain exposure to commercial real estate without the need for significant capital.

Highlights

Introduction to commercial real estate for beginners, covering property classes, equity appreciation, and metrics for evaluating deals.

Definition of commercial real estate as property used for business activities or living spaces with five or more units.

Explanation of the purpose of commercial real estate as income-generating properties leased to tenants.

Types of commercial real estate including office space, hotels, retail, multi-family, industrial, and mixed-use.

Discussion on the role of commercial real estate in portfolio diversification and as a hard asset.

Cash flow and equity appreciation as key reasons for investing in commercial real estate.

Different types of leases: single net, double net, and triple net, and their implications for landlords and tenants.

Key metrics in commercial real estate: NOI (Net Operating Income), Cap Rate, Cash on Cash Return, and IRR (Internal Rate of Return).

The importance of NOI as a measure of a property's financial health, calculated as gross income minus operating expenses.

Cap Rate as a metric for comparing property returns and assessing investment profitability.

Value-add strategy in commercial real estate, involving significant property upgrades to increase rents and NOI.

Example calculation of how raising rents and reducing expenses can increase a property's value and cap rate.

The competitive nature of commercial real estate and the need for good financing and networking in the industry.

The use of 1031 exchanges in commercial real estate to defer capital gains taxes and build wealth over time.

Sponsorship acknowledgment and the role of Fundrise in providing access to private real estate deals for individual investors.

Final thoughts on the power and risks of commercial real estate investment, and the potential for wealth building.

Transcripts

hey everybody welcome back to whiteboard

finance my name is Marco and I'm here to

help you master your money and build

your wealth in today's video we're going

to be talking about commercial real

estate for beginners so commercial real

estate 101. uh we'll talk about

different types of property classes

we'll talk about how to make a lot of

money by forcing appreciation AKA Equity

uh income cash flow different uh

property types Class A B C D uh and then

we'll talk about different metrics we

use to measure these deals to make sure

we're getting a good deal so it's not

going to be like a two hour long video

or an hour and a half like I do with my

stock market for beginners videos but I

will try to convey a lot of information

in a nutshell just to get you started so

let's get right into it so as always

with my educational type videos I always

love to do them in a PowerPoint if you

don't like the PowerPoint format this

channel probably isn't for you a lot of

free game a lot of free information this

video or you can choose to not watch my

channel wake up 20 years from now in the

same financial position that you're in

and kick yourself in the butt while

looking at yourself in the mirror and

saying hey I probably should cinemarco

yeah you should have so here we go so

what is commercial real estate so

commercial real estate is property used

for business related activities or a

flat five plus unit living space so

anything in residential is considered

one to four units so single family home

up into a quad at least with financing

it is and then five and above is now

considered commercial so what what is

the whole point of these properties why

do people invest or build commercial

real estate uh well it's because it's

leased to tenants for income generation

these are income producing properties so

what are some quick types of commercial

real estate we have office space which a

lot of people have worked in at one

point in their careers or lives we have

hotels and resorts we have retail we

have multi-family we have industrial and

we have mixed use there's definitely

more types but those are the big ones

you have health care facilities you have

things like that but I'm not going to go

too much into the weeds here I have a

background I work many years in

commercial leasing commercial real

estate development analysis and then

also on the lending side of things so

instead of lending on single-family

homes we would lend on you know 30 40 50

100 million dollar projects right so I

can give you some real life perspective

here so what is an office space most of

you already know what this is it's your

typical Class A B C maybe D uh office

space where people are conducting

business serious business

but everyone knows what office space is

well you may not be familiar with is

industrial so this is where you can

think of like warehouses production

facilities

um you know or semi trucks pick stuff up

drop stuff off there's a million

different types of industrial you have

manufacturing that's typically you know

one of the bigger components of

commercial real estate then we have

multi-family a lot of people are going

to be familiar with multi-family it's

exactly what you think it is typically

Apartments you know things like that so

retail here's what we have an example of

Acme they're called an anchor tenant so

retail is typically you know your strip

malls your shopping malls any business

to Consumer component anchor 10 is

basically a big anchor like a Home Depot

or a Walmart or something like that and

then you have small auxiliary businesses

all around it to fill up the rest of the

property

so let's talk about some different

classes of commercial real estate I'm

going to talk about a b and c I'm not

going to get into the war zone

properties like d e f things like that

we're going to stick to the A B and C so

with class A these are going to have

your best Aesthetics for amenities and

this applies to pretty much every aspect

of commercial real estate I'm going to

be using office space for this example

just because most people are familiar

with it so with class A again these are

going to be your best Aesthetics or

amenities they're going to be newer

construction they're going to have high

quality infrastructure and they're going

to be in a great location so think of a

Class A like this it's going to be like

a you know a skyscraper or a really nice

building in a downtown location so have

a lot of amenities it's gonna have a

nice open Lobby things like that so with

class B you're going to be looking at

typically older construction smaller

statues so maybe a mid-rise for example

average common areas maybe just you know

not even a security guard but maybe just

the lobby with some elevators things

like that and then you're going to have

average rents for the area okay these

may or may not be located in downtown

these maybe in suburbs as well so with

class C these are going to be your lower

or lowest rents available they're gonna

have little to no amenities they're

going to have older construction and

then that location itself may be kind of

close to Industrial maybe kind of off

the beaten path the location is probably

going to be most likely than average to

below average location so think of Class

A as this right here think of Class B

over here think of Class C over here

where they just Jam pack you in a room

and work you to death and I'm just

kidding so why do people invest in

commercials I know it's a lot of words I

know you may get bored with this but

it's important so pay attention so

portfolio diversification number one

this is a hard asset asset backed by

something tangible it is real it's not

tied 100 to the market even though

commercial real estate typically lags

the market or the economy by one to two

years and these properties can be unique

not everything has to be you know cookie

cutter single family home these

properties can serve many different

purposes the next reason is because of

cash flow and Equity appreciation

ongoing rents or cash flow more income

means more Equity forcing appreciation

I'll give you examples I'll give you

math examples of this later in the video

so stay till the end it can be passive

so we have syndications that you can be

a partner of the sponsor of this video

is actually fundrise I'll be talking to

them syndications can be powerful you

can be a limited partner it gets you a

control of a high quality asset with

high quality management and you can

actually be very passive through

different types of leases which we'll

talk about soon here this is a triple

net lease and then the last two points

we have long-term wealth building and we

have it being a recession hedge so

here's a quick story I worked in

commercial real estate for many years

every single successful person that had

a huge business exit like hundreds of

millions of dollars they all have

commercial real estate as part of their

portfolio the reason for that is because

I'm telling you this it's a long-term

wealth Builder commercial real estate is

a long game most projects are over

two-year holds some can be 10 some are

generational okay this is when you have

the lucky Sun that inherits his dad's

portfolio gives it to his kids so on and

so forth that's how you build wealth in

this country so it allows you to write

economic waves and it can also be a

double-edged sword if you can't sell it

so commercial real estate is also

illiquid

um a recession head so commercial real

estate is less correlated with the

market depending on the location and the

tenants so a McDonald's as a tenant is

going to be very different than you know

a mortgage company flying by night like

Boiler Room you know just smiling and

dialing interest rates go up now they

don't have money for rent right so it

just depends on the strength the

location and the tenants so

um with the types of leases so leases

are usually quoted in dollars per square

foot per year some places that are more

expensive do it per month but most of

the country does it per year so quick

example 25 a square foot for the space

times a 10 000 10 000 square foot space

gives you 250 000 divided by 12 months

your rent is going to be just under 21

000 per month for this ten thousand

square foot space uh these types of uh

prices are going to be like nicer office

spaces you know b-class maybe even a

class in some cities but you have

different types of leases okay so these

These are more for office leases gross

modified gross I know I'm jumping around

here but it's important grow some modify

gross it depends on the property type

this is mostly office and Industrial uh

when it comes to bigger buildings when

it comes to retail like a Starbucks or a

Burger King or you know uh some random

restaurant franchise you're probably

going to be looking more into triple net

leases but I'm getting ahead of myself

let me explain these very quickly so for

a single net lease the tenant is most

likely going to be responsible for rent

and taxes a double net lease this the

tenant is responsible for taxes and

insurance and then with the triple net

lease this is your most passive form of

um lease if you are the landlord is

going to be triple net the tenant is

responsible for pretty much everything

and then obviously it also depends on

what you negotiate in the lease itself

so uh let's talk about key commercial

real estate metrics here so number one

is noi this is going to be your most

important metric this is basically your

net operating income it is your gross

income minus your operating expenses and

don't worry I'll go into depth and noi

in the next couple slides but just know

it's basically income minus expenses it

doesn't count your uh interest or your

um your mortgage on the property think

of this as your ebitda your earnings

before interest taxes depreciation

amortization uh your capitalization rate

AKA cap rate this is going to be your

net operating income which we just

talked about divided by the market value

of the property or what you think the

property is worth at the time then you

have cash on cash return this is

basically your annual pre-tax cash flow

so how much money you're making before

taxes divided by the total amount of

money you have in the deal and then

finally you have your internal rate of

return if you want to play with the big

boys and then all this stuff gets done

in Excel guys the the whole financial

world runs in Excel just so you know so

I can show you examples of that later so

irr is your internal rate of return this

is basically estimating the amount of

Interest you'll earn on each dollar

invested in a rental property over its

holding period okay so it's almost like

a very Advanced version of like noi and

also cash and cash return so in the next

slide I'm going to show you how to start

calculating this stuff but here's a

quick word from today's sponsor fundrise

real estate syndications can be a great

way for individual investors to

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estate deals and help out Pace inflation

as mentioned in this video if you don't

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exposure I personally use a company

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money with them since 2019 and continue

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fundrise at the time of this recording

they have over 371 000 active investors

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inflation as you know crushed the

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with fundrise okay so how do you make

money with commercial real estate let's

talk about some of the metrics we use so

there are two biggest things that you're

going to make money with in commercial

real estate is your income aka the cash

flow that the property brings in or

doesn't bring in there's a lot of

properties that don't cash flow or

underwater but mostly a lot of people

that aren't holding these things for

generational wealth they are most likely

holding these for two to ten years most

likely three to five and they are

forcing the appreciation and cashing out

with Equity okay either a cash out refi

which is tax-free or they just sell the

property you know 1031 exchange and into

another property they forego their taxes

for that transaction but that's outside

the scope of this slide let's talk about

net operating income so net operating

income is your gross income minus your

operating expenses uh this is before

your income taxes and interest which I

talked about in the previous slide this

is essentially your ebitda as I

mentioned your earnings before interest

taxes depreciation amortization this is

the best metric to assess the Financial

Health of a property so let's go through

a quick example here so uh in this

example we have Revenue so I just made

these up okay so if it doesn't make

sense just think of this from a

principal standpoint okay don't get lost

in the math even though the math is very

easy so let's pretend the property

brings in a hundred thousand dollars in

rental income let's just pretend this is

a you know multi-family building right

you know 10 11 units something like that

I'm just making this up so say you're

getting you're making 25 Grand a year

from parking you're charging you know

parking and then you have laundry making

you five grand so the total um gross

income for the property for this year is

130 000 but then you also have expenses

to maintain a property let's say five

grand management fees 25 Grand in

property taxes uh 15 grand in repairs

and maintenance a thousand dollars a

year in insurance I'm just making this

up uh for a total of forty six thousand

so your noi for all the smart people in

the audience it's 130 Grand minus 46

Grand which gives you an noi of eighty

four thousand dollars pretty simple

right it is and I'll show you why

because we're going to calculate a cap

rate and then I'll calculate the price

of a building so let's talk about cap

rate this is your capitalization rate

this is essentially your return on the

investment AKA Roi so this is a measure

of profitability of a property relative

to its cost okay so if a property made

you a million dollars a year and it cost

a dollar that's a ridiculous cap rate

right but if it made you a million

dollars a year and cost 17 billion

dollars that's not that great of a cap

rate right so you have to make a apple

samples comparison so investors use this

to make to compare properties returns

lenders use this metric as well as

others in order to see if you're credit

worthy or loan worthy right uh let me

hammer this home I should have Hammer

this home way earlier in the video

commercial real estate does not gain its

worth uh based on like a single family

home oh you have three bedrooms two s

and then 10 other properties around you

have those same amenities okay this is

what your property's worth you know 200

Grand right no commercial real estate

it's derived from its income for its

ability to produce an income stream for

its net operating income that is how

these properties uh make money so I can

have a one bedroom uh let's just that's

a bad example I can have a 5 000 square

foot uh office space and if someone's

paying me 10 million dollars a month in

rent that property is going to be a

ridiculous amount of money because the

noi is going to be very high that's just

an outlandish example just to understand

where I'm coming from but let me give

you a quick real life example so to

calculate cap rate you take your noi

which we figured out in the last slide

which was eighty four thousand dollars

you divide it by the market value of the

property or what the property is being

sold for uh let's just pretend that the

cap rate or sorry the property cost is

1.4 million for our building with a

eighty four thousand dollar noi your cap

rate is going to be six percent now you

can also do this in reverse okay this is

middle school math so if you take your

noi divided by your cap rate so if I

took eighty four thousand dollars

divided by .06 AKA six percent you'll

know what is a fair price for the

property because of its income stream

make sense okay glad that made sense now

let's continue so how do you make money

with commercial real estate well here's

one of the biggest ways it's value add

okay it's adding value it's forcing the

appreciation of the property you can

only fix up a single family home so much

it's still going to be worth relative to

what the other houses around it are

worth remember you buy the cheapest

house the nicest neighborhood okay

that's how you make the most money but

with commercial real estate again it

goes back to its uh income stream it's

net operating income so what is a value

add to start with so I try to give a

quick example here you kind of have a

before and after picture you have you

know laminate dishwasher you know floors

paint whatever fix it up hey I can now

raise the rents right so investors buy

this to make lights to significant

property upgrades so what kind of

upgrades are we talking about well

there's a million but generally you have

physical which could be Landscaping it

could be improving the units like

multi-family similar to this picture

right here you can have operational

upgrades such as cutting costs changing

management billing tenants differently

you know when it comes select utilities

raising your rents things like that but

mostly It's a combination of both it's

just making a business more efficient

and a better value for your renters okay

your tenants so uh what are some goals

of adding value why do people take on

these deals so these are typically you

know distressed properties it could be a

you know a C-Class property and a

b-class neighborhood that can be raised

to the level of a b-class property with

some changes right and then you can

command higher rents increase the noi

which I'll show you uh in the next slide

so your goals are typically to increase

rent you know increase your income

decrease vacancy okay improve management

maybe being more efficient and then

increasing your noi AKA forcing that

appreciation which we talked about so

moving on let's give a quick example

let's pretend that property that we just

talked about in the last two slides is

an 11 unit building okay I'm just making

this up so we already went over these

numbers let's pretend our 11 unit throws

off

um is worth 1.4 million dollars it

throws off 84 4 000 a year before the

mortgage and the cap rate for the

neighborhood or the cap rate for that

area for this product type is six

percent right but now we're gonna do a

value add okay where the nice uh where

the where the real estate developer that

knows how to raise the rents by let's

just say a hundred dollars per month per

unit because we know how to improve it

for what that Marketplace wants okay uh

say for example uh people want granite

countertops or you know nicer amenities

or you know a doggy park or a pool or

whatever a gym all these things can be

used to increase the rents okay so I'm

just using 100 per month typically

typically if you're a developer and

you're actually doing one of these deals

you want to shoot for a lot more than

this uh typically in the three to five

hundred dollar per month range per unit

but I'm just using 100 freezy numbers so

uh not only did we raise the rents but

we also uh fired the old mom and pop

running the place that were super

inefficient and we hired a nice

management team but it ends up reducing

our operating cost by two hundred fifty

dollars a month month by how efficient

they are so if we take a hundred dollars

per month raising the rents by 11 units

times 12 months we just created an

additional thirteen thousand two hundred

dollars in additional Revenue per year

now we also reduced our annual expenses

by three grand because we're now saving

250 a month times uh 12 months which is

three grand okay so now our income used

to be 130 we're adding thirteen two

which gives us a new income of one

hundred and forty three thousand two

hundred dollars our expenses used to be

forty six thousand a year we reduced

them by three grand a year 250 a month

times twelve and now we have forty three

thousand dollars in expenses which for

all the math Wizards who graduated

Elementary School uh

sorry that guy's kind of mean

um it's basically simple math you guys

your our noi is one hundred thousand two

hundred dollars uh we know that these

types of properties with these types of

amenities go for a six percent cap rate

so our a hundred thousand two hundred

dollars divided by point zero six or cap

rate now gives us a property value of

1.67 million so this property before all

these improvements used to be worth 1.4

now it's worth over a quarter million

dollars more uh just by getting new

management in place and also by raising

the rents by 100 bucks a month on 11

units so um that's just an example I

came up with just for the sake of

Simplicity uh but on huge deals we have

hundreds of units you're raising them

three four five hundred bucks a unit and

you're really get dialing these things

in over the period of three to five

years where you're getting old tenants

out getting new tenants in at a higher

price point you can really reposition

these properties to make literally

millions of dollars okay so moving on

with my thoughts so as always I could

have gotten into way more metrics I

could have gotten to way more

um examples especially real life

examples but just to keep this video you

know not ridiculously long

um I'll just give you my thoughts at the

end here so commercial real estate is

very powerful but you're also competing

against people that do this for a living

this is not your hobbyist you know guy

working eight to five job you know 40

hours a week he's got a rental property

on the side this is not that game this

is literally big boys and big girls that

insurance companies uh huge insurance

companies buy these deals

um you know Wall Street reads all that

stuff right so anyway my point is is

that it's a highly financialized product

and you need to get good financing

financing is different on Commercial

Real Estate than it is with residential

you typically have

um smaller loan to values and you also

have balloon payments you have different

amortization schedules you know I can

make a separate video on that it's not

not it's not good enough for or it's not

it's too in-depth for a quick snippet uh

in the my thoughts portion of this video

is what I'm trying to say so not only

that

um you're playing with the big boys and

big girls but the nice thing is is if

you if you really find a coupon Clipper

the developer that I worked for like I

said we had over a million square feet

of office uh residential or multi-family

excuse me

um and then industrial so a million

square feet of office and Industrial uh

300 units of Class A

um multi-family in a college town so

basically I was part of all those deals

from the ground up to disposition to

acquisition I can tell you this if you

have a nose for a deal and if you know

how to lease these things up if you know

if you're seeing fifteen twenty thirty

percent vacancy you're you're a I don't

want to say schmoozer but you work with

good Brokers and you're highly networked

in the area you can get a lot of tenants

to these buildings increase the noi you

know sell the thing in five years and

you can actually go through what's

called a 1031 exchange so when you have

a capital gains and a house let's just

say you have a house for 100 grand

um you sell it for 200 you have capital

gains of a hundred thousand dollars you

can 1031 that you can do that also do

that with commercial real estate as well

so if I have a building that cost me a

million dollars I increase the noi so

much with good tenants that I get the

value of four to five million dollars I

can defer that with a 1031 exchange by

buying a like or similar property within

a certain time frame and I can forego

you know the capital gains of four

million dollars in this example okay and

what what sophisticated investors do is

they keep 10 30 running they defer they

defer they defer all the way until they

die and then their heirs or their

inheritance

um they they get that property at that

step up basis level so instead of paying

taxes or the capital gains all

throughout those years like the 4

million that I just talked about they

would get the property stepped up at

that five Bill uh five million dollar

tax basis and that way you know they're

starting at zero as opposed to four

million

um of taxable income when they inherit

the property this is what rich people do

okay that was a very long-winded way of

saying uh rich people invest in

commercial real estate but you know you

can also get burned as well it just

increases the stakes by that much more

so I hope you learned something from

this video if you want to go deeper

maybe I'll create like a commercial real

estate analysis course this is what I

used to do for a living I literally

lived in a Microsoft Excel so I've been

rambling way too much thanks for

fundrise for sponsoring the video thanks

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