This veteran CCIM shares six secrets for commercial real estate success.
When it comes to investing in today’s commercial real estate market, industry pro and author Kenneth D. Rosen, CCIM, founder and president of Kendar Realty in Coral Gables, Fla., has some simple advice: “Stick with what you know.” Rosen, who has bought and sold more than $300 million in real estate during the past 40 years, has found success doing just that. “Why put your money in the stock market and pray that values increase? Put it into income-producing property — something you can control,” he says.
Rosen’s book, Investing in Income Properties: The Big Six Formula for Achieving Wealth in Real Estate (www.investinginincomeproperties.com), identifies six criteria for successful income-producing property investments — location, quality of construction, tenant profile, upside potential, financing, and price. Commercial Investment Real Estate asked Rosen to draw on his experience and share his perspective on how to close deals in today’s climate.
CIRE: What advice can you offer to help investors stay focused in today’s turbulent market?
Rosen: The media is continuing to paint pictures of gloom and doom. They are blowing many things out of proportion. Good income properties which incorporate the Big Six criteria I’ve identified in my book are sought after in any market — including today’s recession. About 5 to 10 percent of income-producing real estate is very desirable. The other 90 to 95 percent is made up of average properties. That top 5 to 10 percent are those to focus on and find.
: What’s your secret for finding them?
Rosen: Conventional methods don’t work. These deals do not go on the multiple listing services. Contact owners who have held properties for long periods of time by knocking on their doors and by networking. One of the motivations to sell today is the low capital gains tax rate on real estate. It may be increasing next year, so now is the time to convince these owners to sell. If you simply call and ask if they’re interested in selling, they’ll probably say no. But if you make a compelling written offer, they may look at it.
: You’re still closing deals in this challenging market. Tell us about a recent transaction and how you made it come together.
Rosen: In early March a broker tipped me off about an office complex with 50,000 square feet of rentable space in a prime location in Coral Gables. The property was not officially listed and the owner didn’t want to make it known that he would sell it. He needed cash badly and quickly. I couldn’t believe the price the broker quoted me, which was $8.5 million, or $170 per sf. Similar buildings in the area were selling for $250 psf to $270 psf. The owner insisted on an all-cash deal with no contingencies and a fast closing. I bought the property within three hours after hearing about it. I have owned an adjacent office building for 28 years and knew the property was a steal. I had to put up a $400,000 deposit, which was at risk if I didn’t close the deal. I showed it to three banks to get financing and all three were competing to make the deal. I wound up with an 80 percent loan with 25-year amortization and a fixed rate of 6 percent for the first five years and 1 point over prime the next five years.
When a good deal comes up, you have to act like lightning — over analysis leads to paralysis. There is no question about it: You make your money in buying.
: How are you finding financing for deals like this?
Rosen: You can obtain money right this minute from solid, local and community banks for the right properties. Most of these banks didn’t package up their loans and sell them in the secondary market. They kept them as portfolio loans within the bank. So these lenders are looking for deals all the time.
: What are the investment pitfalls to avoid as commercial real estate rebounds in the years ahead?
Rosen: No. 1 is to stay away from unhealthy debt. If you buy income-producing property that has the Big Six criteria, the tenants are making your mortgage payments and you have cash flow. But avoid certain types of properties, such as speculative vacant land where you have a lot of outgoing money for mortgage payments and taxes and no income or depreciation.
Another pitfall to avoid is making a personal guarantee on a loan because you think a deal is too fantastic to pass up. I’ve done it, but it can be very dangerous. No matter how good it looks, stay away from personal guarantees.
: What’s the most important tip you can offer to those who are new to commercial real estate investing?
Rosen: Don’t just work for clients to earn commissions. Partner up with your clients by using your commission as part of the deal. If you continue to do this, you’ll make far more money than by just working for commissions and eventually you will achieve financial independence.