Skokie, IL

Investing in Commercial Real Estate can be as easy as A-B-C - alright maybe not, but knowing your ABC’s can save you a lot of time and frustration. Certainly when your deciding what and where to invest.

Commercial properties are defined -or classified- by a letter system. While classifying can get a little fuzzy - let’s just say it’s subjective - here are some basics to get you started:

Building Classifications

Class A - are newer properties built within the last 15 years and have the most amenities, highest earning tenants, and typically demand the highest rents with little-if any- deferred maintenance. Usually owned by institutional investors -REITS- have the lowest cap rates, highest per unit prices and have the most potential for appreciation, but lowest cash flow starting out.

Class B- are generally 15-30 years old, have some amenities, have low deferred maintenance,
Institutionally owned or by high net worth individuals., have appreciation potential with decent cash flow from the beginning.

Class C- 30+ years old with fewer amenities, have more deferred maintenance and higher cap rates and can have lower occupancy rates. Tenant base can include government subsidized tenants. Usually owned by private investors or investment groups. Provide higher cash flow and cap rates, but generally have lower appreciation.

Class D- Older buildings in challenging neighborhoods. Have no amenities and high deferred maintenance. Tenant base may require intensive management. These properties have double digit cap rates and little appreciation potential. While these buildings by the numbers may look like cash cows, collecting rents can be challenging and what is collected may be eaten up by deferred maintenance. These kinds of buildings are not suggested for the first time investor.

Neighborhood Classifications

The classifications for neighborhoods are very similar to the buildings and use the same A,B,C & D lettering system.

A- newer growth areas
B- Older, stable areas
C- Older, stable or declining areas
D- Older, declining, potentially rapidly declining areas

Hopefully, this will help you both decide the what and where to invest in. It will also give you the ability to better describe to someone else what you want.

Other articles that may be of interest:

Self-directed 401K rollover..... and Real Estate

The Eviction Process... 7 tips to avoid costly mistakes

Are Security Deposits reall a good thing.. Chicago Apartment owners should think again

Keeping your emotions in check is a good idea when buying Apartment buildings ( just a little food for thought)
Too many times investors walk into a deal with the mindset of a homeowner. This is a business, your major focus needs to be on cash flow, not what color the tenant painted his living room walls.

Be sure you really understand and can live by the time is money principle. When a tenant moves out always anticipate double the estimated time to fill the vacancy. If you factor this into your cash flow projections, you’ll never be caught short when the mortgage comes due.

Not getting advice from an expert. It is very important that you educate yourself. That doesn’t mean you should do it all yourself..... remember the old saying; “Jack of all trades and master of none”. Having a team consisting of a mortgage banker, Investor friendly realtor, inspector, lawyer and CPA. In the beginning, most investors feel they can save money by doing things themselves, the opposite is true. A good team can actually end up saving you money, time and frustration.

More articles that may be of interest:

Some Common mistakes Investors make when buying Apartment Buildings in Chicago.

Real Estate investing is still the best game in town.

5 Steps to get your Real Estate investments rocking in 2011.

Choose an area for the greatest success. So then how do you choose a neighborhood to buy an apartment building in? You want to shoot for an area that would be considered the ‘bread and butter’ area. A property which is slightly lower than the average building in the area. Remember the principle of buying the ugliest building in the prettiest neighborhood.

More than likely the rents are lower than the market, which will give you plenty of opportunity to raise the rent, thereby increasing cash flow and allowing you to slowly do improvements. This process will put cash in your pocket today and build for long term wealth. Remember that ‘cherry on top' - appreciation, it will be back.

However, don’t go too low or you could end up in a war zone. Just be sure to pick a neighborhood where people feel safe and have all the necessary conveniences, schools, places of worship, public transportation. Skokie, Evanston and Rogers Park all have several neighborhoods that would work perfect.

If your still confused at the very least you should contact your local REIA organization. At this time you should be developing your team. An investor friendly realtor who knows the area and can help guide you. An inspector who is well versed in the in’s and out’s of apartment buildings.A mortgage banker who can help with the best financing options available to you. An attorney who can advise you on the various legal entities available and who can protect you and your family for the future.

You’ve decided to invest in real estate. Okay, so you’ve made the commitment. Your all dressed up and ready to do, but where to start.

Run out and buy business cards, for-rent signs, letterhead. Yeah, these are all good things, but all in due time.

The first thing to consider is in what neighborhood to invest. The best for-rent sign in the world won’t fill a building in a neighborhood where the cops won’t even go.

You need a neighborhood that is close to public transportation, where people can get to and from work, tenants with jobs are good. You want schools close, preferably within walking distance, renting to families is also a good thing, they tend to set down roots, stick around longer and treat your investment like a home. Grocery stores in the neighborhood are great. These are the things your prospective tenants will be looking for. Without any or all of these things available to your prospective tenants translates to no cash for you.

Chicago has many, many great neighborhoods with apartment buildings that have all of the above and make for awesome and did I say....profitable investments.

The Eviction Process… 7 Tips to Avoid Costly Mistakes

I realize that most investors start out with a great plan and eviction probably wasn’t part of it. I know , buy a building at a great price, may do some minor repairs, find a decent tenant and sit back and collect the rent. … Right? Evictions are one of the most frustrating and costly problems for a landlord to deal with and they unfortunately do happen. . The following are a few simple tips that may reduce the likelihood of an eviction and, ultimately, protect your cash flow. And, get you back to collecting those rent checks.

1. Maximize the number of applicants you get.. You want to have multiple applications. Even if it means reducing the rent. Don’t put yourself in a position take an unqualified tenant just because your mortgage is due.

2. Be sure the application form is filled out properly and completely. If someone shows up with two months rent in cash and a half filled out application. RUN !!!!

3. The screening process should be used to the fullest. Background checks and credit reports, although in today’s economy many may have a nightmare credit report. It will, however, prove their identity. It will also show if they’ve had a recent (one time) financial set back or a long term aversion to paying bills…… Any Bills!!

4. Employment verification: Don’t just take check stubs or W-2’s. Actually call their employer. Hey! A lender would if they were buying the place.

5. Always, always, always put everyone over the age of 18 on the lease, who will be living in the apartment.

6. Make sure you have a strong lease. If your not sure contact your Attorney. Be sure to include a form stating they have read and understood the lease and everything that is expected. This could eliminate the “I Dun’t Knooowwww” defense later on.

7. Be sure to respond to Tenant issues in a timely manner. Happy Tenants pay their rent and take care of your investment.

That should be a good start for a successful investment Property. If you have any questions on your current properties or are looking to expand your portfolio. Give me a call @ (630) 306-1057