Kim McMahon

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.

Here are a few more things to consider when your setting those goals for buying apartment buildings in Chicago.

Be specific, state exactly what you want. Instead of just saying you want to be financially independent; put a number to it. I want to have a monthly income of 2,000 a month.

Set a date when your going to achieve your goal; I’m going to retire in 10 years.

Make sure the passion is there, if your not all in, then stay out. Your dream just became a job.

Make sure to educate yourself in the process, it will save time, money and frustration in the future.

Are you ready to take action? Opportunities are kind of like kids; they show up when you least expect them, cost more than you expect and bring rewards that last a lifetime.

And finally, do you have the commitment? Some will quit before they even get started. You can expect set-backs but if you have developed a team and follow your plan, you will realize your dreams.

If your ready to get started give me a call, I love this stuff!!

A few things to consider when investing in real estate. This has been said over and over again. And, if your like most people your probably tired of hearing the same thing from everyone. At this point you just want to get started buying apartment buildings. Unfortunately, there is a reason that people, myself included, keep stressing the need for setting goals for your real estate investment business. You noticed I called it a business.

Let me ask you this, have you ever really achieved great things without a plan? I mean think about it; did you lose those ten pounds; run that marathon; hit that sales quota without a plan? Real estate investing in Chicago is no different. Start backwards... yes I said backwards. Where do you want to be in 5 years, 10 years, 15 years? Envision your life there, retired on a beach. (had to throw that one in... that’s mine) and plan forward. It may seem like a lifetime away but it could be here sooner than you think. Start your plan and set your goals today!! What are you waiting for? If your ready to get started give me a call, I love this stuff.