With much of the nation’s focus on the residential real estate market, and rightfully so since more Americans have wealth tied into the homes they live in, now, more than ever, a basic understanding of what drives commercial real estate investing success is paramount. Simply put, there are the three “R’s” -- research, relationships and returns – that are the keys to commercial real estate investing success.

                                                                                   

“First and foremost, most, if not all, Americans can invest in commercial real estate. Whether it is IRA moneys, liquid savings accounts or home equity, the money is there to start the process,” explained Michael Anderson, Principal Broker of RealSource, a Salt Lake City-based brokerage that transacted more than $1 billion in activity for small and medium-sized investors in 2005 and 2006. “It is the decision to move forward that escapes many would-be successful real estate investors.”

 

The first “R,” Research, is a complicated process of economic modeling, statistical analysis and due diligence processes. “Most investors do not have the time, knowledge or money to be successful research economists;” added Anderson “In its most basic form, real estate values are driven by one interdependent relationship, supply and demand. That natural market drive to balance supply and demand produces a dynamic cycle within the real estate market.”

 

The market cycle to which Anderson refers consists of three distinct phases. They are: Expansion, Decline and Absorption.

 

Phase 1 - Expansion

Because the previous phase of the market is characterized as a period of excessive demand, the Expansion phase is depicted by construction. In other words supply, catching up to and (in most cases) exceeding demand. Because growth places heavy demand on materials and labor, this condition is also depicted as an inflationary phase.

 

Phase 2 - Decline

Because the previous phase of the market was characterized as a period of inflation, the market is less attractive to business looking to relocate or expand. Many jobs are lost to other domestic and foreign markets due to the high cost of living. With the job losses, and likely overbuilding, there is far more supply than demand, resulting in declining occupancy levels, rents and values.

 

Phase 3 - Absorption

Because the previous phase of the market was characterized by declining values, the market offers a lower cost of living. This with new government incentives offered to businesses (in an effort to bring back the economy) looking to relocate or expand, the economy starts adding jobs which translates to increased demand, occupancy levels, rents and values.

 

“Early on in the absorption phase is the best time to acquire income property,” said Anderson. “Proven research from a reputable company with a record of pinpointing absorption markets provides a real estate investor with the first step of a three-step process to success.”

                                                               

The second “R” to success is relationships. In most cases, the absorption market will not be a neighboring market to where an investor lives and works. As such, meeting, interviewing and selecting transaction professionals who know, work and have experience in that particular market is vital to relationship building. An investor who is unfamiliar with that absorption market would be wise to choose professionals who have experience conducting due diligence on their behalf, presenting them with qualified, relationship choices.

 

“Once we make absorption market identifications, RealSource provides ongoing ‘turn key’ services for our clients. We help them to select the best local professionals, such as brokers, property managers, builders, title companies, and other local service providers,” added Anderson. “Even though our clients are acquiring their own properties we do have the benefit of economies of scale. The number of our investors purchasing in these markets provides us with competitive advantages.”

 

The third “R” is returns; the return on the property investment made and the return on future growth and opportunities. “The brokers we introduce clients to present exclusives to investors that they go and find with hard work, dedication and experience,” he said. “RealSource is with the investor long after a purchase is made. Our client advisors, for example, continually report market conditions in a timely manner and inform clients when the market(s) reaches an optimum point to sell or is leaving the absorption phase and moving into an expansion or decline cycle.”

 

For more about commercial real estate investing, please go to www.realsource.net.

In the last weeks, we have focused on 1031 tax deferred exchanges. Named after the IRS tax code that permits such transactions, 1031 exchanges allow investors to defer paying taxes on property they buy and sell as long as the transactions occur within a 180 day time span and the funds are placed with an exchange facilitator or accommodator. Ultimately, whether I am hosting the radio show or conducting Prime Time Investing workshops for RealSource, I cannot stress enough the importance of working with a ‘qualified’ qualified intermediary, or QI. While knowledge, experience and a certain level of coverage or fidelity coverage is significant, the financial backing of the company, strict adherence to financial reporting and disclosure requirements hold even more importance.

 

A few general guidelines to follow in order for a taxpayer to defer all the taxable gain:

• The value of the replacement property must be equal to or greater than the value of the relinquished property.
• The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
• The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
• All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.         

Click here for a list of Qualified Intermediaries who have appeared on Income Property Investment Talk, here to talk with a real estate investment advisor, or here if you have any question you’d like answered as it applies to income property investments.

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Let us all make this year, 2008, our best ever. Financially, there is no better way to accomplish this goal than to invest in real estate -- income property. Many, over the years since 1992 when I started in real estate, have done well. Others, unfortunately, have not. I want to do my part to help make sure that everyone does well in 2008. Participate here and help make this a place where everyone who participates does well in real estate investing. What say you?

The Securities and Exchange Commission (SEC) has agreed with the National Association of REALTORS (NAR) and other industry professionals – commercial REALTORS should be allowed to sell Tenant in Common (TIC) securities and receive a commission. NAR has been negotiating with the SEC to determine a process by which real estate brokers can legally be paid commissions on TIC security deals. Under the SEC exemption, REALTORS, who are predominantly engaged in and have substantial experience in the commercial real estate market (see below), can offer TIC securities to all individuals; not just accredited investors, and receive referral fees from TIC broker sponsors. The SEC exemption further states that: · REALTORS must have an investor sign an agreement allowing the real estate broker to advise him/her on TIC deals being sold as securities. · The REALTOR cannot advertise TIC investments. · The securities broker dealer determines eligibility of the investor. · The seller discloses and pays the buyer’s broker a referral fee. · The REALTOR must show the buyer traditional real estate opportunities as well as TIC deals. · The REALTOR must also be familiar with commercial real estate investments.

Prior to the exemption, only real estate brokers who were registered as securities brokers with the SEC and real estate brokerage firms as securities broker-dealers were able to sell, and earn a referral, from TIC deals. Investors who like TIC deals are passive; they prefer the freedom of not having to deal with property management issues and tenant concerns. The SEC exemption application defines “substantial experience” to mean a commercial real estate professional who has received a Certified Commercial Investment Member (CCIM) designation, or a designation from the Society of Industrial and Office REALTORS, or an Accredited Land Consultant designation from the REALTORS Land Institute.

Equivalent education and transaction experience can substitute for commercial real estate professionals who do not have any of those designations.

For example, a professional who has participated in at least five commercial real estate transactions having an aggregate value of at least $3 million in the prior five years, or at least 10 commercial real estate transactions having an aggregate value of at least $10 million in the prior 10 years, can sell, and an earn a referral, from a TIC deal. The TIC investment industry has grown exponentially since the issuance of Internal Revenue Service Procedure 2002-22 in March 2002. The sale of TIC interests in commercial properties has grown from $163 million in equity placements in 2002 to over $8 billion in 2007.

The SEC exemption will open a number of opportunities for new revenue. Be cautious, however, to only work with a TIC sponsor who understands the industry and one that has a successful track record. Increased real estate commerce, controlled cap rate compression, impressive occupancy rates and expanding job growth, are all indicators of a strong market for TIC investments. But, do you have access to that specific research? The relationships? The deals? You can!