After personnel and inventory costs, real estate can be the most expensive line
item in your budget.
About 1.5 million people run full-time businesses on Ebay. Be sure
that this is part of your research. How are sellers marketing their products
online? How can you do it equally or better? Could Ebay or online sales be a
lucrative part-time business?
You have a number of factors to consider when selecting commercial real estate
for your business. Among these factors are: size, physical condition, location,
price, lease terms and overall flexibility, given current market conditions.
Within reasonable parameters, you seek to choose an appropriate size facility.
You want to find a comfortable working environment. You might be able to run a
tailor shop in 400 square feet but maybe you could squeeze into 350 and
anything over 600 square feet would be a waste. You might need up to 1,400
square feet for a karate school, bookshop, dance studio or sporting goods
store. And, you could use every inch of 40,000 square feet for a general
furniture store, indoor flea market or antique exchange. In your specific case,
before you go looking at space, you'll want to know the minimum size you must
have to operate, as well as the maximum size space that you can afford.
Since most commercial spaces are leased by the square foot, size becomes an
important cost consideration. You don't want to lease more than you need, but
if your business plan calls for expansion, you don't want to invest in one site
and then quickly outgrow that site and put yourself in the position of having
to start re-introducing a new home to your customers.
In some inventory-heavy businesses, a split site can be a consideration.
Simply, you'd have two sites. One site would be a smaller, high profile
expensive location where you sell. The second site would be less expensive
warehouse space for storage of your inventory.
Most commercial space is quoted by an annual dollar amount per square foot. In
other words, a 1,000 square foot store with an asking price of $18 per square
foot would cost $18,000 per year or $1,500 per month. This price per square foot
may or may not include the costs of utilities, water, taxes, insurance and
other real estate related expenses. It is very important to ask about extras
and for you to factor in the final cost of the space accordingly.
The physical condition of the space you are considering is very important.
Improved commercial space can range from "raw" to
"turnkey." Raw space can mean you're renting just a floor, ceiling
and four walls. You provide the rest. And, the rest can sometimes incorporate
very expensive extras such as having to install your own heat/air conditioning
system, rest rooms, handicapped access, etc. And, in many leasing situations,
many of the improvements that you make stay with the property after you leave.
The improvements become the property of the landlord.
The opposite of "raw" is
"turnkey." Turnkey means
that everything is in place for you to start in business immediately, you only
have to "turn the key." For
instance, you might be buying a space for a restaurant, which formerly housed a
restaurant and is ready to go. Or, you might be buying an existing business
that is still in operation. Many franchises are turnkey operations.
However, most space offerings will fall somewhere in the middle of "raw" and "turnkey" and, obviously, the condition of the space, the
utilities included and how fast your business can be up and running should bear
some resemblance to the price per square foot being quoted. You should also
note that in most commercial leases, as part of the negotiations, the building owner
may offer you from one to several months of free rent, called
"start-up" months, to help you get your business rolling, and
consequently your income flowing.
In almost every real estate investment book that you read, you'll see the often
quoted phrase that the three most important things to remember about selecting
real estate are "location, location, location."
However, the importance of location is often misunderstood.
To be successful, every business doesn't have to be on Rodeo Drive in Beverly
Hills, on Fifth Avenue in New York or on Newbury Street in Boston. Sometimes,
quite the opposite is true.
Many fine business opportunities abound in the inner city. Neighborhoods
abandoned by major retailers and service providers can be fertile fields from
which to reap honest profit. The big businesses may have left an area, but the
people haven't and these people often lack adequate transportation to the local
malls and must rely upon a new strong breed of young urban entrepreneurs for
their consumer needs. Some risks of operating in economically deprived areas
are real and some risks are just perceived. The inner city opportunities are
there and you must assess the pro/con factors for yourself.
This is important. If there is any way that you can own the commercial
real estate housing your business, you want to do this. Tenants make landlords
rich. The best of both worlds is to be both the landlord and the tenant. Many
small business owners retire wealthy not from their businesses but from the
fact that they owned commercial real estate which has appreciated in value with
a mortgage which has been amortizing each month. When you complete the Master
Real Estate Course, you will become an expert on local real estate
investing.
In selecting a location, you must determine how important foot traffic is to
your business. If you are in an "impulse business" selling things
like costume jewelry or t-shirts to the general public, then a high profile
location is of primary importance. No offense is intended, but people aren't
likely to go out of their way to buy your t-shirt if the same t-shirt can be
bought in a hundred other closer shops.
On the other hand, if you are selling high tech-mountain climbing equipment to
a select group of adventurers, or you are selling rare musical instruments to a
select group of collectors, then these people will probably be willing to
invest the time in finding your out-of-the-way location or will be willing to
wait for you to ship them the specialized/unique items they request by mail
order. In these instances, the location of your business becomes a secondary
consideration.
In most commercial real estate transactions, you will be signing a
legal contract called a lease. Be sure that your interests are protected and
that you clearly understand your obligations by having the lease reviewed by
your attorney before you sign. Do you want a long-term lease for security? Do
you want a short-term lease for flexibility? Attorney review should be mandatory
for all contracts.
In general, the more commonplace your product or service, the more important
the location. While the more specialized or unique your product or service, the
less important the location and the more important your website becomes.
Location must also be considered in the general context of advertising. The
more visible your location, the less advertising may be required to generate
sufficient traffic.
In some situations, such as mall locations, you may be able to, or required to,
sign a percentage lease. With a percentage lease, you would pay a base rent
together with a percentage of your sales. With a percentage lease, you and your
landlord work in partnership.
In dealing with real estate matters, as with most other aspects relative to
your business's success, you will fall back on your research. By conducting
extensive and continuing research into successful ventures similar to your
planned operation, you should find your own answers to many real estate
questions.
A real estate broker knows real estate. He or she may know nothing about the
fishing bait and tackle business.
A business school professor knows general business concepts. He or she may know
very little about the tree farming business.
A banker knows lending. He or she may not have heard about opportunities for
profit in the field of holistic medicine.
You have to find the people who do have answers. You have to be able to
evaluate their responses. You have to be able to adapt the specific information
to suit your objectives.
Story:
Andrew Martin, Investor
This was it. Andy
again started to feel and think like a warrior with something to prove. He had
to prove to himself that he could persevere. OK, this was the battleground. If
he didn't succeed now, he was entitled to start doubting himself. Insurance? He
gave up. Computers? He gave up. Now, he wanted to give up selling residential
real estate. What would he be doing next? Selling and giving up on cars, rugs,
furniture? What's the difference?
It doesn't really matter what you sell. You've either got it or you haven't.
You've either got the nerve to make the hundred calls and take the ninety-eight
rejections or you haven't. If you have the nerve, you have a way to succeed.
It took Andy most of the next seven weeks to inventory the 272 investment real
estate buildings in Newton. Everyday, he was at the Town Hall at 8:30 AM when
the office opened and he was there at 4:00 PM when the office closed. He went
over the tax and assessment records for the town. He noted the property
address, the number of units, the owners' name and the owner's address, if
different from the property address. He recorded the type of zoning and the
land area of the parcel. He wrote down the assessment for the land and the
assessment for the building. He noted the taxes.
After recording data on over 80 buildings, Andy decided that he should have had
a separate sheet of paper for each property. He started his record keeping over
from scratch. When he was half way through the first 80 for the second time, he
wished that he hadn't used blank flimsy notebook paper but instead had created
a form and used card stock. Andy made up a form and had the form copied onto
card stock at the local print shop. With the full sheet card form, he started
over for the third time. When he had that done, he had lunch with his brother
who laughingly told him that he could easily design a computer database for him
that he could use on his desktop computer, his laptop and even wirelessly
Bluetooth to his PDA.
Learning is a process of trial and error. You start one way and learn
a better way and then an even better way. This may be frustrating. The weak
will whine and feel sorry for themselves and give up. Losers whimper and fail.
The warriors suck it up as experience. This is called progress. The loser
complains. The warrior learns.
All day he did his research and each evening Andy returned to the office at
four and stayed until nine, concentrating on rentals. Rentals have a quicker
commission payback than prospecting for listing or sales. And rentals could be
done at night.
Finally, he was done. Having catalogued all the multiple dwellings in Newton
and all the commercial buildings and all the industrial properties and all the
developable land, Andy felt very good about himself.
He three-hole punched his card sheets and bought six loose-leaf binders. He had
one book for two and three family houses. One book was for buildings with four
or more apartment units. Another book was for office/professional buildings.
The next was for retail and retail/apartment buildings. Finally, there were the
books for industrial property and developable land. With the help of this
brother, his next job was digitizing all this information for his computers.
Throughout this project, no one in the office was paying much attention to
Andy. So, Andy, figuring that he was entitled to at least a little pat on the
back, wanted to tell Mr. Taylor that his work was completed.
Andy lugged the six books into Mr. Taylor's office. "Well, Mr. Taylor,
I'm done with the research."
Mr. Taylor looked up from his desk and seemed somewhat surprised as he asked, "You're
done already, Andy?"
"Yes, sir."
"Well, let's see."
Mr.
Taylor randomly opened to one of the sheets in the "Newton, Four Units
Plus," book.
Mr.
Taylor quizzed Andy, "Andy, tell me about 337 Washington Street."
"Well, sir, the information is right there." Andy pointed to
the specific page in his book.
But, Mr. Taylor shook his head, "No, Andy, I can see the information
you have here. Tell me about the property."
Somewhat exasperated, Andy took the book from Mr. Taylor and began reading,
"Well, it's on Washington Street..."
Mr. Taylor raised his hand and interrupted what seemed to be a parroting
exercise, "Andy, what you have here is information that I could get by
searching the town records. In fact, every Christmas, I send a poinsettia over
to the women in the Assessor's Office, so I don't even have to do the
searching. I can just call up the Assessor's Office and ask for Alicia Downs
and she'll do the searching for me."
Andy wanted to defend himself. "Well, Mr. Taylor, you won't have to do
the searching any longer; just ask me. And, soon I'll be able to Bluetooth
this information to your PDA."
Mr. Taylor didn't seem suitably impressed. "Yes, well Andy, thank you
for the Bluetooth offer. You've obviously done a lot of secretarial work here
but I'm not sure that you've learned very much. But, you do have a basis for
learning. Let's look at this 337 Washington Street. Who owns the
building?"
Andy looked, "Well, I have that information right here, Francis
Brimmer?"
Mr. Taylor stood up and started to pace, "OK, Andy, tell me about
Fran Brimmer."
Andy read from his sheet, "Well, the tax bills are sent to him at 14
Summer Street in Newton. So, I presume that that's his address."
"You said, 'he.' Do you know Francis is a he?" Mr. Taylor
interrogated.
"No, I don't."
"Do you know that 14 Summer Street is a home and not an office building?"
"No."
"Do you know if Fran Brimmer owns any other property?"
"No."
"Do you know if Fran Brimmer is a responsible property owner?"
"No, I don't."
As an Action Principles® Champion, you don't
want a coach or a mentor who just pats you on the back. You want someone with
the confidence to keep pushing you toward your potential.
Mr.
Taylor sat on the edge of his desk and paused a moment before continuing,
"Andy, I'm
not trying to be hard on you. I just want you to realize what you don't know,
but what you must know, before you can attempt to solicit Fran Brimmer as a
client."
Mr.
Taylor continued, "OK, what do we know about Fran Brimmer? We know that
he or she is probably an absentee owner, an investor. Go to 337 Washington
Street. What observations can you make? Is the property in good condition? How
are the windows, the foundation, the siding and the roof? Is the property well
maintained? What about the lawn, the hallways, the mailboxes or the parking
area? What about the tenants? Are they at home; are they at work? What kind of
cars do the tenants drive? What's your overall impression of this property? A
fixer-upper? Average? Excellent? Condo potential? Room for expansion? Who, in
your opinion, would buy this particular property?
"If it needs work, perhaps a contractor? If the property is in above
average condition and appears to require minimal management, perhaps a
professional person would buy. If the tenant situation looks tricky, perhaps
there is someone willing to take the time who has the financial resources to
turn the property around. If the building looks well laid out, perhaps a condo
converter would be interested. What's your general estimate of value based on
the comparable listing you've seen?"
Mr.
Taylor concluded his important lecture to Andy, "Ask yourself
questions. Learn something about 337 Washington. Learn something about Fran
Brimmer. Then, now or at some point in the future, you may be able to work with
Fran Brimmer to maximize his or her investment. Or, you may be able to sell the
building for Brimmer to someone suited to maximizing the building potential.
Or, you may be able to sell similar buildings to Brimmer. I don't know what
you'll be able to do and at this point, it is apparent that you don't know
either."
Andy seemed a little crestfallen. "Mr. Taylor, you mean that I should
do this observation work for every one of these buildings?"
Mr. Taylor wanted to make sure that Andy was getting the point, "Here
we go again, Andy. You should do this work for every building, which you expect
to sell and that could be every building. If that's every building, then, yes,
do the work for every building. And, it wouldn't be a bad idea to take the
office's digital camera and take a picture of every building and download the
picture for your files."
Andy had a look of an inmate who had just been denied an expected parole, "Well, Mr. Taylor, I guess I'll talk to you again in about another six
months."
Mr. Taylor held out no sympathy. "Andrew, you're a Navy man.
Pretend you're a SEAL and either ring the bell or get on with the job. Please
don't look at this as a chore. Do you want to be just an investment property
salesperson? Fine, all we'll do is add "investment property
specialist" under your name on your business cards. Or, do you want to be
a successful investment property salesperson? If you want success, then you
have to invest. This work is an investment and this investment will pay you
back handsomely in future, if you take it seriously. You're at the crossroads;
you decide which path to take. You can work for something special. You can work
for your financial future and mine, or you can do crossword puzzles and answer
the phone for me. I need both types of people. You decide for yourself whom you
will be."
As Andy returned to his desk, it was apparent that most of the office had
overheard the conversation. Ann Brown, the crossword lady, gave Andy a
sympathetic look as if he had just done a whole lot of work for nothing. Mr.
Edgers didn't look up from his paper. Don Nardo seemed to feel a little sorry
for Andy, even though Don realized the importance of the work that Andy had
"just started."
Don spoke up. "Andy, Fran Brimmer is a man. He owns a second property
on Washington. He also owns one on North Main Street and two other properties
in Dover."
Andy was buoyed by Don's comment. "Have you worked with him, Don?"
Don nodded. "I haven't worked with Fran in about ten years. The
property he bought on North Main was my listing. Might be worth your while to
see what he's up to these days."
"Thanks, Don."
Well, miracles do happen. For the first time, Don appeared to be taking Andy
seriously as a person. Who knows? Maybe some day, Don would even treat him as a
colleague.
Over the next six months, Andy did not have much time for reading newspapers
and doing crossword puzzles. He spent all of his free time doing drive-by
observations and taking notes. And, things were starting to click. He learned
about good neighborhoods and bad neighborhoods and about good buildings and bad
buildings and good tenants and bad tenants and good owners and bad owners. And
he learned about all the gradations between good and bad.
All Andy's research started to pay a dividend in boosting his rental work. As
he learned about buildings and he rented apartments, Andy started to feel
confident about advising building owners about rent levels.
He could tell one owner, "Let me save you some money. Your asking rent
for this particular apartment might be a little too high. This could mean that
you'll either end up not renting the unit and losing a month or two in rent or
you'll have to take a poorly qualified tenant and worry about getting your rent
every month. Here's what the market says the rent should be for that
apartment..."
He could tell another owner, "Let me make you some money. Your asking
rent for that apartment in that neighborhood is too low. At the rent I'm going
to suggest, I can still get you a top-notch tenant. Here's what the market says
the rent should be for that apartment..."
And, having impressed the building owner, Andy knew enough not to let the
opportunity for future significant profits pass. "Mr. X, I'm handling
rentals at night but my full time job is as an investment property broker with
Taylor Realty. Would you ever consider selling this building? Are you in the
market to make any further investments at this time?"
Are you a buyer or a seller? If an owner isn't selling, then he is re-buying at that price.
Andy was
beginning to understand a bit of the art of salesmanship. And he was beginning
to understand a bit of the investment property business. Most real estate
investors were first and foremost business people. Would they sell? Yes, they
might be willing to listen to the right offer.
Would they buy? Yes, they might be willing to look at a property if the numbers
worked.
So, Andy started to get a perspective on real estate. If you were in
residential sales, you sold houses. The average homebuyer remained in his home
for seven years. So, on average, every seven years, you'd have an opportunity
to deal with that buyer again. However, on the other hand, investors were
usually not as emotionally attached to their properties as homeowners.
Investors wanted to make sound investments. Investors want to make as many sound
investments as possible. Rather than one deal in seven years with homeowners,
it was conceivable that you could make seven deals in one year with the right
single investor.
If you do what you always did, you get what you always got. If you do
what everyone does, you'll get what everybody gets. You'll be average. As an
Action Principles® Champion, you must hate being average.
The pieces to the puzzle were beginning to fit. Don Nardo had helped Jack
Sullivan buy and sell numerous properties over the years. He was still working
with Jack. And, now the second generation of Sullivans were to become Don's
investors, starting with Danny.
During the next six months of observation research, Andy was averaging two
rentals a week, which paid him about $600 each, and he had two small investment
properties listed. He had spoken with fifteen Newton investors who had outlined
their investment criteria for Andy. Andy had one investor almost ready to make
an offer on a six-unit building.
Things were starting to take shape.
Operational Limitations:
Location, location and location are not always the most important words in real estate. All real estate is not suited to all businesses. Your research will guide you to the commercial space you need.
Tenants make landlords rich. Be the landlord.
If you do what everyone else does, you'll be average. You are a warrior; hate average.
Seeds for thought:
What are the three most expensive line items in a typical small business budget?
What is the advantage of a "split site" for some businesses?
Why is choosing the right size space important for a small business?
How is the price quoted for most commercial space?
In real estate, what is meant by "raw" space?
What is meant by a "turnkey" location?
What is meant by "start-up" months?
Why do some inner city locations make good sites for small businesses?
For what types of business is location of secondary importance?
What is the relationship between location and advertising?
What is a percentage lease?
How will you know what size space you'll need?
Why did Mr. Taylor not feel sorry that Andy had a lot more work to do?
What did Mr. Taylor mean when he said that Andy was at a crossroads?
What did Andy learn from his research?
Jargon:
Amortize – to pay down a mortgage.
Bluetooth – Wireless communication between mobile devices.
Inventory - Merchandise that is purchased and/or produced and stored for eventual sale.
Lease – A legal written contract between a tenet and landlord specifying the responsibilities of both parties.
Lessee – The tenant.
Lessor – The landlord.
Line item - reference to a single entry in a budget.
PDA- Personal Digital Assistant, such as a Palm Pilot or Blackberry.
Percentage lease – Lessee pays a base rent plus percentage of sales.
Raw space - commercial space to which no improvements have been made.
Start-up month – Free month[s] rent from a landlord allowing you the opportunity to customize space for your business.
Square feet – How commercial real estate space is measured.
Tenant-at-will – Usually a month-to-month tenancy.
Turnkey space - commercial space to which all improvements necessary to run a particular business have been made.
Questions and Answers:
What does "quiet time" have to do with business success?
Running a small business is
often stressful. For your own peace of mind, taking 20-30 minutes a day of
quiet time for yourself can become a treat that you'll look forward to.
Take a walk. Take a deep breath. Smell a flower. Look up at the sky. Smile and
put the day that has past or the day to come into perspective. It sounds new
age and corny, but it works and the ideas do flow. In the solitude, you
discover someone very important, yourself.
How
do you find a good lawyer and accountant to help you with your business?
If you join your local
Chamber of Commerce or other civic organizations such as the Rotary or Kiwanis
or Lions Clubs, you'll be associating and networking with area professionals,
including lawyers and accountants. You'll be able to meet them and evaluate
them in an informal setting. Do they seem interested and knowledgeable about
your industry? Also, by becoming an active member of your trade associations
and doing your research, you'll be able to talk with others in your industry about
lawyers and accountants with specific industry experience.
Is buying a franchise a good way to get into business?
It is. However, be sure that
you do not let your research guard down. You'll want to carefully review all
the documentation that the franchisor offers. Ask the franchisor for the names
and for permission to speak with successful franchisees. Also, insist on
getting the names of one or two franchisees who have failed so that you can get
both sides of the picture. It's also a good idea to volunteer to work for free
for a week or two with a successful franchise operator to get a real day-to-day
feel for the business.
Action Plan:
Do all businesses in your industry have identical real estate requirements? What are the differences? Why? Which do you prefer?
List five commercial locations in your area that you feel would be ideally suited for your business should they become available. Can you identify the landlords?
Check the real estate section of your local newspaper to see if any commercial locations are being advertised that would suit your business. Can you call for listing sheets? These listing sheets can be faxed or emailed to you.
Age is whatever you think it is. You are as old as you think you are.
Muhammad Ali
My attitude is never to be satisfied, never enough, never.
Bela Karolyi
You get out in front, you stay out in front.
A. J. Foyt
We ain't making no goddamn cornflakes here."
Col. Charlie Beckwith
Get in, get it done, get it done right, get out.
Fred Trump, Sr.
Not by strength, but by guile.
British Special Boat Service (SBS) Motto
Discipline is not a nasty word.
Pat Riley
Everything can be taken from a man but one thing: to choose one's own way.
Victor Frankl
Semper Fidelis (Always Faithful)
Marine Corps Motto
Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.
Martin Luther
Ne Desit Virtus (Let Valor Not Fail)
187th Infantry Regiment Motto
Enjoy the journey, enjoy every moment, and quit worrying about winning and losing.
Matt Biondi
Things turn out best for the people who make the best of the way things turn out.
John Wooden
The mark of a great player is in his ability to come back. The great champions have all come back from defeat.
Sam Snead
You can make more friends in two months by becoming interested in other people than you can in two years of trying to get other people interested in you.
Dale Carnegie
To be a leader, you have to make people want to follow you, and nobody wants to follow someone who doesn't know where he is going.
Joe Namath
The will to win is not nearly as important as the will to prepare to win.
Bobby Knight
Pressure is a word that is misused in our vocabulary. When you start thinking of pressure, it's because you've started to think of failure.
Tommy Lasorda
The man who has nothing to do is always the busiest.
French proverb
Don't compromise yourself. You are all you've got.
Betty Ford
If there are things you don't like in the world you grew up in, make your own life different.
Dave Thomas
They always say that time changes things, but you actually have to change them yourself.
Andy Warhol
Many receive advice, only the wise profit from it.
Pubililus Syrus
When you've learned to shut off outside influences and believe in yourself, there's no telling how good a player you can be. That's because you have the mental edge.
Rod Carew
Ask and you will receive. Seek and you will find; knock, and it will be opened to you.
Matthew 7:7
Knowledge is power.
Francis Bacon
No one can make you feel small without your consent.
Eleanor Roosevelt
As simple as it sounds, we all must try to be the best person we can: by making the best choices, by making the most of the talents we've been given.
Mary Lou Retton
Confidence is the result of hours and days and weeks and years of constant work and dedication.
Roger Staubach
Luck is infatuated with the efficient.
Persian proverb
Within reasonable parameters, you seek to choose an appropriate size facility.
You want to find a comfortable working environment. You might be able to run a
tailor shop in 400 square feet but maybe you could squeeze into 350 and
anything over 600 square feet would be a waste. You might need up to 1,400
square feet for a karate school, bookshop, dance studio or sporting goods
store. And, you could use every inch of 40,000 square feet for a general
furniture store, indoor flea market or antique exchange. In your specific case,
before you go looking at space, you'll want to know the minimum size you must
have to operate, as well as the maximum size space that you can afford.
The opposite of "raw" is
"turnkey." Turnkey means
that everything is in place for you to start in business immediately, you only
have to "turn the key." For
instance, you might be buying a space for a restaurant, which formerly housed a
restaurant and is ready to go. Or, you might be buying an existing business
that is still in operation. Many franchises are turnkey operations.
Over the next six months, Andy did not have much time for reading newspapers
and doing crossword puzzles. He spent all of his free time doing drive-by
observations and taking notes. And, things were starting to click. He learned
about good neighborhoods and bad neighborhoods and about good buildings and bad
buildings and good tenants and bad tenants and good owners and bad owners. And
he learned about all the gradations between good and bad.
It took Andy most of the next seven weeks to inventory the 272 investment real
estate buildings in Newton. Everyday, he was at the Town Hall at 8:30 AM when
the office opened and he was there at 4:00 PM when the office closed. He went
over the tax and assessment records for the town. He noted the property
address, the number of units, the owners' name and the owner's address, if
different from the property address. He recorded the type of zoning and the
land area of the parcel. He wrote down the assessment for the land and the
assessment for the building. He noted the taxes.