Having the right perspective, and plenty of patience, are necessary traits for investing in commercial real estate. Experts say that success in commercial real estate investments requires the willingness to spend a lot of time and effort upfront in researching, developing the right relationships and identifying the right type of investment.
Most real estate investors get started buying single-family houses, probably because it’s what we’re the most familiar with. But whether you’re going straight to the big time or are ready to advance from houses to larger (and more profitable) deals, here are 10 time-tested guidelines to follow that will help you have more success.
Tip #1: Think Big
If buying a 5-unit apartment requires you to get commercial financing, which is more of a hassle, then why bother? It’s usually best to buy properties with at least 10 units. Remember that the more units you buy, the cheaper they are per unit. Also, Dave Lindahl has been quoted as saying, “It’s no harder to manage 50 units than it is 10.”
Tip #2: Take Your Time
Commercial deals take longer than single-family houses do. They take longer to purchase, renovate, and get sold. This is not necessarily a bad thing, but something to keep in mind so that you don’t get impatient or rush into a bad decision. Think of commercial deals as big bonuses or your retirement vehicle, not a way to create quick cash to pay the bills.
Tip #3: Don’t Choose Apartments By Default
There’s nothing wrong with investing in residential apartments. Since most investors are already comfortable with residential property, they tend to look for apartments without considering other types of commercial property such as office buildings, industrial, mobile home parks, land, etc. It’s best to weigh all of these property types and choose your own niche based on whatever will help you reach your unique goals, regardless of your comfort zone.
Tip #4: Be Prepared to Spend a Lot of Time at First
Fight the temptation to get discouraged if you haven’t done your first deal yet, or if you are spending more time per deal than your previous ones. Houses are so similar in that it’s easy to make a cookie-cutter system for buying and selling them. Just remember that there is a learning curve, like with anything else, and that things will go faster over time.
Tip #5: Learn the new formulas
If you’re buying houses, you may use certain formulas, like buying at 75% of After-Repaired Value, minus estimated repairs. Commercial property will have new and different formulas to get used to, such as Net Operating Income and Cap Rates. Learn what is considered good in your area and get familiar with them when making offers.
Tip #6: Relationships Are Even More Important
Relationships with other investors and private lenders are important when buying houses, but they are even more so when buying commercial properties. For one, properties costing a million dollars or more are probably not within the financial wherewithal of most of us individually, so you probably have no choice but to get to know and work with partners. Also, many commercial properties are sold without being listed first, so the more people in your network who know what you’re looking for, the more deals you’ll find.
Tip #7: Find Good Financing In Advance
Commercial loans are a different animal than residential loans, and in some ways better. The down payments needed are usually a higher percentage than loans on single-family houses, which means you’ll have to put more down. However, there is often no personal liability if the deal goes south, and they are more lenient about letting you borrow the down payment money from someone else. Nevertheless, before making offers, ask around and find out who the best lenders are in your area to use when buying commercial properties, as it may make the difference between qualifying for one or not.
Tip #8: Be Prepared to Lose Due Diligence Money
After your offer is accepted, you have a period of time (just like with houses) to do your due diligence. You should get an appraisal, property inspection, and other tests and inspections required by law. The only problem is that these cost a lot more than they do for smaller deals. You might spend $5,000-10,000 on a deal, only to find out you don’t want to buy it after all. While this is always better than buying a bad deal, you should still be prepared for these kinds of expenses.
Tip #9: Partners Are Your Bridge to Wealth
Since buying million-dollar properties is not something most people can qualify for on their own, make sure that you spend a lot of time finding private lenders or deal partners. A partner can provide the cash and/or credit needed to purchase a property, and you can compensate them by paying a fixed interest rate or a percentage of the cash flow or proceeds from the sale.
Tip #10: Know Where to Get Tough Questions Answered
Lastly, it’s imperative that you associate with experienced commercial investors who can answer questions that come up while you are evaluating properties. There’s no sense in losing a deal or buying a bad property because you didn’t understand certain environmental regulations or estimating what trash collection really costs. Know who you can ask to get fast answers when you need them, and make them your new best friends.
By following these guidelines you will have the right perspective about investing in commercial property that can help you start right and stick with it for the long haul. Good luck to you in moving from single-family houses into commercial real estate.