Business & Investing
Sponsored by

Investing in Commercial Real Estate

2,523 Views | 10 Replies | Last: 5 yr ago by 62strat
thisguy05
How long do you want to ignore this user?
AG
I like the idea of holding investment real estate, but I have no interest in being a residential landlord. How much more difficult is owning commercial real estate than residential? Assuming one had the capital to do either, would it be best for a novice to buy an existing developed property or buy raw land and develop himself? Is the latter even possible without becoming a full time job? Specifically, I envision a small 3- to 4-unit mini strip center (the merits of which are also up for debate).

Let 'er rip and don't assume I know anything.
Post removed:
by user
dc509
How long do you want to ignore this user?
AG
thisguy05 said:

I like the idea of holding investment real estate, but I have no interest in being a residential landlord. How much more difficult is owning commercial real estate than residential? Assuming one had the capital to do either, would it be best for a novice to buy an existing developed property or buy raw land and develop himself? Is the latter even possible without becoming a full time job? Specifically, I envision a small 3- to 4-unit mini strip center (the merits of which are also up for debate).

Let 'er rip and don't assume I know anything.
Commercial real estate is certainly more complicated than residential, but it can be a damn good investment. Sticking with you small strip center, which is and idea I like, I would first try to find an existing property. I'm not saying you couldn't pull off developing land, but that's tremendously more complicated. Don't be afraid of single tenant either.

What I would look for (and everyone else is looking for) is a property with strong tenant(s) that have 1-3 years of term left on their lease. This is where the hard part comes in. You'll need to try to find out everything possible about their intentions. If you can renew them, even at a small discount, for say 8-10 years you've just increased the value of that property significantly. In a multitenant situation what I would look to do is get them all of long term leases, and then either cash out refi or sell.

Before the "well, yes, but" crowd comes in, everything I just said is more complicated that it sounds in that paragraph. That's the broad strokes of what I would, and have attempted to do in the past. The reason I say "attempted" is because these properties are hot, and they were all bid up past where we thought there was value. My advice would be to call owners of properties that aren't currently for sale, and see what you can make happen. I hope that's at least semi helpful.
Slappy007
How long do you want to ignore this user?
AG
dc509 said:

thisguy05 said:

I like the idea of holding investment real estate, but I have no interest in being a residential landlord. How much more difficult is owning commercial real estate than residential? Assuming one had the capital to do either, would it be best for a novice to buy an existing developed property or buy raw land and develop himself? Is the latter even possible without becoming a full time job? Specifically, I envision a small 3- to 4-unit mini strip center (the merits of which are also up for debate).

Let 'er rip and don't assume I know anything.
Commercial real estate is certainly more complicated than residential, but it can be a damn good investment. Sticking with you small strip center, which is and idea I like, I would first try to find an existing property. I'm not saying you couldn't pull off developing land, but that's tremendously more complicated. Don't be afraid of single tenant either.

What I would look for (and everyone else is looking for) is a property with strong tenant(s) that have 1-3 years of term left on their lease. This is where the hard part comes in. You'll need to try to find out everything possible about their intentions. If you can renew them, even at a small discount, for say 8-10 years you've just increased the value of that property significantly. In a multitenant situation what I would look to do is get them all of long term leases, and then either cash out refi or sell.

Before the "well, yes, but" crowd comes in, everything I just said is more complicated that it sounds in that paragraph. That's the broad strokes of what I would, and have attempted to do in the past. The reason I say "attempted" is because these properties are hot, and they were all bid up past where we thought there was value. My advice would be to call owners of properties that aren't currently for sale, and see what you can make happen. I hope that's at least semi helpful.

This is good advice. I completely agree that developing land is drastically more complicated than purchasing an existing property. Let me start by saying that my wife and I close tomorrow on an existing 4 tenant 6500 SF strip center that never made it to the open market. Neither of us work in real estate and were under educated prospective buyers two years ago. After going through the process of missing out on a few good opportunities and then ultimately purchasing a small strip center, I do have a couple of pieces of advice.

If you are new to real estate, specifically commercial real estate, I'd recommend reaching out to a commercial brokerage firm. We initially set down with a broker, explained what we were looking for, our budget, and had them search for and bring us potential properties. Since we had minimal experience with commercial properties, we needed their expertise and experience.

Secondly, aside from the complexity of new construction, if you are going to be borrowing 70%, potential vacancy is a big red flag to potential lenders. The lenders want to ensure that your in-place NOI exceeds your debt service by a factor of 1.5x. A crucial beginning step in the process is understanding your price range and property preferences. I would recommend reaching out and meeting with multiple commercial lenders to understand the lending rate, rate term and lending potential These metrics are crucial for understanding what type of property is in your price range and for cash flow analysis.

Finally, make sure to do your due diligence to get educated. A good starting point is to hop on Loopnet to get a general understanding of commercial real estate opportunities similar to what you are looking for. If you have a question, find someone that can answer it. We have relied heavily on our broker, lender, attorney, and friends for insight along the way. When you finally pull the trigger, know that you, your spouse, or your business partner/s will spend significant time purchasing the property. I'd estimate I have personally spent 80 hours from the time we put the offer in, until today.

Hope this helps, let me know if you need clarification on anything.



62strat
How long do you want to ignore this user?
AG
SoupNazi2001 said:

Interesting topic I would stay away from office real estate as a general theme. I think the trend of more people working from home will continue to increase especially after the "old guard" retires. I think it will negatively impact this segment except for premier locations. I still like good Multifamily as people always need a place to live. Stay away from retail for obvious reasons.
Dentists/clinics, donuts, haircuts, nail salons, food, etc..

These jobs are not going to be working from home anytime soon. They will continue to exist in commercial real estate because people need to go to them.

We have a superintendent who told me he built a property in his late 30s with one tenant already signed up, a dentist. He has a 30 year lease on it, and pays it off here in about 2 years, then he's making $15k a month profit.
His dentist signed a 5 year lease initially, then a 10 year lease a few times. The other tenants have come and gone, but never at the same time, so he never had both empty and the dentist just about covered his mortgage anyway.

It seems like an exceptional idea to me. Multiple tenants to lower risk of sitting empty and way longer leases compared to residential.
Diggity
How long do you want to ignore this user?
AG
why would the dentist sign a 30 year lease? that doesn't make sense.
752bro4
How long do you want to ignore this user?
AG
What are you? An anti-dentite?
Diggity
How long do you want to ignore this user?
AG
Never!

thisguy05
How long do you want to ignore this user?
AG
Great stuff. Thanks to all!
62strat
How long do you want to ignore this user?
AG
Diggity said:

why would the dentist sign a 30 year lease? that doesn't make sense.
Read it again, with these assumptions

He = the superintendent
lease = mortgage/loan
Diggity
How long do you want to ignore this user?
AG
on no planet does lease = loan, but thanks for clarifying.
62strat
How long do you want to ignore this user?
AG
Yeh I was thinking about the next sentence and the dentist leases, but still typing the part about the superintendent buying the building.

On no planet do my fingers type fast enough to keep up with my brain.
Refresh
Page 1 of 1
 
×
subscribe Verify your student status
See Subscription Benefits
Trial only available to users who have never subscribed or participated in a previous trial.