Buy Your First Commercial Property | 5 Easy Steps
It’s not uncommon for new investors - or residential investors - to only focus on the barriers to commercial real estate investing.
But, entering the commercial real estate realm doesn’t have to be an insurmountable obstacle!
In this article, I’ll dive into the five steps new investors can take to buy their first commercial properties.
Step 1: Choose and Master Your Niche
Residential real estate investors need to learn a fair amount. Commercial real estate investors need to learn far more.
Put simply, commercial real estate includes far more options, asset classes, and strategies - to say nothing of lending differences - than its residential counterpart. But, the upsides to investing in commercial real estate make learning all these new topics worth the effort.
As such, new commercial investors should first educate themselves, that is, dive into the “academics” of the commercial world. Countless educational resources exist, and here are just a few:
● Blogs
● Podcasts
● Local commercial real estate investing clubs
● Books
With a solid foundation of how commercial real estate works, new investors next need to choose a property type. As you’ll see once you dive into the education part - too many options exist to become an expert in everything. Instead, most savvy investors learn absolutely everything about a single property type, becoming masters in that asset class.
Here are the six broad categories of commercial property (each of which has a variety of sub-types):
● Multifamily properties
● Office space
● Medical
● Retail
● Industrial
● Hospitality
After selecting a property type, investors next need to select a commercial real estate investment strategy. Here’s a list of the major strategies, each of which offers its own inherent pros and cons:
● Traditional development
● Land banking
● Fix & flip (essentially same strategy as residential - just with commercial properties)
● Wholesaling
● Owner-occupied
● Value-add
Local commercial real estate professionals can help you determine the best property type and investment strategy for your market and unique situation - need help finding reliable ones in your area? Drop us a note!
Step 2: Learn How to Analyze Commercial Real Estate Deals
After determining their niche, analyzing - or underwriting - commercial real estate deals can be one of the most challenging processes for new investors.
In a nutshell, analyzing a commercial real estate deal tells you whether or not it meets your investment criteria, in other words, should I invest in this deal?
Most experienced investors develop their own personal underwriting system - typically using Microsoft Excel. But, plenty of options exist to purchase or download templates for free online. Regardless of what path you choose, a solid underwriting process will let you enter the following key deal variables:
● Purchase price
● Estimated rehab costs
● Projected rents
● Financing costs (construction and permanent)
And, with that information, a well-built underwriting system will kick out a deal’s expected investor returns, telling you quite clearly whether or not the deal makes sense.
Analyzing commercial real estate deals can appear complicated for new investors, so please drop us a note for help working through the process.
Step 3: Build A Rockstar Team of Commercial Real Estate Experts
I intentionally italicized “commercial” in the above section heading - residential real estate professionals should not be used in commercial real estate deals. While both groups are professionals, they’re professionals in different fields.
And, no single investor is experienced and knowledgeable enough to be an expert in every facet of commercial real estate. As such, building a team of commercial real estate professionals allows you to undertake the due diligence necessary to make you confident in moving forward - or not - with a given deal.
While you may need to bring in different subject matter experts for specific deals, the following key players will comprise your team for every commercial deal. As such, building solid relationships with these professionals is a key step to your first (and subsequent) deal:
● Commercial real estate broker
● Commercial real estate attorney
● General contractor specializing in commercial real estate
● Commercial lenders (more is better here)
● A reliable commercial real estate property management company
Step 4: Practice!
Once you’ve taken the above three steps, you have the foundation necessary to buy your first commercial property. But, as with building a property, a foundation is only the beginning.
Next, investors need to get reps actually underwriting deals - ideally underwriting one new deal per day. And, working with a solid commercial real estate broker, you can find plenty of deals to use for practice.
This may not be the cool and shiny part of commercial real estate, but it’s absolutely where the rubber meets the road. By underwriting deals over-and-over, new investors will be confident when the right deal comes along, as they’ll:
● Know their return on investment criterion, that is, their minimum required return; and,
● Have enough confidence in their underwriting abilities to know if a given deal meets that criterion
Bottom line, practice ensures that, when an opportunity comes along, you know whether or not to pull the trigger.
Step 5: The Weekly Offer
At the end of the day, underwriting practice still won’t give you real-world commercial real estate experience. For that, you need to actually go out and invest in a commercial real estate deal.
While you can make the interval whatever you want - every two weeks, once a month, etc - I recommend regularly making an offer on a commercial real estate deal. At some point in time, you just need to start, and I personally think one offer per week gets the job done.
And, this can be tied in with the above daily underwriting practice. As you’re underwriting more and more deals, eventually some will start to meet your ROI requirements. When they do, you don’t lose anything by:
● Putting together a letter of intent; and,
● Making an offer
By turning this process into a recurring habit, buying your first commercial property just becomes a matter of getting enough reps.
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We recognize that, even after outlining the above information, investing in commercial real estate can seem daunting.
That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!