BiggerPockets

Is Residential Investing A Prerequisite For Doing Commercial Deals?

I can't tell you how many times I've heard beginner investors say "I want to get into commercial eventually, but I need to do a few residential deals done first". Now don't get me wrong, I can see where one might think that would make sense. I mean after all, commercial investing can seem pretty intimidating at first, and logic would say to walk before you run.

But the reality is that residential experience is not at all a prerequisite for commercial investing. As a matter of fact, they are both very different in almost every aspect. The valuations are different, deals are structured differently, and exit strategies are different. So with that said, is flipping residential properties really going to prepare you for commercial investing? Not really.

For instance, take the appraisal process for residential versus commercial. On one hand, residential is based on comparables (comps) to determine current value while commercial values are first and foremost based on the net operating income (NOI) and the capitalization rate. That's a very key distinction.

Now even though the nuts and bolts are very different between the two, there are bigger obstacles in people's minds that prevent them from diving into commercial right off the bat. The first simply put, its "I don't have the money to invest in commercial". Well they're right, if they have to come up with a 7-figure check to purchase a commercial property that would definitely keep a few people out of the game. But if you were planning on raising the capital by wholesaling properties, you had better get going because you'll be busy for a good while.

The truth of the matter is that in almost every commercial deal involves multiple investors that partner on the project and own an equity share in the deal. This allows every day investors the opportunity to own large commercial real estate projects with much higher cashflow and long term equity growth without the burden of coming up with the large capital required to close the deal on their own.

The second challenge holding people back is the learning curve involved in commercial investing. Now this is an important concern that shouldn't be taken lightly. Ther are many variables to consider when evaluating projects, and there are potential "gotcha's" to look out for. If you are interested in investing in commercial real estate for all of the benefits associated with it but are not interested in the management side of it, you might consider co-sponsoring a project with an experienced investment group as a passive investor.

So although there are several perceived barriers to entry into commercial real estate investing, there are many options for novice investors to dive in without having millions of dollars and being an expert in these transactions and operations. If you really want to become a commercial investor, you should explore your options. While residential investing is a great method for building wealth and may seem like the likely place to start, it certainly is not a prerequisite for doing commercial deals.

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