This is the third blog post of three meant to share answers about commercial investing from the BiggerPockets community. Be sure to also check out the first, “Should You Invest in Commercial Properties? 10 Investors Weigh In,” and the second, “Why Is the First Commercial Deal the Hardest? Advice From Investors.”
While working on new lender partnerships for BiggerPockets members, I realized there was a gap in my knowledge of how commercial investors decide which property to buy and who to work with. Since only 15 percent of investors on BiggerPockets invest in commercial, I thought that perhaps there are questions many investors want to ask—specifically about getting that first deal.
So, we posted a survey about commercial investing in the BiggerPockets Announcement Forum. Below you’ll find the answers from top commercial investors in our community.
The questions are:
- What made you decide to invest in commercial properties?
- What was the hardest part about the first commercial deal you completed?
- What should every first-time commercial investor know to be prepared to speak with a lender?
Today we tackle question No. 3.
What Should Every First-Time Commercial Investor Know to be Prepared to Speak With a Lender?
Here’s what investors have to say!
Starting With My Favorite…
“They should know what a lien waiver is. I cannot believe they loaned my dumb ass the amount of money they did.” — Anonymous
“Know a successful commercial investor.”
“Every first-time commercial investor should know someone who is successful in your field and doing business in the area you’re doing business. If you have the opportunity to partner up with those who already have a track record, then that’s gold. You can learn and earn all at the same time.” — Jeffrey Rollon, San Diego, CA, Developer
“Share your past successes.”
“Best to have some experience doing what you propose to do. A success story or two or three that you can show a lender goes a long way.” — Jim Schneck
“Know your numbers. For real.”
“Be ready with a personal financial statement.” — Aravind M.
“Know the project inside and out. Understand the challenges, and be prepared to have an answer to it, and mitigate the risk to investors. Every project has challenges. Be realistic.“ — Karen Margrave, Redding, CA, Realtor with 35 years of experience
“Know the numbers inside and out. You should be able to speak about income, leases, and who your tenants are. You should also know every expense and who pays for them. Hopefully, your property has triple net leases.” — Danny Randazzo, Charleston, SC, Apartment Syndicator & Commercial Investor with 6 years of experience
“You have to know how all the numbers associated with the property are related. On the income side, know what current market rents are, what increases are currently in the area, and what your competition is. Be on top of why someone would want to rent from you vs. the other available spaces near you. This will help maintain your income stream and lessen chances of vacancy. On the expense side, you must know all your expenses. What are your utilities, taxes, impact tenant change-over will have, upcoming repairs on the HVAC system, etc. As you scale up with multiple commercial tenants, so too will the expenses. Keeping expenses in line and making small increases in rental income can provide for quick increases in property value. On the flip side, escalating expenses and stagnant rents can just as quickly eat away at your value.” — Will Kenner, Seattle, WA, Rental Property Investor with 10 years of experience
“The current lease terms and length, any existing tax debt or other debts, actual income generated by the property.” — Efrain Hernandez, Queens, NY, Rental Property Investor with 2 years of experience
“The lender wants to know the income and expenses for the building (Pro tip: you should want those numbers, too!) The lender will then calculate the debt service coverage ratio and will want to see at least 1.25. Loan terms are typically no longer than 20 years and there is often a balloon well before that.” — Bob Langworthy, Brunswick, ME, Accountant & Real Estate Investor with 10 years of experience
“KNOW YOUR NUMBERS. Go in there with the numbers the lender is going to care about: rent rolls, cap rate, cash flow/mortgage ratio, and your personal or business balance sheet plus income statement. You should know your net worth and show them that it really doesn’t matter because the deal can stand on its own. If you show them you’re in the business of doing business, they’re very receptive.” — Jonathan Bombaci, Lowell, MA, Real Estate Agent with 1 year of experience
Takeaways & Resources
Takeaway 1: Learn from someone who has done a commercial deal.
- Recommended Resource: Find networking events near you to attend to meet local investors, and learn from the best in the BiggerPockets Commercial Real Estate Investing Forum.
Takeaway 2: Complete a deal or two before scaling into commercial investing.
- Recommended Resource: Share your residential investments with the BiggerPockets community by adding it to your profile under “Investments.” It’s a great place to highlight your work, so when you need to brag to a lender, you can point them to your BiggerPockets profile. You’ve already done the work!
Takeaway 3: Know your numbers.
- Recommended Resource: This is an oldie but a goodie: Commercial Real Estate Vocabulary 101 – Commercial Deal Analysis.
I hope reading the above answers helps you understand what you need to prepare before scaling into commercial properties.
If you feel the need to ask more questions about commercial investing—I know I have many more—start talking with our community in the Commercial Real Estate Investing Forums. The reason BiggerPockets exists today is that people in real estate like to talk about real estate. When I say like, I mean LOVE. So go ahead and start learning how to scale.
If you are interested in commercial investing, what is your next step to get started?
Share in a comment below!