Should You Invest in Commercial Properties? 10 Investors Weigh In
This is the first blog post of three meant to share answers about commercial investing from the BiggerPockets community.
Let me start by saying I am not a commercial investor. However, I have had the pleasure of speaking with both commercial investors AND commercial lenders over the past couple of months. My main takeaway: commercial investing isn’t that different than residential, but not all investors are ready to scale into commercial.
Since we don’t have a commercial investing webinar (yet!) I asked commercial investors the following three questions:
- 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. 1.
What Made You Decide to Invest in Commercial Properties?
Here’s what investors have to say!
“I was tired of paying rent.”
“My start into commercial properties was purely by accident. I was a recent dental school graduate and had my office in the building that I eventually purchased.
The owner at the time got the property in a divorce settlement and did not like being a landlord. Consequently, the building was not well maintained nor operated efficiently. As I was trying to grow my dental practice, I was faced with either moving my office to a new location (which isn’t easy or cheap) or taking over the building that I was in and fixing it up. Either way, I wasn’t flush with cash, as the economic downturn was in full effect.
After almost signing a 10-year lease with another property that would have required an expensive build-out with little TIs, I made the decision to approach the owner of my current building about selling. Looking at the total rent that I would be paying for my new space, I figured why don’t I put that toward owning?!
Fortunately, I was able to negotiate with the owner a seller-financed deal that worked for both of us. We ended up closing on the deal at the same time our first child was born—just in case things weren’t already interesting enough!
Since then, I’ve been able to increase the monthly rental income by nearly 50% through value-add sweat equity and creating more rentable space within the building. And it was during this process that I truly began to appreciate the power of commercial property investments. Those regular 3-4% annual rent increases, creation of an additional rentable SF, and creating a desirable building that people compete to be in all equate to significant increases in cap rate valuation of the property and cash flow.” — Will Kenner, Seattle, WA, Rental Property Investor with 10 years of experience
“I own a small accounting practice and was tired of paying rent. I knew the math behind owning real estate and decided it was time to take the plunge. Looking forward to closing the next deal this summer.” — Bob Langworthy, Brunswick, ME, Accountant & Real Estate Investor with 10 years of experience
“I have several businesses and I needed a commercial space because the city enforces zoning laws in the area that I was located.” — Anonymous
“My small business had the equipment and expertise to construct commercial buildings more cost-effectively than most. Keeping the construction costs low keeps the returns high.” — Anonymous
“I was looking for another property.”
“I was looking for another property in a certain small town I invest in, and Fannie Mae had a foreclosure listed for a 4-unit apartment building. As I learned more about the property, I found that it also included a building of storage units, as well. Since the price was right, I bought it. We are in the middle of rehabbing the apartment and still working on possession of the storage units.” — Lynnette E., Tennessee, Rental Property Investor with 2 years of experience
“I saw an opportunity.”
“Saw a niche in the market that wasn’t being met and designed projects to fill them. We’ve designed and built spec office buildings, small office parks, office/retail condos, residential subdivisions, medical/dental clinics, and more.” — Karen Margrave, Redding, CA, Realtor with 35 years of experience
“I just wanted more units under 1 roof. Anything over 4 units had to go commercial. I found a 5-unit that I liked and went down the commercial lending path and found it super easy and fun. Now I only want to deal with commercial lending. The credit union that I’ve been partnering with lets me do way more creative financing stuff and rolls with whatever I want to do. Of course, the deals I’ve brought to them make sense on the key metrics they use in underwriting.” — Jonathan Bombaci, Lowell, MA, Real Estate Agent with 1 year of experience
“Commercial property is valued based on the income it generates, and investors have the ability to control how much income is generated. Thus, investors can control the value of the asset.” — Danny Randazzo, Charleston, SC, Apartment Syndicator & Commercial Investor with 6 years of experience
“I found a mentor in commercial investing.”
“Six years before I got into commercial, I met a successful developer already doing commercial deals, and he was younger than me. Over the next 6 years, I’ve followed his success and we stayed in touch. When he invited me to help with his downtown projects, I jumped on the opportunity to learn from and work with him. That—and I see the growth in downtown San Diego—and it was a no-brainer.” — Jeffrey Rollon, San Diego, CA, Developer
“Mentorship through employment at large commercial real estate investment firms.” — Anonymous
Takeaways & Resources
Takeaway 1: If you are interested in scaling into commercial investing, finding a mentor or someone you can shadow is helpful in learning the ropes.
- Recommended Resource: BiggerPockets Commercial Real Estate Investing Forum is a great place to start meeting seasoned investors.
Takeaway 2: Own a business? If you have the cash flow, it might be worth buying a property instead of renting.
- Recommended Resource: Talk with a realtor in your neighborhood to see what’s available. It’s free to talk & view properties.
Takeaway 3: There is always an opportunity to scale from residential to commercial, you just have to be open to scaling.
- Recommended Resource: This helpful video explains how one investor began scaling: “How I Went From My First Rental Property & Scaled to Commercial Real Estate.”
When you are ready to get a commercial loan, we can help, too.
If you are interested in commercial investing, what is your next step to get started?
Share in a comment below!