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Steve Uekert
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Commercial Real Estate as a Rookie?

Steve Uekert
Posted Dec 20 2022, 11:27

Hello everyone!

As I continue to absorb as much information as I can, I find myself with more questions than answers (which is normal I guess). I also find myself trying to narrow my focus down a bit to a specific type of investing that I might want to begin with as we get closer to starting our real estate adventure.

As I've shifted from STR's, to LTR's and now more recently into multi-family investments, I've begun thinking about commercial. Just to be transparent, I've just started looking into commercial, so I know almost nothing yet (but trying to learn and read as much as I can).

I know commercial properties tend to have a higher possibility of greater cash flow, but also seem to cost significantly more to get into.

Which got me thinking, if a person wanted to begin the foray into commercial investing, what are some of the options you'd look at that seem to have a lower barrier to entry (obviously this is subjective)?

Small office buildings? Hotels? Retail space? Etc.

Or, is commercial real estate something a rookie should avoid?

Sorry for all the high level questions, I'm just looking to starting filling in the blanks of everything I don't know. Once I know a bit more of what I don't know, then I'll know more questions to ask LOL. 

Thank you all very much for any insight you're willing to share!

Steve

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Tyler Fontaine
  • Property Manager
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Tyler Fontaine
  • Property Manager
Replied Dec 20 2022, 11:43

Fair question. Lots of avenues in RE to make money. I can see why you are exploring all options.

Ill start with no matter what, just make sure you execute. Don't be stuck in analysis paralysis. Eventually you just have to pull the trigger, jump in the deep end, and get started. 

Now, I will say there is a lot of nuance that comes with RE but especially the commercial space. One place to start is to decide if you want to do residential commercial, retail, mix use, and so on. Plus and minuses with all of them.

Then I would be sure to get a realtor who specifically works with commercial. Same thing for your lender. The contracts are different, the funding infrastructure is different, how the asset is valued is different. You want to build your "team" with people who are niched into this and don't just do it casually for a paycheck.

Next, I would say you are correct. The barrier to entry into to commercial is much higher. You can only get into a deal in a few ways. Bring the deal to the table, fund the deal, have the knowledge to guide the deal, or be the person who quarterbacks it and makes sure all the parties involved are doing their parts. You could look in your local area and see if you can intern/work for free/get an entry level position with someone who already is actively having success investing in commercial. This way you can earn your stripes, learn, and potentially build seed money/relationships needed to get into a deal yourself and get a piece of the action.
 

Personally I started with a house hack to lower my expenses. Now I graduated to flipping houses. We will use the proceeds from the flips to build seed money to get some more residential rentals so that my expenses for my personal life goes to zero. The next step will be to trade in our portfolio into a larger resi commercial building or to use the money to simply buy additional units to add to the portfolio. 

Im a realtor, I work at a property management company, I have network of commercial/residential/private lenders, a list of contractors, a phone book of other investors who are doing the same things we are, a couple good attorneys, a book keeper, and a killer accountant. This took time to build these relationships but the machine if you will has been built to be able to take on much larger deals in the near future once we stack some more capital to invest with. I think building your network so you can have the ability to execute properly is the number one priority other than getting the money to make a move.

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Benjamin Aaker
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Benjamin Aaker
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  • Brandon, SD
Replied Dec 20 2022, 13:49
Hi Steve, thanks for the question. I started in SFRs then MFRs (all long term) and on to commercial. I agree that commercial takes more up-front capital but so do multi-familys. More likely is that commercial can be vacant for much longer, get higher rent (rent-loss when vacant), and usually have less units per property, so a single vacancy hurts the bottom line more. They might even have a low cost of entry but a much higher reserve fund need. Low barriers to entry right now are small office buildings. They are depressed due to working from home. A rule of thumb is that each vacant unit should have a minimum of 1 year of rent as a reserve fund. This all hinges on whether or not you believe that office will make a come-back. If not, then avoid.
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Barry Ruby
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Barry Ruby
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  • Boulder, CO
Replied Dec 22 2022, 10:18

@Steve Uekert Steve, I think that your first step needs to be gaining Financial Literacy.

This means learning the language and metrics of CRE AND how to apply that knowledge to underwrite and determine the highest and best use of a development site.

You must be able to understand how to work with the numbers to define sensitivity to de-risk a deal before you tackle one.

Feel free to contact me if you have any specific questions or concerns.

Feel free to contact me if you have any specific questions.

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Tanh Truong
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Tanh Truong
  • Investor
  • Cincinnati, OH
Replied Dec 23 2022, 06:05

One of the best 'starter' properties to get into commercial is mixed-use buildings where they have commercial units on the bottom and apartments at the top. The reason is the underwriting is similar and you can get your bearings in place. Finding a mentor helps a lot. I'm a part of a non-residential commercial mastermind that has helped me tremendously. Happy to elaborate.  

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Scott E.
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Scott E.
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  • Scottsdale, AZ
Replied Dec 23 2022, 07:10

I got started in commercial around 2 years ago. First deal was a small medical building. Second deal was a larger single unit office building.

It does require more capital. And there is a good amount more due diligence that needs to happen (but you get 30 days for due diligence vs 10 days in residential).

Once you own the deal and have the tenant placed, commercial is much smoother than residential in my experience. Especially if you are on a long term NN or NNN lease.

What got me comfortable enough to do my first deal was spending months looking at every OM I could get my hands on. You can just browse around loopnet for this. You can't trust the OM on most deals, but they at least provide a thorough underwrite on deal, the sub market, the pro-forma, the demographics, etc.

Ultimately once you are ready you just need 2 things:

1. Enough cash for your down payment, and for reserves if you need to fill a vacancy

2. A good commercial broker that you can trust, who has experience in both sales AND leases

My broker served as my broker but also kind of like my mentor when I was navigating those first couple of deals. It helped a LOT to have somebody I could lean on and trust throughout the process.

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Brock Mogensen
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Brock Mogensen
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Replied Dec 23 2022, 08:36

Small deals take just as much work as big deals.  Commercial real estate is a very broad term.  In multifamily speak it means 5+ units.  But retail, industrial, office, self-storage..all clasified as commercial. When you are looking to move into the commercial side, first define which asset class you want to target.  Then make the relationships (broker, bankers, property managers) that correspond with that asset class.  Good luck. 

-Brock