My general question: How do you narrow your criteria for commercial properties if you don't have enough experience to know what you're looking for? I just finished "Crushing It in Apartments and Commercial Real Estate", and there's a lot of talk about narrowing your search criteria to your particular needs and going from there. If you're new to CRE, how do you know what type of property/deal is going to work for you, or even what criteria are realistic? People say to narrow your focus or you end up looking at too many properties and wasting everyone's time, but how to know which properties or type of properties won't work for me?
My specific situation: I live in Minneapolis and have owned one investment duplex since '13. With the capital in that, and some other cash, I have around $250k that I'd like to invest in commercial real estate. I like the idea of simplifying into a single property, and with %25 down for a commercial bank loan, that equates to about a $1mil property. I also like the idea of non-residential property to avoid the time requirement of that many tenants, but more than a single tenant seems like a good idea to keep the entire property from sitting empty if a renter vacates. Any thoughts? Is looking for seller financing at all realistic in this market? Or pursuing other financing options other than using all of my cash on a down payment? Would it be better to split the cash up into multiple deals? How do I narrow down my options?
Hi @Eric Sanford Welcome to BP!
If you're looking for a bunch of non-residential tenants, it sounds like you should focus on office and/or retail (think strip mall on Main St.).
But nobody can definitively tell you what to narrow down - it depends on what you want out of it. I think you can do a pros/cons list of sorts on each of your questions and see what the costs and benefits of each are.
You may like having smaller properties to diversify, or you may want to save yourself a bunch of transaction headaches and plop it all down on bigger one. I also think you should consider whether you want to invest near home or 100 or 500 or 2500 miles away.
In my experience, if you're looking at listed deals, seller financing will be hard to come by. If you get a chance to actually speak with a seller, you'd have a better chance, only because you can really hear what they need and want, and then tailor an offer to that (and to your benefit, of course).
Also, you may not have meant it literally, so I apologize if I misunderstood. But don't use all your cash for the downpayment. Generally speaking, if things turn downward, they only get really bad if the owner is not properly capitalized - i.e. liquid enough to keep going through a bumpy road.
Generally, the less money you have in a deal, the more potential profit you can make. But it also means that there's more leverage and higher risk, in one form or another. That's more of a personal decision - what are you looking for.
@Eric Sanford I think @Simcha Davidman has excellent points. Especially related to money down. I think one unit is risky. Commercial units do not require a lot of oversight but they can sit vacant for years at a time. Could you pay your mortgage, taxes, and insurance on the building without income for 30 months? I'd suggest a hybrid mixed-use building. They tend to be small and you can get a few with your money. You will get a mix of commercial and residential which will help ease any commercial vacancy. If the resident is not your thing I would either look to get a multi-unit space or partner with others so that you can get a bigger building with more units or have the financial backing to fund reserves. Personally I choose the latter option and am very happy. If you get partners you can get a large enough apartment that you can easily afford a manager and then you don't need to worry about the management.
@Eric Sanford @Tim Swierczek makes good points. You agent should be asking you questions to find you niche. We have all types of clients and we could not possibly use a one size fits all for investments. Every buyer has different attributes that are advantages and disadvantages. As is relates to real estate find what your life experiences, geography, family, income, savings, free time, etc can give you an advantage over the next guy and use that.