I thought I would put this out there. Many times a week I am contacted by potential purchasers of commercial real estate. Some have no experience in real estate at all and others are exiting the residential space or they are adding commercial to their real east portfolio and diversifying.
How does the process work is a common question.
First I analyze the potential buyer. What is it they are trying to do??
Are they a direct buyer with high liquidity and net worth and need help? Are they someone with limited funds and trying to syndicate with no experience?? Do they have money but are an overseas investor and will have many hurdles overcoming tax treaties and entity creation?? Are they a large institution or a group buying asking everyone to see what properties turn up??
The variables go on and on but I know from years of experience which ones have the most realistic chance of buying a property and closing on something.
In my view commercial real estate has some excellent buys right now. It's where multifamily was 3 years ago in some asset classes. The deals are in the market but they do not sit around and are gone in a few months time.
There are some CMBS lenders who will do non-recourse down to 1 million loan but they are pickier on the property. Generally as a direct buyer having 750k and up to put down is a good start in higher quality commercial assets. If a buyer has 50k,200k etc. then you are looking at lower quality assets to own directly with a personal guarantee or buying shares in a company or syndicate or partnering for a higher quality larger property.
Where do you think the opportunities are? What asset classes?
Well put. This is no ground for those who do not have experience, even if they do have cash or financing.
Right now retail strip centers is what I am seeing for value add and stabilized at higher cap rates.
Multifamily is tapped out for the most part. The rates people are paying and trying to structure the debt just to make the property work scares me.
Hotels are nearing pre-recession 2006 levels.
Strip centers are on the recovery phase. Everyone has an opinion but that is where I am placing my chips for the moment.
I certainly agree with you on the apartments vs. retail strip centers. It seems like the opportunities are slim until you hit the 3M purchase price though.
I have been selling apartments for the past couple of years and moving to retail as you are aware.
Thanks for your help!
As an investor that fits into several of the categories you've mentioned above:
"Are they someone with limited funds and trying to syndicate with no experience?? Do they have money but are an overseas investor and will have many hurdles overcoming tax treaties and entity creation??"
I'd love to hear what preparations or steps you'd recommend. After 6 years doing residential rehabs and a few residential rentals, we are looking at moving into the commercial space. We've found a retail strip center in a rapidly gentrifying area whose owner is selling because he doesn't want to adjust to the gentrification. The total investment will approach $1M, and we'd like to use funds from overseas investors (whom we know personally) to finance the down payment.
This may belong in a new thread, but I'd value your thoughts both on what next steps would be prudent and / or what details would make a new thread more informative and likely to receive quality replies.
Get a syndication attorney to help set up the proper agreements.
The foreign investor will have currency exchange rates, withholding, and entity creation to think about.
Whether you want to partner with them directly or have them be a completely passive investor with no control makes a difference.
Bryan Hancock would be someone on here to run your scenario by.
Doing a syndicate myself makes sense because of the returns I would get but putting all that together as a commercial broker transacting a 1 million dollar deal for 30k commission is not worth my time.
I am looking at putting a few of these together myself.
I want the setup to be ( sponsor fee 3% going in , 20% equity slice, cash flow percentage after investors are paid, and sponsor fee / commission of 3% when it sells ).
I only would take exit fee if a profit was made on the project and take cash flow only after investors are paid first and reserves were in place.
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@Joel Owens I own 5 Residential properties, 4 are free and clear. Very little Liquidity, What would you suggest for someone such as myself for getting into a cash flowing commercial buy and hold.
Is there an equation that most commercial sellers use to come up with a decent asking price when they sell a cash flowing business?
Trevor it depends on total net worth. Also the deal size you are talking about.
If you have say 100k to work with then small balance retail condo,office, or say an old town building might work for 100k investment.
Those type of properties you have to work harder for yield.
My clients tend to buy properties in the millions to tens of millions in price so cash flow is a consideration but secondary usually to passiveness of the asset, equity growth long term, and high quality location for wealth preservation.
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