investing in Commercial properties questions

5 Replies

I have thought of buying a commercial property and have a couple of questions. Lets say I see a property for $1.2M for a first floor in a commercial building. A commercial lender requires 25% down ($300K). Should I be looking for a partner and setting up a LLC? I hope this in turns entices me to buy one or two more commercial properties. I have read investing books saying that setting up a LLC is often the best thing a person could do. What are the loan rates for commercial loans? I can probably come up with the $300k we have probably $300k in equity in our home and our 401K is probably approaching $1M, and I have a timber property in southern VA that has $150K in equity. I am looking at 2 years down the road into maybe buying a commercial property. And I am not looking at SFH because I do not want to deal with renters 24/7. How have people started out buying commercial properties?

@James Ellis

Have you looked into opening a self-directed IRA or, if you are self-employed a self-directed solo 401k? You can then invest your personal money and solo 401k into an LLC (pool your persona and retirement funds) for the real estate purchase.

My first deal wasn't commercial (it was a literal no money down SFR for my family to live in) but everyone since has been commercial. The fact you are planning and laying down a foundation to move into commercial properties is a very good start. I would recommend you start by finding a good value add property at or close to the cash you have to make a purchase. The value add could be a mismanaged property, a property plagued by vacancy (marketing deficiency) a property that can be broken down into smaller units hence growing NOI, etc. A move in this direction would serve multiple purposes: a) Buy a deal you could generate greater NOI than a similar 'straight' leased investment. b) Allow you to gain some experience managing and marketing CRE space. c) Provide you with a track record in commercial which conventional CRE lenders look towards when loaning on CRE. Ordinarily I like to use leverage, but I always like to caution new investors to consider taking small steps when moving into commercial. There are many different types of commercial properties and they each have different dynamics. Office space is unique with requirements to provide TI's for new tenants. Retail also has its own characteristics and needs to be reinvented every decade or so to remain rentable and competitive. Industrial too is unique and has its own strengths (easier to manage) and cons (longer vacancies). Each type of commercial is going to require a different style and application of management. You should have a light understanding of the type of CRE you would like to own as you head into the market looking for deals. Personally, I prefer industrial because it's an easier asset to manage and I have a lifetime of experience working in this asset class. That said, and as mentioned earlier, if you head into the marketplace searching for a value add situation then you might want to keep your mind open to various types of commercial property. Instead of searching for a specific type of commercial you might let the economic opportunity guide you to a property. One additional note, be sure to keep an outstanding set of books on your CRE. Lenders and buyers will require good accounting, but equally important you want to be able to point out later to prospective lenders your economic metrics e.g., grew NOI by X, ROI was y, Refurbished/demised space and increased gross rents by n.

James if you do not want to deal with problems then VALUE ADD even in commercial is not for you. They will require a personal guarantee.

Non-recourse debt is at higher loan levels.

2 years from now might not be the best time to buy commercial. Right now cap rates are good and debt is good on multi NNN strip centers for instance. Sellers want to sell because buyers can get low debt fixed for 10 years and pay a decent cap. If rates rise 2 years from now the sellers would have to sell at a higher cap rate to offset the buyers expected return and would lose equity from the sale. In a lot of those cases the owners will not be selling but holding rather than giving away equity. That is why so much activity is occurring now. Buyers want to lock in new 10 year debt and seller want to realize the gain and 1031 into something else that has value again or just go to a larger size property with the same returns.

At this point you could buy something all cash but at 300k it will be mom and pop and require your full attention all the time for value add to turn around. You could also invest the 300k passively. I am getting a lot of request for me to offer syndicating where the investors can be passive. You could partner with someone for more cash to do a larger deal.

Each has it's own pluses and minuses. There is the type of property, the debt, the chosen entity structure, and the exit timeline that affects everything.  

Rates will probably go up in 2 years - although I have been hearing that for the last 4 years so take it with a grain of salt.

I would recommend keeping mixed used commercial/residential on the table as an option. In many instances, you can triple net the commercial space sufficiently to cover your debt service, with the residential offering greater mobility in the short run. Hire a management company to service the residential units only, and you avoid the 24/7 phone call headache. But vacancy in commercial space is no laughing matter. 10 year leases are great, but 18 months of vacancy at the end of that lease can bankrupt small investors. Having sufficient cash flow from residential units with shorter leases can offset that risk. Also, shorter 1 year lease terms allow you to capitalize on market shifts in rent.

Just a suggestion to keep that door open.

Great advise, also because commercial real estate investing is very broad what are some great books to read to get a great foundation overview of commercial real estate opportunities? 

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