investing in Commercial properties questions

[James Ellis]

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?

[Christopher Telles]

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.