Seeking guidence to purchase first commecial property in Houston!

17 Replies

Hello Dear Sirs!

I am an engineer having a 9-5 job with oil giant in Houston Texas area. I am very much interested to invest in commercial real estate property as my parallel investment income. I would be very much interested to learn basics to evaluate profitable investment in commercial real estate. Lease terms, national tenants, lease length, lease types, cap rate etc. I am very much interested in small strip joint with national tenants that have lease laid out until another 8 to 10 years. Would someone please guide me through the basics of investment? Goal is to invest up to 1M property with up to 10 % down payment where tenants leases laid out for another 8 to 10 years and cap rate of at least 6 %. Seeking wisdom from learned ones. Best Regards, Kenny  

@Ken Thakar

Typically, speak with a commercial real estate agent and explain what you have your eyes set on.

They will explain what properties are currently available for your target area. Then they will get the flyers or brochures and review which ones you want to see.

After seeing the properties, you will narrow down your selection and the agent will provide whatever financial analysis that is needed to determine if the numbers make sense.

Commercial lending usually wants 30% to 40% down. There is the possibility of seller financing. It depends on the situation.

once you narrow down your options, the agent will submit a letter of intent that spells out what you are offering. If the seller is interested, negotiations will continue until you have a final set of numbers. Then you will move to contract and the due diligence period.

It can usually take 6 months to 12 months to search, identify, and close on a property depending on availability. If you have a decent amount of inventory in your area, it's just a matter of narrowing which ones make sense. If the inventory is tight, it can take longer.

@Ken I am not sure how far you are into commercial RE learning curve. There are few podcast related to commercial RE. If you have not heard already, I would highly encourage to listen to those.  Great tips to find right area and you ll be able to get useful links through podcast show notes.

There are so many variables involved with commercial deals. But I'm pretty confident that you're not going to find any retail strip centers with national tenants for $1,000,000. Those kinds of centers would fall in the multimillion-dollar zone.

For that kind of cash, I would recommend looking into a multi-family property. I know of a couple of multi-family properties in that price range that will bring the 6% CAP rate.

Originally posted by @PJ Singh :

@Ken I am not sure how far you are into commercial RE learning curve. There are few podcast related to commercial RE. If you have not heard already, I would highly encourage to listen to those.  Great tips to find right area and you ll be able to get useful links through podcast show notes.

PJ - I own couple of town houses in harris county and fortbend county. I've never invested in commercial property. I want to learn mathematics involved when I sit down to tally numbers for the property I like. Key indexes that are involved to make a decision based on pure mathematics and historical data.

Originally posted by @Fred Heller :

There are so many variables involved with commercial deals. But I'm pretty confident that you're not going to find any retail strip centers with national tenants for $1,000,000. Those kinds of centers would fall in the multimillion-dollar zone.

For that kind of cash, I would recommend looking into a multi-family property. I know of a couple of multi-family properties in that price range that will bring the 6% CAP rate.

Fred -

I believe multi-family building should earn average 8% cap rate. There are some properties out there that I've seen and inquired earns 8% or more cap rate. There are also properties out there in Harris County that has national tenant with NNN lease under 1.5 M. I am currently learning the mathematics to tally numbers of the properties that I am interested. Do you suggest any basics? Key indexes that I should concentrate on? cap rate varies. Seller wants lesser cap rate as seller wants higher $$ / SF. Buyer can provide offer based on the cap rate buyer think he wants comparing market average. Correct me if I am wrong I am just a beginner. However I like to do my due diligence.

Originally posted by @Christopher Phillips :

@Ken Thakar

Typically, speak with a commercial real estate agent and explain what you have your eyes set on.

They will explain what properties are currently available for your target area. Then they will get the flyers or brochures and review which ones you want to see.

After seeing the properties, you will narrow down your selection and the agent will provide whatever financial analysis that is needed to determine if the numbers make sense.

Commercial lending usually wants 30% to 40% down. There is the possibility of seller financing. It depends on the situation.

once you narrow down your options, the agent will submit a letter of intent that spells out what you are offering. If the seller is interested, negotiations will continue until you have a final set of numbers. Then you will move to contract and the due diligence period.

It can usually take 6 months to 12 months to search, identify, and close on a property depending on availability. If you have a decent amount of inventory in your area, it's just a matter of narrowing which ones make sense. If the inventory is tight, it can take longer.

@ Christopher Phillips -

Chris that is a valuable information. Thanks for the reply.

Basic investment is Commercial Properties require larger down payments than 10%. Miracles can happen but I would count on at least 30% down and 50% being more likely at a bank in Houston. Your low cap rate is low so you should be able to find deals on LoopNet or REDNews. Subscribe to both and you email will be filled with offers. Vacancies can be very long in commercial properties. But tenancies can be even longer so that's why we like commercial. National tenants need an up-to-date property and they are notorious for terminating or buying themselves out of leases which can subject you to long vacancies while local tenants tend to stay longer in a substandard property. So consider upgrades and updates if the property needs them. Leases without build out will run 3-5 years so if you can buy a property with longer leases that is a positive. Best tenants can lease NNN as they understand expense inflation but others you may want to put on a shorter gross lease. Get a very good attorney as you will need one. The harsh reality is that your ten percent is not going to get you very far in commercial property so you may want to consider an office condo - that's how I started - or just run a search on LoopNet for properties you can afford and go after them.

I would agree that more of a down payment is needed. At least 25%.
Lots of factors go into cap rates. Credit of the tenant, length of the remaining term, average income in 1,3,5 mile rings, comps etc.
You may want to develop a relationship with a broker at a national commercial brokerage as they have in-office deals only available to their clients. Often the deals you see on LoopNet and other publicly available sites are there because they didn’t any action from seasoned investors over a 60-90 day period.
Commercial real estate does offer the best passive income most investors are seeking when they decide to start.
Just remember cap rates are a risk barometer.

In addition to what others have said about down payment (25% is absolute minimum) and price ($1M is way too low to get a national tenant strip center, you need at least 3-4M) the biggest factor is your liquid net worth. From my experience, lenders will want to see a liquid net worth (what you can convert into cash today) at least 50% of the value of the property. So if you want a NNN center with a national tenant at say, $3M if you don't have at least $1.5M of liquid net worth it's not going to happen.

There is a reason most people start with residential, you can get loans way easier without being already wealthy. Once you acquire the net worth then you can move into commercial.

Originally posted by @Jess Hewitt :

Basic investment is Commercial Properties require larger down payments than 10%. Miracles can happen but I would count on at least 30% down and 50% being more likely at a bank in Houston. Your low cap rate is low so you should be able to find deals on LoopNet or REDNews. Subscribe to both and you email will be filled with offers. Vacancies can be very long in commercial properties. But tenancies can be even longer so that's why we like commercial. National tenants need an up-to-date property and they are notorious for terminating or buying themselves out of leases which can subject you to long vacancies while local tenants tend to stay longer in a substandard property. So consider upgrades and updates if the property needs them. Leases without build out will run 3-5 years so if you can buy a property with longer leases that is a positive. Best tenants can lease NNN as they understand expense inflation but others you may want to put on a shorter gross lease. Get a very good attorney as you will need one. The harsh reality is that your ten percent is not going to get you very far in commercial property so you may want to consider an office condo - that's how I started - or just run a search on LoopNet for properties you can afford and go after them.

Jess -

That was an excellent reply. Thanks for sharing. I currently own two town houses in Houston Texas area. May be I need to more focus in office condo as that fits perfectly in my budget just the way you started. I will also be able to put 20 % down to finance my property. That way I will be able to build my net liquid worth. Would you be able to provide some tips / education to kind of property to look for or ask broker to show me? Basic concepts to make a profitable investment? Of course leases are important. How far out should I typically seek the leases of tenants to be in property?  I have a really good real estate attorney friend.

I get this all the time. I look at about 1,000 properties a week. Some replying in this thread are my clients already.

I get contacted by people with good incomes but net worth is maybe 1.5 million or so. They have 300k down. They are wanting an area of high quality with a tenant that typically for STNL runs 2 to 3 million. To get in their low 1 million range something has to give. It usually is a low growth state or a warm belt state with weak suburban to rural area instead of strong suburban to urban core.

So if an investor is accredited and has say 300k but wants assets with 3 million quality the answer might be to invest with a retail sponsor on larger high quality projects and locations. For 300k you will not own it directly but own a smaller part of a higher quality asset.

You lean on the sponsors experience and then as net worth grows over time if you so decide then go and buy on your own directly. There are some retail condo's as mentioned to get started that might be 200k or 300k etc. You have to be careful with those as there tends to be a condo association and you have to know who the other owners are whether investors or business owner/operators.

10% down payment is a pipe dream. It's just not realistic. Lenders go by DSCR factor (debt service coverage ratio). When you buy at lower caps more down is required to make DSCR work.

Buyers inquiring into commercial retail either need to learn the finance space or engage an expert that understands cap rate values and what debt is available under what terms in the market otherwise the buyer is chasing a Unicorn.

Out of 40 buyers that contact me with initial interest I would say 25 to 30% buy. It usually comes down to they did not understand the financing and how it works, they were looking at multiple asset classes, they have a 1031 exchange that hasn't sold yet, they were not realistic on market cap rates,etc.    

@Ken Thakar , Not to add one more thing to this mix but... I am fascinated by the juxtaposition of your day job and your desire to invest in real estate. There is an interesting confluence of the two in that mineral and oil drilling interests and royalty interests in oil, gas, and mineral resources are considered to be like kind for investment real estate for purposes of 1031 tax deferred exchanges. And also interestingly enough, the energy and real estate markets are somewhat opposite much of the time. So with access to industry knowledge in Oil and gas and a growing competence in real estate investing you'll be uniquely positioned to move in and out of the energy and real estate sectors at opportune moments and do it tax deferred through 1031 exchanges. It's an advanced concept but if you keep at it this will give you all kinds of opportunities to maximize your buying power and ROI.

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