Commercial Investing Creative Strategies - same as residential?

Question

I had quite an interesting conversation with a broker today who happens to also be a developer and an investor. He brokered many commercial real estate deals/investments around my area. In fact, he sounds like he either developed, or had a hand buying and selling, nearly all the major commercial centers in my general area (wal mart, grocery stores, shopping centers). The most interesting part of our discussion however was the strategies he says he was using to structure these deals - buying low (really low) from distressed owners, using lease options to pay off the owner in full once he actually sold the deal on his end, buying at auctions, repairing, selling for much higher, structuring million dollar deals with none of his own money down.

I never even considered to look into commercial real estate but it sounds like much of what I'm learning on the residential side is applicable on the commercial side. Is this reasonably accurate? Can anyone share any major differences and similarities between the two?

Are all the creative, no money down, investment strategies applicable on the commercial side? Can I sign a purchase agreement with contingency to pay only after a buyer is found, on a really good deal, then locate funding from private lender (JV or interest) or even HML to eventual refinance? In short, can I also get as creative as I want (or need) in the commercial sector in the same way as it is possible in the residential side?

He invited to show me some deals in person and sounds like he could have some seriously good deals he's working on (like 10 cents to a dollar ones). It was quite fascinating talking with him. Being a neophyte, I'm just glad I was able to understanding mostly everything he was talking about. I'm definitely going to take him up on his invitation, if only to hear more of his experience, though I honestly feel a bit out of my barring here on the commercial side, understandably, since I haven't even done any residential deals.

Assuming he has an amazing commercial deal (around or below 50% appraisal), how would a rookie investor like me take full advantage of the situation without too much capital (10k, hardly worth mentioning), average credit, an self employment income? I would imagine I would need to JV with some private lenders on the deal, assuming HML is out of the question (refinancing might even be an issue). Not the greatest starting assets, but it is what it is and I need to work with what I have or go around it entirely.

Any thoughts? I'm very eager to hear how you guys with more knowledge and experience would approach or structure a really good commercial investment deal from a beginners standpoint.

with respect,

Tim

Alina Trigub · Answer

@Tim Ivory

If you're looking to do a large commercial deal and have no experience or the funds, your best bet would be to bring a quality off market deal to an experienced investor and have them coach you through the deal.

John Warren · Answer

@Tim Ivory as I have grown as an investor, I have learned that those with capital can more easily play in the commercial arena. This really goes for large apartment complexes too. Any time you have a piece of real estate worth north of a million you need to have reserves that are scaled up with the value of the property. Things like commercial flat roofs, parking lots, exterior stairs, etc can cost a ton of money to replace/upkeep. The down payment is really just the starting point in these deals.

Tom S. · Answer

@Tim Ivory I realize this thread is a few weeks old, but just chiming in on the "if you don't have capital you can get crushed". As John posted above, running an apartment building is running a business, and you need to have cash for the day to day operations.

Of course you plan to have good monthly cash flow, but suddenly you can have a non paying tenant. Then it's the double hit of no income coming in, and legal expenses going out for an eviction. Then the additional expense to fix up the place to re-rent. And other items that pop up such as new codes, like hard wired smoke detectors. In an apartment building that can be thousands you didn't plan for.

To your original question of financing, commercial tends to be more flexible than residential. I've been allowed to do things like have seller financing contribute toward the downpayment, or bringing in partners. My personal experience is the application is nearly the same as residential. They'll consider the income of the property, but most of the weight was toward my personal financials: credit report, bank statements, tax returns.

Hope that helps!

- Tom

Alina Trigub · Answer

@Tim Ivory If a property is in plain site, what are the chances you can get it at a great price?! When it's an off market deal, you have significantly less competition.

Tim Ivory · Answer

Yes! I like this idea. The investor in question might even be willing to show me the ropes. I could tell he really loves real estate :) He is a real estate agent, but I know he works on off market deals. He has banks calling him for offers and other owners. The first thing I will ask him if the deals he can show me are off market.

Specifically, even though it is obvious, is there any other reason it needs to be off market other than the deal is in plain site?

Tim Ivory · Answer

Thanks guys. I appreciate your thoughts on subject.

@John Warren Can you please expand on what you mean by I would get crushed without capital? Do you mean without access to funds for a large downpayment? I'm hoping if the deal is good, I would be able to find partners or private lenders on the deal. I don't really know my credit situation so my next step is to learn what I can about the financing aspects, before I approach the lenders. Then get some level of financing in place in case I need it. I don't want to waste anyone's time (or my own), but actually follow through on the deals I can.

Can someone recommend a good book about loan types/financing? I'm sure there are different types and I should probably be very specific on the type of loan I'm interested in getting and its duration. I'm sure whatever terms are associated will effect he interest. There are non recourse loan, loans without income verification (if this is true?) etc.

Where to go looking for transactional funding, is this more HML or more credit union territory?

Are there any well written books on commercial investing anyone can recommend?

@Joel Owens Is this because it is more of a sellers market? Is that in general for real estate or specifically for commercial? Where do you go to read on market trends, national and local level.

Apologies guys for so many questions. When I read posts that have more than a few, I usually cringe myself. Even answering 1 is enough ;)

Joel Owens · Answer

From what I am seeing nationally for commercial that was strategies used about 5 to 7 years ago. These markets today it is a lot more rare as tons of money in the market to do deals.

John Warren · Answer

@Tim Ivory the strategies for acquiring real estate don't necessarily change from commercial to residential. I would be cautious jumping into something like this though. If you don't have capital you can get crushed, and this is doubly true in larger commercial deals where lenders require higher LTV, cities require more professionalism from the owner, etc.

Commercial Investing Creative Strategies - same as residential?

Commercial Investing Creative Strategies - same as residential?

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