Skipping to Commercial Buying

13 Replies

BP, I'd like to get your advice on a first-time investor skipping small multi-family properties and purchasing commercial housing buildings. Would your thoughts be to "Go for it!" or "Start small" & why?  Additionally, without a track record, is one likely to find funding from conventional lenders? I have great credit, a good amount of funding and intend to make use of local professionals for day-to-day responsibilities.

My thinking is to make the most of my time/leverage and find a B/C+ building with 12-15 units within my budget. As I currently live in SoCal, I intend to locate a Mgmt Co to handle day-to-day responsibilities (possibly existing management). What are your thoughts?

I don't see why not.  Mentality and confidence is everything.  If it doesn't scare you then go for it.  Just remember.   You make or lose money when you buy.  Don't buy a bad deal just for the sake of buying a deal.  Be patient and don't let your emotions guide your judgement.

Originally posted by @Ronald Rohde :

What's the difference between small multi-family and commercial housing?

I believe he meant skip the 2-4 unit residential MFR and go straight into 5+ unit commercial deals.

Huge advantages in commercial, less headaches all things being equal.  A little more of a learning curve re leases, negotiations, lawyers etc..., on balance no reason NOT to do it.  Go where the opportunity is ...

Thanks, guys. Currently trying to better understand what a commercial DEAL looks like in my target market (Dayton/Cincinnati OH). Not sure how to locate commercial comps. @Ronald - Yes, 5+ units as Brian mentioned

To my previous question though, is conventional lending more difficult to secure being that it's identified as 'commercial'?

Originally posted by @Brian Garrett :
Originally posted by @Ronald Rohde:

What's the difference between small multi-family and commercial housing?

I believe he meant skip the 2-4 unit residential MFR and go straight into 5+ unit commercial deals.

 Got it, thanks.

I didn't consider a difference between 4 units and SFR.

Commercial is going to rely on a lot more team members than a personal RE loan. I think most people don't have the time to do commercial deals without a clear understanding of the cost to maintain properties/loans/legal/accounting, etc.

Does the typical commercial investor establish those beforehand or identify these professionals as they come needed? If before, it seems as though that would present a barrier to entry with likely associated costs before ever establishing any income.

NO, there are factors that are different when getting a commercial loan that are different. But it is not harder to get. I have a client that got a million for commercial for his first ever deal. There was a few little hiccups that he had to go through because he was new to investing, but it went through. The LTV is usually higher than SFR. I will also say that there say there are different types of commercial loans. There are hard money, private investors, equity loans, just to name the basic kinds of loans.

If you have any more questions , I will be happy to discuss here with you.

@Jack Davis I like the approach! We are in the same boat, novice commercial property investors looking to get into the game. There is no reason to start "small" because of the amount of time/effort to put the deal together will be more efficient and take less time with commercial properties (5+ units) vs residential (1-4 units). However, I would caution you to move forward with wisdom over emotion.

From networking and studying creative financing, there are opportunities to sidestep conventional financing and construct a deal with custom/flexible terms. Here is a list of unique opportunities to leverage: 

  • Owner Carry First Mortgage 
  • Owner Carry Second Mortgage
  • Master Lease Option
  • Hard Money
  • Assume the Mortgage (Seller Keeps the Land)
  • Broker as the Lender
  • ...there's more

However, you from the conversations I've had with investors with proven track records, you should come to the table armed with both creative and conventional financing tools/knowledge which is how the best deals are made. 

@Larry Caper @Jack Davis I am also in the same boat as you two; going after a larger apartment complex for my first deal. Excited to learn with both of you!

Larry,

Do you have any resources you can share about commercial financing? I am familiar with the basics but would love to do some additional research.

Thanks!

@Wiley Strahan  Unfortunately, I do not have a one point-of-reference. Often times, when I'm researching and listening to podcasts, they host or guest mentions how they financed a recent or present deal. From there I take notes and do my homework to further understand the granular details behind the strategy. As you may have realized, there's a ton of information out there, but it's not all quality. Here are a few quality resources I've benefited from: 

Podcasts: 

  • Lifetime Cashflow through Real Estate Investing, Rod Khleif
  • Wheelbarrow Profits, Jake and Gino
  • The Commit to Wealth Podcast, Juan Vargas
  • Best Real Estate Investing Advice, Joe Fairless

Books: 

  • The Millionaire Real Estate Investor by Gary Keller
  • The Complete Guide to Buying and Selling Apartment Buildings by Steve Berges
  • How to Take an Apartment Building from Money Pit to Money Maker by Craig Haskell

YouTube: 

Industry Trends/News:

@Larry Caper This is amazing! Thank you for all of the references. I will have to start sorting through it all! Keep us updated on your journey. I am personally interested in hearing about your experience. 

FIrst you say commercial and then you say conventional lenders. That is two different things. As for what I would do, if your credit is good and you have some down money I would definitely go for a unit that has more than 5. A good commercial loan should come in between 5-9 % at 65% LTV with 2.5-5 points at closing.