Start with Residential before getting into commercial???

Question

Hey All, I'm a new investor (no properties yet) and I'm interested in commercial real estate specifically mixed-use, apartments, and offices. I don't have the income or savings to invest in commercial yet so I've been starting with residential properties first to get some cash on me. Is this a good strategy? Or would you recommend going straight into commercial properties? If so, how could I do that with limited income (I'm currently a grad student working part-time). Thanks!

Joel Owens · Answer

I have seen mainly 4 paths with my clients.

1. The net worth lifecycle ( They start out with SFR, then multifamily, then self storage or mobile home parks, etc. They eventually go to buy NNN properties as are more now in wealth stabilization to preservation mode outpacing yearly inflation by a factor of 2 to 3 times in the safest assets they can find.)

2. They invest a little in crowdfunding or smaller type deals they could not afford on their own. Over time net worth grows to eventually where they can buy on their own.

3.  They go in with a group where they have say 150k and go in with 3 others to buy who also have 150k.

4. They already have great net worth as a corporate executive, a doctor, or they own or a business with high profits to redeploy or they sold a business.

There are other avenues such as a syndicator etc. but those are the 4 main ones I see. There is small balance commercial under 1 million but typically more mom and pop properties.

Ash Patel · Answer

My first property was a mixed use and seeing both sides of things, I chose the commercial route.  Mixed use is a great stepping stone.  Often you can find mixed use buildings for the same price as a house.  Don't let the mental barrier keep you from going into commercial.  I would much rather deal with business owners vs. residential tenants.

Bjorik Mutize · Answer

Great responses above.

Residential being, relatively easier, may be a good way to get transactions under your belt.
However, if commercial real estate meets your goals don't limit yourself on considering going directly. Capital is usually a barrier of entry and this is where most investors partner/syndicate.

Alex Olson · Answer

I know it sounds really simple but start with whatever you know the best - either through personal, family or friends. Then - research, ask, as again, and then BUY. If you don't like it, sell, and 1031 exchange into something you do like. How that helps!

Mack Benson · Answer

I get it and I was in the same boat. I wanted to get into apartments but didn't have the capital to be able to buy anything but the worst of the worst duplexes in the worst areas in town. I spent well over a year chasing every shiny object I could find trying to find a way to build my capital account but not getting anywhere. The market is/was tough and everything I found was way overpriced or too tight for me to make money on. When I was looking at SFRs I did the math and found it would take a ridiculously long amount of time to have the cashflow plus my salary afford my next purchase.

Nothing made sense and then we had another kid and things changed. Life was put into perspective and I realized the long road to apartments through residential apartments didn't make sense, at least not if I wanted to be in my kids lives while they were still small. I decided I needed help and time was of the essence so I started shopping for a paid mentor/coach. For me, the most important thing was the size of the existing network I was joining so that became a huge factor during my interviews.

That's a long way of answering your question but no, you don't NEED to do residential before getting into commercial but the correct answer for you can only be determined by you. What are your goals and what are your life circumstances? What are your skills and what is most important to you?

Nick Robinson · Answer

@Eric DeNardoI think getting into commercial properties is the way to go.  The one downside is the capital needed to get into the commercial properties.  I agree with everyone if you can do some residential properties that make sense with the goal to do a 1031 exchange and roll the profits into a commercial building that is one idea.  You can also do a syndication and that will give you a better idea how commercial properties work and getting some returns in the process.  Both have positive and negatives.  With going residential you can get investing in RE quicker but your returns can be tighter.  With syndication you will want to find a person/group that you trust especially if you are not one of the main operators in the deal.  Long story short choose the option that makes the most sense to you and as you are trying to grow as fast as you can do not put yourself into a bad position.

Miller McSwain · Answer

After listening to the BP podcast for a while, I have heard that most people who get into commercial start in residential; however, this is not always the case.

Starting in residential can be a good stepping stone because:1. You can easily find a residential deal yourself2. You can easily pay for a residential property yourself3. You can easily manage a residential property yourselfAdditionally, I think investing in residential is much less risky for a new investor because if you were to make a huge mistake (unlikely), then there are plenty of people that can buy the property from you (home-owners and investors).

Commercial on-the-other-hand often involves raising money from other investors or working with partners. If you are considering jumping into commercial, finding a great partner will greatly help your odds of success since they can teach you along the way. The downside is that if a mistake is made, commercial properties are often much more difficult to get rid of.

Personally, I have just saved up enough for residential property and am actively looking for my first deal to purchase. I eventually would consider buying commercial; however, I would rather start in residential because I can ask questions to the tons of residential investors in my area, I can easily manage the property myself, and it is a bit less risky.

That being said, I think both are great options and have been proven to make people wealthy as long as the correct steps are taken.

Neil Henderson · Answer

Most commercial real estate investors we have interviewed would say "Skip residential, go right to commercial."

Maybe. Maybe not. I contend that many of them have forgotten what they didn't know when starting out, and the fear of the unknown that made it hard to move forward.

Everyone's situation is different. I don't think you can go wrong getting your feet wet in the shallow end of the pool first. Learn what it feels like to risk your capital on a cash flowing asset that you might lose if it doesn't cash flow. Do that a half dozen times before you venture into the deep end.

Just my two cents.

Mack Benson · Answer

I have my opinions on a few but would prefer to not share them in an open forum because it could seem as though I am endorsing one over another. Feel free to DM me and we can discuss further.

Eric DeNardo · Answer

@Bjorik Mutize @Alex Olson @Mack Benson @Charlene Fetzer Thank you all for your response! Very helpful and I'm reconsidering my goals and focus because of your responses.

Any recommendations for mentors/coaches?

Start with Residential before getting into commercial???

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