Tired of Competitive Residential Markets? Here’s How to Break Into Commercial Real Estate!

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Many investors in today’s marketplace are tired of how overpriced and competitive residential rentals have become. Therefore, more and more investors are considering investing in commercial real estate instead. Commercial real estate investing has some similarities to residential investing and many differences. We recorded today’s video from one of our commercial buildings — a 10,000 SF building that has 18 small business tenants located in Trenton, NJ. Matt begins the video explaining the value of investing in commercial real estate. He then shares three tips to break into this niche of real estate investing!

Related: Why the Wealthy Put Their Money Into Multifamily & Commercial Real Estate

How to Break Into Commercial Real Estate

Are you considering starting in commercial real estate? What questions or concerns do you have?

Thanks as always for watching, and let’s get some conversation going!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

16 Comments

  1. Orane Williams

    Hi Matt thanks for the tips in your video. I actually met your wife at a seminar in this very building. would you recommend someone bypassing residential real estate if they eventually intend to invest in commercial real estate? What do you recommend for someone be able to Source funds for their first commercial deal?

    • Matt Faircloth

      Hey Orane,
      Good to hear from you. I think doing a commercial deal as your first out of the gate will be a heavy lift, but it’s doable. You need to be able to obtain a bank loan so good credit and income outside of real estate income is a must. You will also need your own cash or investors that are willing to work with you even though you don’t have any experience in the business or a track record. It would also need to be a solid deal, not too much speculation, and an easier lift to get leased. If your goal is to be a commercial RE investor, I would try and confirm you have these things and then go for it.
      I hope that helps!
      Matt

      • Dave Roberts

        Hi Matt,
        I’m currently trying to buy some self-storage facilities (I know, like everyone else) and I haven’t gotten to the financing piece yet as none of our offers have hit the mark. But from my understanding I thought the banks are more interested in the viability of the deal itself than the viability of you as an individual. So credit scores, W2 income etc are less important than the NOI of the business. Has this not been your experience when dealing with the banks?
        Cheers

        • Matt Faircloth

          Hey Dave,
          Self Storage, awesome! Curious what typical NOI’s you are seeing? Also what geography?
          For the loans, you are talking about a Non Recourse Loan. These kick in on larger purchases, typically over a million. The bank will not require a personal guarantee on these deals, the real estate is the only collateral they take. That being said, they do vet you out still so expect to send tax returns, bank statements, etc… and expect them to still check your credit. They just want to make sure you are overall financially responsible and haven’t made any major mistakes recently.
          Best of luck!
          Matt

    • Matt Faircloth

      Hey Bob,
      Glad you enjoyed it! The returns are good, and the commercial market is less competitive than the residential market so prices seem to be more reasonable. Actual returns depend on your market so it’s hard to say, and it really goes deal by deal. Down payments will be the same, between 25% and 30% of the sale price of the property. Single or multi-tenant doesn’t matter specifically, what does matter are the terms of the lease – who is paying for utilities and Common Area Maintenance, how long are the leases, and utility arrangements. Those are really what drive value for deals like this and can make a deal a good or bad one.
      I hope that helps!
      Matt

  2. Jiri Vetyska

    Hi Matt, great introduction to commercial, it may certainly be something to look into. I have one question, since longer term leases are the norm with CRE, how would you normally structure such a longer lease, such as a 5 year lease when it comes to the monthly payments. Are there automatic increases factored into each year, or is the amount set up front and fixed for the duration? Any specific provision to breaking the lease?

    • Matt Faircloth

      Hey Jiri,
      Glad you enjoyed! With regards to the lease, you typically design in increases per year to cover for rising expenses. The strong leases have something called an Acceleration Clause meaning that if the tenant breaks or violates the lease in any way, the entire contract’s worth of rent comes due all at once. It’s a very strong clause but can really carry some weight if your tenant has strong credit, like a larger company. Another benefit to commercial is the ability to get the tenant to pay for fit out improvements to the space, contribute to maintenance and other costs of the space (Common Area Maintenance), and on very strong contacts contribute to the real estate taxes and insurance!
      Take care,

      Matt

  3. Matt,

    This is a great introduction to commercial real estate and I really like your positive but careful tone in your videos. I bought a commercial property many years ago for my own business and got badly burned, and it’s only now that I’m dabbling in the area. I learned a lot from that investment, and from being involved in the commercial property business through work.

    First, it became clear to me that the quality of the leases is very important. Just like multifamily, the value of the property is pretty much exclusively based on the multiple of the income. The second thing I learned is that the cycles are much longer. A commercial space can sit for years without leasing and this is fairly rare in multifamily. So a dog can be a dog for a long time, but conversely you can get very reliable income from a good property. That also means that you should have ample funding. As you mention, if you can bring value to a commercial space you can leverage a lot of investment, whereas this is much harder in, say, a single family home or a small multifamily property. The last thing I learned is that you must do environmental due diligence. It’s also a factor in residential (e.g. buying near a dry cleaning site is probably a bad idea, and you have to look for oil tanks etc,). But, in commercial, you can have a lot of surprises from past use. There are a lot of benefits to commercial properties and the right fit can make a lot of sense. But it’s definitely a different game than residential. I’m personally dabbling by owning a very small mixed use property (2 bedroom apt and retail space). So the 2 bedroom apartment can carry the property while I figure out what to do with the commercial space.

    • Matt Faircloth

      Hey Peter,
      Sorry to hear you had a deal not work out! It sounds like you shook it off, onward an upward right?
      You are correct on the feast or famine comment – commercial can be a big winner once it’s leased, but it can take a while to get a solid tenant in the space at a good rent. You may have to give some concessions or put some dollars in for marketing to get noticed.
      I have found that anything over 4 units should have some form of environmental inspection, if not a full out Phase 1. There are just too many risks these days – I’ve found them all. Underground tanks, asbestos, prior uses, and the list goes on.
      Best of luck with your mixed use building!! I love those types of buildings, they are the best of both worlds. The residentials are easy to fill, and the commercial brings stability and high profit once it’s leased.
      Good luck!
      Matt

  4. I saw some commercial properties for sale with a variety of cap rate claims. Will sellers share proof of actual expenses over the last several years? I wonder if these returns are accurate or inflated but under reporting expenses.

    • Matt Faircloth

      Hey Nora,
      Great question. You can absolutely request the seller’s actual numbers for financial performance and the realtor should be willing to give it to you. It doesn’t always happen that way and the seller tends to start to have amnesia and didn’t keep any of their records, lol. If that happens be wary.
      Matt

  5. Jennifer Jesse

    Thanks Matt,
    I love your videos. As always great insight and knowledge you share with us. So if i’m a residential RE agent and looking to get into commercial (learning and investing one day), your advice is to hit up some commercial agents in my area and take them to lunch, ask questions and just see what opportunities are out there?

    • Matt Faircloth

      Hi Jennifer,
      Thanks for the comment! I think you may have a bit more of a challenge as you are a licensed agent, approaching other licensed agents about how to get into their industry. They may see you as competition and not want to help you. Make sure they see you as someone that is looking to learn and collaborate with them. If you are careful on how you word it, they will be willing to help you. Talk about how you can help them sell or lease the listings they have on the market. Talk about potential leads you have or could generate for them in exchange for teaching you the ropes. If you are also considering buying a commercial property one day, make sure they know that also. I hope that helps!
      Matt

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