There are a lot of similarities and differences that you’ll want to take into account when you get started investing in commercial real estate. The first thing that you’ll want to do is go over the categories. Most people end up finding one investment type that they like and stick with it.
So here is a quick overview of the different types of Investment Properties.
- Single Family Homes
- Duplex / Triplex / Quadplex
- Apartment Complex / Townhomes
- Warehouse / Distribution
- Flex Space
- Special Purpose
- Multi Tenant
- Mid rise / High rise
- Strip Centers
- Special Use
- Assisted Living
- Sports Complex
This isn’t an exhaustive list, but you’ll start to quickly see that there are a lot of different property types. There’s as many property types out there as there are different jobs. Everyone will need a place of business or a place to live.
Learning about commercial real estate investing for beginners should make you realize that your real goal is to help businesses succeed. You can’t just buy any building out there and think everyone will show up wanting to throw money at your face. That dream does sound nice, but that’s just not the way it works. You’ll probably want to spend time learning about the businesses that you want to end up serving with your properties. By looking at your skills and inventory as a solution for others and not just a way to make cash for yourself, you’ll be better able to see the bigger picture and how it will end up affecting everyone involved.
What you need to know about commercial real estate investing for beginners
What doesn’t change?
The basic aspects of any real estate deal no matter how big the numbers are will always stay the same. This is something that you need to remember. Yes the risks and rewards can be much bigger, but the basics of looking for and acquiring an investment property doesn’t change.
Basic property needs will never change. You’ll have to pay taxes, maintenance will be required, and you better make sure you have insurance. Sometimes you can change who is in charge of paying for different things, but they will need to be paid by someone.
Things that do change
Complexity is the first thing that you’ll notice changes once you start working on commercial real estate deals. Buying an apartment complex with several units or buying a huge industrial building will both have completely different needs and different laws that affect each property. Your knowledge will be stretched a bit further than compared to a small single family home investment.
Speed of transactions can slow down on a lot of commercial deals. You might find that it takes much longer to buy a commercial property, get all necessary and extra due diligence finished, and it can also take much longer to get a tenant into a property. All that being said, all of these can work in your favor as well when you structure things right
It’s even more about the numbers than single family home investing. You’ll find more conservative estimates will serve you well as you spend time looking and getting properties.
You’ll find commercial deals might be much fewer and less easy to find than single family homes. That’s why commercial realtors can be huge help. I almost always recommend using a realtor when buying. Not only because I’m one, but because of the immense amount of help they can be. They get paid if the transaction closes and it doesn’t affect the price you pay at all.
Get your real estate financing in place
Financing a commercial property is different than getting a single family home. I highly recommend starting with your finances first and seeing what kind of loans, terms, and conditions you have. The ratios, limits, and requirements are different and will really affect you. You’ll also find a difference in owner occupied properties compared to investment only properties or build to suits.
You’ll find a lot more owner financing and creative financing deals in commercial real estate. A lot of times it might seem a lot more confusing so you want to start getting as much in place as soon as possible.
Network the right way
The people that you’ll be dealing with in commercial properties is a much smaller circle and everyone knows everyone. Protect your reputation. Even if this is your first day, you want to have a good reputation. Long standing business ethics and Biblical principles of helping others, being honest, and doing what you say you will are the cornerstones that will help you have a long and fulfilling career in commercial real estate investing.
The people that help you with your investments are your team. You can think of them in many different ways, but they are the people that affect your income and success so it would be a good idea to start thinking of them as your team. Many of the best deals will never be known to more than the two or three people who made them. I’ve personally witnessed mind blowing deals go down with one phone call. I watched $1,000,000 get made in 3 days from one phone call. You know what? this happens a lot more often than you think. Your network can speed up your journey to success.
Looking for deals is a little bit different than a single family home. You have to get into the mindset of what your tenant is going to need. Your property is the product and you are going to have to sell it to a business to pay you money every month to stay there. You’re products will fit very specific criteria and you’ll have a much better experience if you can get in your future tenants head first. Who cares if you love the special features of a property if all the possible tenants hate it.
You’ll need to be able to find out more on zoning rules and regulations, permits, and many other things that will affect a commercial property compared to a residential. I’m not trying to scare you off, but I get really mad when people lie about things. There’s a lot more to know about commercial properties and they can be more work. The thing is, with high risk comes high reward. This is not like gambling where the house has the upper hand and you’re most likely going to lose. You can do all sorts of things to make the best educated and well planned decision possible. It doesn’t take away the risk, but it dramatically lessens it.
Negotiating and Closing
Negotiating on a commercial property is not that different up front than a single family residence. You will have all the same elements in place such as offer, counter offer, option period, inspection period, title search, and final closing. The scale will be bigger and you can get even more creative. There have been numerous books written on commercial real estate, I highly recommend reading as many of them as you can get your hands on.
Negotiating might be seen by many as a soft skill, but it brings about huge rewards. Buying a small $100,000 property that is really valued at $140,000 creates $40,000 of value out of thin air. You might also see a bigger deal that good negotiating works out even better. For example, an $800,000 build to suit buidling with a 20 year lease with 0 personal money invested and the property paid off in 8 years. These are not made up numbers. I have personally witnessed these deals and I know it happens and will continue to happen. It takes a whole lot of work to find those deals and I’m not kidding on the lots of work part. Good negotiating will really help you out in your efforts and if you aren’t good at it, then find someone who can help you.
Effectively managing a property means getting the most rent produced while minimizing expenses. Making a good deal on a property is a huge hurdle, but its completely worthless if you can’t do anything with the property once you have it. A single family residence is much easier to get rented out. Your tenants will have very specific needs and requirements which will make or break the deal many times. Knowing this ahead of time lets you prepare for as much as you can and allows you time to work on overcoming obstacles.
For example, a kitchen would be necessary for any type of cafe or food establishment. What if you bought a property that didn’t have a kitchen but was the right location for a cafe owner. You’ll need to spend some time overcoming that obstacle. After getting zoning, planning, and permits done, you might be able to do a build to suit kitchen add on for that great tenant on a longer and higher lease to cover your costs. This is just one example of creative thinking that you’ll need to start working on.
It can take a lot longer to buy a commercial property. In the same way, it can take a lot longer to sell one. An effective exit plan is something that you’ll need to spend a little more time planning on and using as a tool to work to your advantage. There’s more than one way to exit out of something and you can come out far ahead in the game with effective planning.
Commercial real estate investing for beginners is a huge field and its a lot of fun. You’ll find your niche and what you like and don’t like and then you can run with what you’re good at. If you end up really like single family homes, don’t waste your time on commercial. At the same time you can stay away from residential investing and stick to only commercial. You can even do both if you want. The decision is up to you.