Literally Everything You Need to Start Buying Commercial Real Estate

by the end of this somewhat lengthy video I'm going to make sure that you have everything you need to go and buy your first commercial property and I'm going to give you five downloads that will help you get there let's jump right into it now let's do this all right let's start by discussing how to choose the right property type for your investment goals there's a whole smorgus Board of options out there Office Buildings retail spaces warehouses you name it commercial real estate comes in all shapes and sizes which makes it very fun and entertaining for me take some time to do your homework and figure out which property type best aligns with your investment goals and preferences but honestly don't overthink this I guess I have a lot of things to ponder each property type comes with its own set of characteristics risks and potential rewards at the end of the day you can be just as profitable in any type of commercial real estate I promise it just comes down to how well you know how to find run and operate these deals first things first you need to consider your investment goals are you looking for steady cash flow or long-term appreciation typically those are on two different sides of the same coin understanding your objectives will help you narrow down your options next we'll look into the type of tenants that you want to attract do you prefer dealing with corporate tenants in office spaces or are you open to managing individual renters in a multif family setting determining your desired tenant profile early on will help you narrow down your options even further Anda tailor your investment strategy accordingly now on to day-to-day management requirements different commercial properties come with varying levels of management responsibilities from the ownership for example managing a retail space with multiple tenants might require a more Hands-On involvement than a single tenant industrial property with a triple net lease consider your available time and resources before committing to a particular property type or just do what the pros do and hire a property management company it's essential to assess your skills and interests as well well are you a Hands-On investor who enjoys tackling Property Maintenance tasks or do you prefer a more passive approach to investing understanding your strengths and preferences will play a crucial role in determining the most suitable property type for you I love getting my hands dirty but I don't want to do that every day on my own Investments now let's talk about specialization versus diversification while specializing in a specific property type can offer advantages such as expertise and efficiency diversifying your portfolio can help spread out your risk and optimize your returns take the time to weigh the benefits of both approaches and again find the right balance that aligns with your investment objectives last but certainly not least it's time to drive your Market conduct thorough research to identify sub sectors with strong fundamentals look for areas experiencing population growth Economic Development and infrastructure improvements by focusing on niches with promising metrics you'll increase your chances of finding a solid investment opportunity there's a different type of commercial real estate to fit every investor and there are five primary types of commercial real estate that you can invest in simply put multif family is a residential property with more than one unit it's a very familiar asset class for most investors for those of you that are transitioning from residential to commercial property investing multif Family Properties are an easy First Step since the tenant base is pretty familiar having multiple tenants within a single property creates multiple income streams which helps remove a bit of the risk of the investment if one tenant moves out of an apartment complex chances are you won't really notice a big hit to your bottom line since you have so many other tenants continuing to pay you rent the multif family asset class includes everything from duplexes with just two tenants to apartment buildings housing hundreds similar to multif family a major factor that draws investors to office real estate is the multi-tenancy depending on the style of the building and where it's located the property can have one to dozens of different tenants office spaces are also further broken up just like multif family into class A B and C assets depending on their age and quality office investing can be more Capital intensive than some other types of commercial real estate due to the cost of turning over and building out space for incoming tenants however because of cap rate valuations in commercial real estate offices can actually command some of the highest values in the market industrial properties widely range in size and use and this asset class has absolutely taken off over the last economic cycle thanks to the rise of delivery this class certainly has a different feel from the others and isn't as polished or sexy as retail might might be however industrial can be one of the best assets to invest in thanks to flexibility and lower cost of entry in fact some of my most popular videos on this channel are on Industrial properties I think that has to say something these tenants often tend to stay in their locations for extended periods of time since there are few reasons for them to really relocate retail real estate is intended to house any business that sells products and services directly to Consumers these projects are typically located to provide the maximum amount of convenience possible to those consumers while many may say retail is dead it's simply shifted thanks to the rise in delivery retail is now pivoting to offer more entertainment and experiences which just cannot be replaced through online orders this real estate asset can range from single Standalone restaurants to massive Regional shopping centers Hospitality real estate exists largely to serve Travelers both for business and pleasure while they can also include entertainment such as water parks these projects are often hotels or temporary stay res residences like airbnbs Budget Hotels or Resorts my personal favorite today is industrial but I'm also renovating a 48 key Boutique Hotel and working on another food haul concept I'll take anything that's a deal very much an opportunist in that respect like I said earlier the type of commercial real estate doesn't really matter in terms of what will make you the most money in the long run it comes down to what you like the most and how good of a deal you can [Music] find all right if you've never been through this process before you're probably wondering all right Tyler how much is this going to cost me well you basically have three ways of funding your project you've got creative financing traditional loan and owner occupied we're talking about the debt here not the equity there's so many different ways and we'll talk about that in another video but with creative financing you actually have the ability to put down 0% that's where the seller is going to carry the note on the property seller financing which on a million doll property means you have to bring $0 to the table pretty sweet I've done a couple of deals like that before in my life and they are some of the best you will ever do traditional loan this is from a normal Bank you're probably going to be in the 20 to 25% range which means you need to bring about $2 200,000 to $250,000 a lot of money but again you could raise that from investors you don't have to do that all yourself now if you're going the owner occupied route you could probably do the SBA 7A or 504 loan route which means you'll probably be able to put down about 10% or $1,000 the great part about this I know that seems like a lot of money but if you're raising capital from investors you don't need to bring any of the money to the table they're doing all that for you you're just putting in The Sweat Equity right you're going out there you're finding the deal you're operating it and you're making sure that they're getting a good return on their Capital now I started my career on the front lines as a commercial real estate broker which meant I had to learn how to Source deals for my investor clients and I get asked how to find investment opportunities by new investors all the time they usually tell me there's nothing out there and in most cases that's simple not true investing in commercial real estate can be a lot of fun and it's certainly rewarding but coming across a good deal is often the most frustrating part of the process if you're not taking the right approach when it comes to starting the search then you're already behind you can't just make a post on Facebook announce what you're looking for once at a Real Estate Investors event or tell the occasional real estate agent you come across and expect to find anything finding your next investment opportunity needs to be at the Forefront of your mind so let's break down exactly how you should be going about trying to find good Investments some of the most successful Real Estate Investors I've ever met reach out to their database on a consistent basis to let everyone know what they're hunting for I made $400,000 off of an Instagram story and I'm not even kidding I posted on Instagram that I was driving through Chattanooga on my way to Atlanta and wanted to look at deals on the way there I ended up setting up three tours putting an offer in on a nine-story office building and my investors and I flipped it 16 months later for 2 and 1/2 times what we paid for it if you never ask you'll never know and if you don't become your own evangelist first no one else will you never know what you'll find in a deal that others have simply missed be prepared to turn over every stone just because something has been sitting on the market for a while and everyone has seen it and passed on it doesn't mean that there isn't an opportunity there underwrite every opportunity that comes your way because they could be few and far between depending on your investment criteria where you want to buy Etc there is an old Contra in real estate that you have to comb through a 100 deals to find one that fits and unfortunately there's a lot of Truth to that statement plus everyone else might just be looking at a car wash when you see an outdoor Food Hall commercial real estate brokers are likely your best option hands down when on the hunt for commercial property because they're already doing some if not all of what I'm already telling you these agents operate on a similar structure to the residential agents that help you buy your home they're paid commissions on deals that they source and close so they are very highly incentivized to keep their ear to the ground for available opportunities and find a deal that fits your criteria they also guide you through the entire process they'll connect you with all of their contacts along the way to make sure everything goes as smoothly as possible for you want to work with the best damn brokerage team in the country to find your next commercial real estate investment reach out the world of commercial real estate is often shrouded in mystery since there is no single database that maintains tracks and lists all of the available opportunities like you might find with the MLS and residential real estate so these brokers work their hardest to keep a running list of any current and upcoming availability so that they can work to pair buyers and sellers together they also often have access to off-market deals that just aren't publicly listed by building relationships with reputable Brokers and clearly communicating your investment criteria you might just gain access to exclusive opportunities that no one else will get to see and don't sleep on snail mail most investors and really just people in general for that matter don't even think to take take advantage of this method sure it's very common in the residential world but almost Nobody Does it in commercial real estate it can be impossible sometimes to find the proper owner in commercial real estate since these ownership entities are often hidden behind the barriers of an LLC or through the office of a real estate attorney however tax records have mailing addresses for the ownership of every property so if you send a certified letter you know that your message will be delivered to the right person physical mail has also decreased in popularity since the Advent of email so send those letters and postcards to owners and yours may be one of the few pieces of hard mail that they actually receive here's a copy of the letter that I sent to a buyer on a smaller retail building here in East Nashville I bought it with a partner for $435,000 in 2020 and we just sold it a few weeks ago for $625,000 that is download number one the internet could be one of the easiest ways for investors to find potential investment opportunities while there is no single database with information you can browse different websites that allow Brokers and sellers to list their properties for sale check sites like the MLS kxy and others to see what's out there and make sure that you sign up for email listings and New Deal alerts if you want to be the first of the punch keep in mind though that these websites often have outdated or incorrect information so you will have to do a fair amount of research to verify anything before you should make a decision you can also check out the listing pages from Boutique brokerages in your city like what we have here at the Cobble group we maintain a directory that showcases available for sale and for release properties you can probably sign up for email alerts on New Deals and don't be afraid to reach out to these brokerages and give them your buy [Music] box all right now that we found the perfect commercial property to invest in there is the exciting yet critical phase of actually making the offer the first step in making an offer on Commercial properties is submitting a non-binding letter of intent typically your broker will draft and send the LOI to the seller or their representative this document outlines the proposed deal terms the conditions which includes the purchase price due diligence period closing date all of the factors that if you can't agree on those there's no point negotiating a purchase and sale agreement while Brokers often handle this task some investors prefer to draft and submit the LOI themselves especially in direct negotiations that's download number two once the seller receives your Loi and expresses interest in moving forward they may request a proof of your financial ability to actually complete this transaction this often comes in the form of a proof of funds letter from your lender indicating that you have the necessary funds or financing in place to purchase the property having this documentation ready demonstrates your credibility as a serious buyer and strengthens your negotiating position think about it if you don't have those ready a seller is going to think you don't know what you're doing negotiating deal terms is where the real action happens this is your opportunity to discuss and refine key aspects of the transaction such as the purchase price due diligence period and the closing date be prepared to engage in back and forth negotiations with the seller aiming to reach mutually agreeable terms that satisfy both parties your broker will play a crucial role in facilitating these negotiations and advocating for your interests throughout the process and once you have an executed Loi it's time to hand everything over to your attorney for the purchase and sale agreement it also doesn't hurt to get your attorney involved earlier in the process but this is where they become absolutely critical as seasoned Commercial Real Estate Investors like to say make your money on the front end when you buy it so if that's true then conducting your due diligence before you buy a site is pretty important to your success as an investor but what if you've never been through this process before well here's a few steps to take when conducting commercial real estate due diligence once the contract is fully executed and finalized we organize it into a project folder on Google Drive and send a fully executed copy of the purchase and sale agreement to our real estate attorney the sellers will have a number of files that we require they turn over within a specified number of business days after the execution of the contract contract typically 5 to 10 business days these files can include all of these things listed on the screen here as you can tell having these files readily accessible through the cloud is critical when working with multiple team members and partners since everyone can add to and view the folder at any time now you can definitely try and remember all of these but that will all be included in this due diligence checklist right here which is download number three after you've organized the documents we just mentioned it's time to begin reviewing all of them start verifying the certificate of occupancy check to see if there have been any permits pulled or if there's a lack of permits on the property that should be there check on the zoning check on title work check all of the records if you're buying a property based on the income that it produces like on a cap rate then you want to double check to make sure that the property is actually making the money as advertised review the tax returns and the property financials be amazed at how often the sellers lie or just misrepresent I'm sorry it was a reflex oh my God I'll Loop in my management firm at this time to help dive into the leases the rent roll the operating expenses and they'll also visit the site with me so that we can start putting together a list of capital expenditure items that may need to be addressed in the next few years like hbac units Roofing Etc if possible get your CPA or financial officer involved in the numbers too fortunately it's fairly easy to follow the money if you have qualified professionals on your side so that you know how truly profitable or unprofitable the site actually is when you're able to you'll want to open up discussions with the current tenants and see what they like and don't like about the property what their wish list might be and if they're interested in renewing their lease of course you'll likely need to do this talking through the current owner or through their property manager considering how sensitive sales can be sometimes with tenants you don't want to Spook the tenants and scare them off you may also want to get what's called an estaple where the tenant agrees that the terms of the lease that the landlord has provided you with are in fact true trust the seller but always verify your primary objective here should be to investigate how you could possibly run the property more efficiently we're able to significantly increase our property values often times without raising rents simply by decreasing the operating expenses and therefore increasing our noi now would be a good time to see if you can get a better deal on Landscaping Property Management save your utility cost by installing LED lighting and more for example if your electric bill is $30,000 a year you might be able to save around 15% or $4,500 a year with LED lighting which could lead to a 56,2 $50 increase in value on your property at an 8% cap rate you're also going to need to physically inspect the property and I don't mean a just casual walkthrough I mean the kind of inspection where you spend half the day or all day on site if the project is big enough you need to be thorough in your inspection and get eyes on every possible nook and cranny to make sure that you understand any potential issues that may be there on site you'll also want your team with you if possible so that could include your property manager your general contractor leasing broker architect inspector if you've hired one and anyone else that you may deem necessary now that I've worked on a number of projects from The Brokerage management and ownership sides I have a pretty good understanding of exactly what I need to look for when I'm on a site visit however I will still engage a property inspector if I find anything suspicious so that I have backup to my claims should I need to renegotiate with the seller or if I'm just worried about protecting my investment when you're on site try to ask the business owners and employees and any customers what they like and don't like about the property you'd be amazed at some of the stories that they will share with you and it'll certainly help with not only your understanding of the property but also your tenant relations if you actually fix any issues they point out unless you have a number of degrees on the wall it won't be possible for you to conduct all of your due diligence on your own nor should you really want to so that's where your site Consultants come in I'll typically engage this team once I've gotten through my initial inspections to make sure that I'm as smart with my money as possible after all if you can't get past an issue in the rent roll there's no point in hiring a team to core drill the site right so we've got the big three and I'm going to take you over the Whiteboard to talk about them so the big three are phase one environmental your Ulta survey and your geotechnical these are some of the tests that you'll need to do while you're under contract or in due diligence to make sure that the property is worth moving forward on the phase one environmental will test the soils the water any lead paint or asbest that may be on the site to make sure that hopefully you don't have any of that if you do you're going to have to go through what's called a Phase 2 environmental at which point you're going to have to spend a whole lot more money most investors tend to stay away from that an ala survey includes the boundry lines of the property as well as the title they actually lining up your property lines with what is deeded to the property that way you can make sure you don't have any encroachments with any neighbors and that you are buying what you think you are buying geotechnical this is core drilling essentially Engineers will go out on site they will core drill the property and they're going to test the soils to see is it soft is it Rocky what are we going to be dealing with here so that you know what you are going to be building on now this you probably don't need to deal with if the property is already developed this is just for ground up new development or if you plan to do some sort of new structures or new development in the future financing is typically dealt with during the due diligence period if you haven't discussed the project with your wers prior to going under contract open up that conversation as soon as possible in fact I start testing the waters as soon as I go under contract the more time you have to work with your lender on the project and get them comfortable especially if it's Unique or a heavy lift and let's be real lenders are the most conservative people you will ever have in a deal the better off you will be when it comes to getting the deal closed you may be saying to yourself my lenders what lenders and that's fair you probably don't have lenders if this is your first time going through the process so if you don't have any lenders you'll want to start shopping around for some and explore your options different lenders offer varying terms interest rates financing options plus some are just more fun to grab a beer with than others so take the time to compare and contrast before making a decision my go-tos are local and Regional Banks followed by credit unions and commercial mortgage brokers find the one that best fits your needs I typically recommend reaching out to at least three to five lenders on every opportunity lenders will also typically require each of the following from the partners two to three years of tax returns and k1s if you have any a personal financial statement and and a copy of your driver's license and of course your track record I also send them a CRS tax report on the project an overview of my plans for the site an abbreviated version of my underwriting and an abbreviated version of my offering memorandum which is download number four just copy my om I typically open up the conversation with potential lenders to test the waters and see if this project is even in line with what they're interested in lending on at this stage if so I'll go ahead and get high level terms that can help me finalize my underwriting before I come back to them with my full request on the project for small business buyers exploring SBA Loans can be a game changer SBA 7A and 504 loans offer favorable terms and lower down payment requirements making them an attractive option for aspiring Commercial Real Estate Investors these loans are backed by the government which provides lenders with added security and borrowers with increased access to Capital the pros you don't have to put as much Capital down and you may be able to get a 25-year amortization which will help lower your mortgage reach payments the cons the interest rate is often way higher than traditional Banks and the loan approval process can be brutal do you understand yes sir when evaluating loan options pay close attention to interest rates and loan terms determine whether a fixed or variable interest rate is more suitable for your financial situation and investment goals here's a pro tip it will Almost Never Be variable interest rates also consider the length of the loan term and any Associated prepayment penalties or balloon payments you may want to pay that loan off a little bit sooner or refinance into something else you want to have that flexibility in addition to the loan amount it's essential to understand the key costs associated with financing a commercial real estate deal this includes the down payment obviously but also origination fees to the bank and closing costs to the title company attorneys Etc factor in these expenses when determining your overall budget and financial feasibility finally don't forget to plan for reserves to cover unexpected expenses such as vacancies repairs and Capital Improvements while there's no one siiz fits-all when it comes to calculating these reserves it's a good idea to set aside at least a few months of your total operating costs for the property adjust this figure based on the investment type location and market conditions all right now let's get this bad boy closed first we got to do a final walkthrough of the property think of it like giving your new place a once over before moving in this is your chance to double check that everything looks as it should any promised repairs were completed and there are no surprises waiting for you on closing day you don't want to buy a property if there's something not right with it now let's talk about the money you'll need to have your down payment ready to roll when the big day comes get those funds wired in advance to the right place so there's no last minute scramble if you're bringing in capital from investors make sure they wire the money to the company's bank account at least one week prior to closing it can be an absolute nightmare otherwise ask me how I know on that one closing day is paperwork Central you'll be handed a large stack of documents to sign and it's crucial to to read through each and everyone very carefully don't be afraid to ask questions if something doesn't make sense and don't forget about those closing costs they can add up so be prepared get a damn good commercial real estate attorney and have them review all of these documents prior to closing I promise you whatever you paid them it will be worth at least three times that hands down now that you're officially the new owner it's time to start making this place your own what upgrades or changes do you want to make maybe it's sprucing up the lobby or adding some Energy Efficiency features whatever it is make a plan and get ready to put it in action it's also a good idea to get off on the right foot and communicate with your new tenants set up some meetings to introduce yourself chat about lease renewals and address any concerns that they might have with the property it's all about building those good landlord tenant vibes from the get-go and extra brownie points if you do it in person it's way easier to keep existing tenants than it is to go find new ones okay now here are some actionable tips that you can take to make the most of your investment first analyze the property's expenses and identify any areas where the cost may be reduced without compromising the quality of the property don't compromise the quality of the property this may include renegotiating contracts with vendors upgrading to energy efficient systems like LED lighting or optimize your maintenance schedules research the market to verify that your rental rates are competitive you could increase rents by just improving the property like honestly just a coat of paint or you could offer new amenities or Implement a proactive tenant retention strategy to minim minimize your vacancy sometimes just making sure you don't miss a month of rent is the best way to increase your Revenue invest in landscaping exterior painting signage parking lot improvements these can make a massive difference for curb appeal it doesn't take much to make your property more attractive to potential tenants and customers reconfigure underutilized spaces to maximize rental income for example convert storage areas into additional rentable square footage or create shared amenities that attract tenants you could even finish them out as photo studios and throw them on a website like a V like Brandon did in that story of the deal we covered you can find all of those and so much more in this value ad checklist here which is download number five all right I know that was overwhelming and it was a lot of content and you're probably thinking to yourself I still have questions if so that's why I created the beginner guide to commercial real estate investing it's my online course with over 18 hours worth of lessons at this point way more downloads than I'm giving you in the description below today and so much more content that you will feel unbelievably confident going out and buying your first property check that link out in the description below and if you want to continue to learn more about commercial real estate for free you're on the right channel check out this playlist here on commercial real estate for beginners

Channel: Tyler Cauble

Views: 11,280

Keywords: commercial real estate, commercial real estate investing, real estate investing, buying commercial real estate, passive income, passive investments, commercial real estate for beginners, getting started commercial real estate, commercial real estate 101, Commercial Real Estate Investing, How to Buy Commercial Property, Commercial Real Estate for Beginners, Investing in Commercial Real Estate, Commercial Real Estate Tips, Commercial Real Estate Strategies

Id: zbTS0t1p0YI

Length: 26min 44sec (1604 seconds)

Published: Mon May 20 2024