Transitioning from Residential to Commercial Real Estate Investing

for most people getting into real estate residential is a natural path to take after all it's what we're familiar with most of us grew up in a single family home or an apartment building but in reality it's not the greatest investment the cash flow is often lower the assets appreciation is based on what your neighbor's place sold for and it's just not that scalable commercial real estate solves all of these problems and that's what I'm here to teach you about today the following is a snippet from a 60-minute presentation that I gave on transitioning from residential to commercial real estate if you'd like to access that full video for free check out the link in the description below excited to be diving into this with you all today we're going to be doing kind of a a beginner's guide to transitioning from residential to commercial real estate I tried to jam-pack as much information in this as we possibly can so let's go ahead and get started so let's talk about the pros and cons of residential it's most people 's first entree into the world of real estate investing it's got a lower barrier of Entry right I mean houses you can find them for $150,000 there's a much larger Prospect pool um which I know a lot of people are far more comfortable with it's easier to find tenants or at least seemingly easier to find tenants however and I know this may be a little bit contrarian I would argue that residential real estate actually has a higher vacancy risk and it's not because it's difficult to find tenants it's because they're single family homes and if you lose a tenant you have 100% vacancy day one so for that reason I think it's a higher vacancy risk now for the pros and cons of commercial real estate so it does have a higher barrier of Entry most properties a million million5 $2 million to start I'll show you today that that's not always the case I've got a a case study on a on a property that we'll talk about that I bought for $430,000 and that was here in Nashville so it is possible to do commercial real estate the same size as some of the houses you all are buying most of the properties that I have and I'm sitting in a 28,000 ft office building that I bought back in 2019 that's 100% occupied have long longer term leases 3 to 5 years sometimes you'll even get seven or 10 year leases I love that because we sign the lease tenant pays their rent every month and we don't have to worry about it you actually have a lower vacancy risk because of the longer term leases and the fact that these are professional businesses if you screen them correctly then those tenants are probably going to be there for a long time I've got some tenants that were in this building for 10 or 15 years before I bought it and they're all renewing their leases and then of course it is less consistent in in economic downturns let's break apart each of those cuz it's not always true but sometimes it is cost of commercial property is higher and the learning curve is rather steep the cost of course is one thing but the biggest thing that I found if you have the knowledge to pull these deals together it's the same as in residential real estate if you know exactly how to get creative with commercial deals price doesn't really matter I know guys that are closing 10 20 30 $40 million deals that don't have any money and it's because they have the knowledge to go out and find the right deal tie it up and then bring the right people together so as long as you know enough about commercial real EST estate you don't need to have any money to do it and of course there's this you know good old boys club kind of atmosphere around commercial real estate a lot of the time I think that that is uh at least today that is now more of a bad reputation instead of a truth because I think commercial real estate has really changed over the last 5 years you've got a much younger group of people that are moving into it it's becoming more democratized more people are talking about commercial real estate instead of keeping it close to the best so I think commercial real estate's changing but you can get creative with deal structures as well you can also start with easier commercial assets right the learning curve is steep but there are assets out there that are very similar to residential real estate or have a very similar process to follow or just less of a learning curve that you can take to make your entrance into the commercial industry a lot easier you don't need to be a part of the club I am covered in tattoos I've got a beard I'm not your typical guy wearing a button- down and a suit doing commercial real estate deals so higher profitability potential you've got actual professional tenants with professional tenants that means that these businesses care about their space the way they care about the property they care to make sure that they stay in good standing with you because if not it's going to impact what makes them money so take Starbucks for example they pay their rent on time every month they take care of the property on their own because they have a brand image to uphold they're not going to let anybody get in the way of that brand image because they know they're not going to sell as much coffee if it looks like a dump or the building's falling apart so they actually spend a lot of money maintaining their own spaces and of course the trip net lease everybody loves this one if you're not familiar with the triple net lease the three Nets in commercial real estate are commoner maintenance property taxes and building Insurance what does that mean well tenants pay their Prat a share of those expenses every year so you know in a in a in a single family home situation or even a multif family situation you as the landlord collect all of the rents you pay out your property taxes you pay for your building Insurance you pay to maintain the the property and then whatever's left over you net whereas in a trip net lease if my property taxes go up if my building insurance goes up which a lot of multif family guys are seeing that all over the country right now or if you know let's say it it snows and I a bunch and I have to put a bunch of salt out my common area expenses go up I as the triple net landlord pass those expenses directly on to the tenant so it doesn't affect my bottom line makes it a much more stable invest cash flow wise so this is a property I was telling you about earlier with regards to forced appreciation this is actually the building that I'm selling here in East Nashville but when I bought it we bought it for $435,000 and we went under contract I think with like 60 or 90 days to close and in that time period I went out found a tenant signed a lease and the building because we had the lease tenant hadn't moved in we hadn't touched the building yet because we had signed a lease the building appraised for $650,000 ,000 so we got $220,000 in equity day one just because we Inked a piece of paper saying a tenant was going to move in so the major chefs in going from residential to commercial biggest things really are running the numbers and underwriting if you're already buying multif Family Assets you're doing something that is way way more difficult than commercial real estate so you're already kind of ahead of the curve there you just got to get the commercial real estate knowledge transaction timelines are entirely different from residential due diligence and financing are very different as well so let's dive into to those and pick them apart this is a screenshot from one page of one of my underwriting spreadsheets and I know that this looks very overwhelming but it's actually really easy to follow all of these you know blue sectors here are pretty much where I input data and then this just spits out everything that I need to know about it and it helps because when you get into a multi-tenant situation you get into a scenario where you've got all sorts of different numbers like I've got investors I've got to pay I've got cash out cash returns that I need to calculate after a refinance things like that that you can't really do that math in your head you can do that very easily on a single family home can't really do that in commercial real estate so while there is a bit of a learning curve here it's relatively easy to figure out once you realize like oh yeah I just need to plug in specific numbers here and move the spreadsheet around a little bit and figure it out typically takes you around 14 to 30 days to negotiate a purchase sale agreement that's I know that's very different from residential sometimes you can have a contract in less than 24 hours that's typically not the case in commercial real estate because everybody has their own attorney there's no such thing as tar forms or you know Association of Realtors forms when it comes of commercial real estate you can use them but nobody does and then closing is about 30 to 60 days so your typical time from starting to go find a deal to actually closing on one typically ranges from about 134 to 300 days depending this is the due diligence checklist that we use as we're going through this process if you want to download this you can get it for free Tyler cob.com resources but this shows you the amount of items that go into due diligence on the commercial side don't let it overwhelm you I know that it's a lot but when you have everything written down down and you know what to be looking for it becomes very formulaic so let's talk about some of the easiest commercial real estate assets to get started in I love outdoor self storage units um so not the indoor climate controlled outdoor very simple very straightforward it's similar to multif family a lot of people love to say you know oh it's like multif family but I don't have to fix the toilets like yeah that's actually pretty true they they might have Lighting in them they usually don't it's basically a an aluminum shell uh give or take demand has been steadily increasing over the last 5 10 years uh mostly because apartment complexes are actually getting smaller people are moving into smaller and smaller spaces which means they're putting their stuff in a storage most of these are very modular you can pick them up and move them around if you need to or very quickly disassemble them and move them on so if you wanted to treat it as kind of like a covered land play great option there multi- tenant strip centers they have very favorable lease structures typically retail tenants are signing longer term leases cuz they don't want to move like we're looking at jamb Bice and Jimmy John's they don't like moving because once their customers know where they are once they've put all of the money into branding that space once they know that you know their employee Baye can easily get to that location they don't like to move so they're probably going to stay there 5 seven 10 plus years and of course they're typically signing triple net leases right so they will sign those leases where you don't really have to cover any of the expenses it's very easy to take advantage of forc appreciation right I mean you just sign a new lease at a higher rental rate per square foot and your building is suddenly worth significantly more the great thing about multi tenis STP centers too is that even smaller assets justify Property Management typically these leases are structured in a way to where Property Management fees are covered in common area maintenance meaning the tenants are actually paying for their property manager it's not coming out of your pocket and then of course Flex industrial if you've been following my YouTube channel this this one's been blowing up uh so I mean we've made a few more videos on it just because everybody's loving it right now but this is in very very high demand Flex industrial really caters to the Amazon proof or recession resilient businesses of course you could have tickle ball courts and podcasting studios in there but they traditionally catered to your mom and pop plumber your mom and pop electrician you know anything that needs like smaller office and a bit of Warehouse attached to it a lot of e-commerce businesses actually love Flex industrial because it's very easy for them to kind of operate ship manufacture whatever they need to do in there and the supply is actually dwindling it is not being built as much as it was you know 710 plus years ago so these tenants are getting pushed out and they need somewhere to go so if you can get some Flex space uh it will stay full all right I know I kind of blew through that but I had a lot that I wanted to make sure that we got to uh in the amount of time that we had allotted appreciate you guys now the most complicated part of the process and the one that I probably get the most questions about is how do I actually underwrite commercial real estate deals so check out this video here so that you know exactly how to run the numbers on your Investments and I'll see you there [Music]

Channel: Tyler Cauble

Views: 3,903

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

Id: zHi0nLR6Ih8

Length: 11min 0sec (660 seconds)

Published: Wed Apr 17 2024