First off, what is commercial real estate? Commercial real estate (CRE) is any property used solely for business purposes rather than to provide a living space. This type of real estate ranges from a corner store bodega to the Tyson’s Corner shopping center. We will go over the different types in depth.
If you are interested in jumping into the world of commercial real estate, here I will break down some important information that will help you get started in a step-by-step guide.
Step 1: Get Educated!
Commercial real estate is vastly different from residential real estate, and you need to understand the complexities before jumping in. Commercial real estate has the potential to make a lot of money - exponentially more than residential real estate, in fact! However, it’s also more complex and costly. So get educated before diving in!
There are many ways to develop a decent understanding of commercial real estate. Take advantage of these resources to get the gears spinning:
* Read commercial real estate books
* Listen to podcasts
* Watch youtube videos
* Talk to other investors! Join networking groups where you can meet investors and discuss questions, ideas, setbacks, and successes together. Look on Facebook, Linkedin, blogs and whatever social media you tune into.
Modern technology means you have unlimited knowledge in your pocket. Tap into that, gather all the information you can for the best chance at success.
Step 2: Choose a Property Type
Once you are educated on commercial real estate and conscious about why you want to dive in, time to learn about property types and choose one!
There are five primary types of commercial real estate:
1. Office
Office buildings can be urban or suburban depending on location and size. Urban office buildings are usually bigger, think skyscrapers and high-rise properties.
They can be single-tenanted or multi-tenanted and they are ranked in tiers depending on construction type and quality/maintenance. Classifying an office building is rather subjective and is more art than science. While there isn’t a step-by-step guide to classify office buildings, there are some generally accepted guidelines.
2. Retail
Retail properties house retailers and are classified as Regional Malls, Power Centers, Big Box Retailers, Freestanding Retail Sites, Strip Malls, Lifestyle centers, factory outlets, Community Centers and neighborhood centers and Convenience centers. Mix Use properties where you can find shops and restaurants below offices or multifamily. They are usually considered as NNN properties.
3. Multifamily
This covers residential real estate outside of single-family and properties with greater than 4 units. These are often classified into tiers depending on prestige and price, Class A-Class C.
4. Industrial
This section includes manufacturing, storage and distribution centers, data centers, R&D, light manufacturing and flex spaces.
5. Hospitality
This covers hotels. Establishments which provide accommodation, meals, and other services for travelers. They can be independent or part of a major hotel chain.
Each type has pros and cons and the best for you depends on the reason you are interested in investing in commercial real estate. Only you can decide which property type you want to invest in, so think it over!
Step 3: Choose your Investment Strategy
There are many different strategies out there for investing in commercial real estate. Depending on your goals and needs, you need to determine what is the best fit.
Here are some examples of investment strategy:
* Value-add: fixing up a property to add value and then reselling
* Development: turning raw land into constructed property
* Land banking: purchasing land in the path of development with anticipation of value-gain as development spread that direction
* Owner-occupied: purchasing a piece of real estate where you will run your business
* Wholesaling: putting a property under contract and selling the contract to another investor
* NNN investment: Buying a NNN property and selling it following leasing it to good credit tenants with long term contracts.
There are other investment strategies out there, and each has pros and cons so continue to educate yourself on them to decide which fits your goals best.
Step 4: Secure your financing
Before you start making offers, you need to ensure that your financing is secure.
First, check your credit. Depending on your lender and what type of loan you apply for, your credit scores are likely to be reviewed so first, you should make sure the information in your reports is accurate. If there are errors, dispute them.
Once you are squared away with your credit information, consider what type of financing you are eligible for. Some different types of financing options include:
* Business Loans
* Apartment Loans
* Hard Money Loans
* Commercial Real Estate Loans
* Bank Balance Sheet Loans
* Seller Financing
When considering which to select, compare interest rates, fees, and repayment terms.
Step 5: Assemble your team
Buying commercial real estate is a complex process. Surrounding yourself with the right team of experts will provide you with the best chance for success.
There are many brokers out there, but you should look for one who specializes in the type of property you have chosen to search for. This will ensure you are seeing properties you are interested in. Hop on their mailing list and read over every email you receive from them. Underwrite each property, and tour the ones that fit your criteria.
Find a CRE Attorney
This is necessary for a few reasons. Commercial Real Estate Broker will negotiate the monetary value of the transaction and draft the agreed terms of the contract. Commercial real estate attorneys will make sure that those terms are reflected on the contract and you are legally protected.
Find a Commercial Real Estate Contractor
A contractor will walk through a property and identify any additional expenses you should know about such as repairs and maintenance.
While assembling your team, always look for professionals who specialize in commercial real estate, and even better, the specific type of property you want. This group of experts may be expensive, but in the long run this will save you from making mistakes and stumbling into hidden expenses. These people are all here to help you succeed so that you can return for more business. They have a plethora of specialized knowledge which you should take advantage of to ensure securing the best property and deal.
Step 6: Learn the ins-and-outs of Underwriting Commercial Real Estate Investments
What is underwriting? This is the process investors use to assess expected returns on their deal.
Most use an Excel spreadsheet to type in various items such as price, estimated repairs and maintenance, projected rent, and financing. This will give you an idea of risk and return for your investment.
By evaluating these factors, you will get a better idea of what you are looking for and the worth of the property you are assessing. If you master the practice of underwriting, you will become skilled at recognizing a good opportunity because you will be in the habit of assessing pros and cons of a property. This takes practice! It is worth it, however.
So how do you analyze a potential commercial real estate investment?
1. Look for Comparable Properties
This will enable you to verify the price is right based on other similar properties.
2. Dig into the Numbers
Once you have an offering, look at the numbers to assess whether your deal will actually make you money. You will need to collect all financial information on the property, so ask the owner for rent rolls, profit and loss statements, and tax returns.
3. Renovation Estimates
This is why you need that commercial real estate contractor to look over the potential property and estimate how much construction and renovation will cost you.
4. Gather Term Sheets from Lenders
Before fully analyzing your potential investment, you will need to know loan costs. Meet with a few different lenders, present the deal, and get term sheets from them.
5. Analyzing the Investment
With all the information, now you can underwrite the deal. There are pre-existing templates you can use or you can create your own spreadsheet using Excel. These spreadsheets should consider:
* Renovation costs
* Down payment and loan costs
* Purchase price
* Rental rates/monthly income
You should be able to punch in some numbers and get predicted amounts on returns and cash flow.
Underwriting can be complex, but it really is worth it to gather an adequate understanding so do some research, talk to people, and try it out! Or work with a full service commercial real estate broker who can analyze and compare those investment properties for you.
Step 7: Find your Property
Once you are equipped with your team and some commercial real estate knowledge, it is time to start looking at properties in your market.
As mentioned before, get on a specialized broker’s email list and look over every property sent your way. When you see ones you like, tour them!
Have discussions with your broker and build a relationship so they understand your needs and criteria. This will help you receive options tailored to you.
Underwrite for each property you consider and do not settle! Don’t get distracted by a good deal if it doesn’t meet your criteria. The perfect property is out there and you will find it!
Once you find properties which fit your criteria, make sure to ask questions and do your research. A bad investment will cost you a lot of money, so make sure to gather as much information as possible to make an educated decision about each property.
Step 8: Make an Offer!
When you find a property you are ready to purchase, the final step is to make an offer!
This is where your team of experts comes into play. Your broker can assist in writing up your offer and your attorney should review it before signing and submitting. Ensuring that your team is knowledgeable and reliable will prove itself at this stage. If you have the right team, things will go smoothly!