Today, I’m going to show you how to get started in commercial real estate investing
with 5 steps to buying your first property.
In fact, it’s the same strategy that I used in 2019 to acquire 4 office buildings here
in Nashville.
So, if you’re interested in commercial real estate investing, you’re going to love this
step-by-step guide.
Let’s dive on in.
Step 1: Choose your niche and become the expert
First, educate yourself on commercial real estate.
You need to decide what you want to do and focus on that.
There are many “shiny objects” in commercial real estate - that’s one of the beautiful
things about this industry! And while diversifying your portfolio is certainly an important aspect
of commercial real estate investing, I recommend that you dial in and become the expert on
one specific type of investing, first.
Now, the most you’ll ever learn about commercial real estate is actually during and after you’ve
done a deal - some parts of the investing process just can’t be captured in a book
or video.
However, you need to have a decent understanding and road map for your investing strategy.
There are so many ways that you can go about educating yourself on commercial real estate:
1. You can listen to podcasts 2. Read commercial real estate books - I’m
actually going to leave you guys a link on my 10 favorites.
3. Watch videos on YouTube (like this one). 4. Have conversatio
5. Join Real Estate Investing Groups 6. You know what? You might even get a job
in commercial real estate! That’s what I did - I got my start as an in-house leasing
agent for a boutique development firm. In the 4.5 years I was there, I learned how to
build single family homes, develop townhome projects, manage office / retail / industrial
properties, and how to masterplan communities! It would’ve taken me a lifetime to learn
that any other way and I got paid to do it. Ok, so after you’ve educated yourself on
commercial real estate investing, it’s time to choose a property type. And the reason
that I recommend you choose your property type after you’ve educated yourself on commercial
real estate, is that you don’t necessarily know which property type will be right for
you before you get started. For example, if you’re a single-family residential
investor, you’ve probably heard the next step is buying multifamily. But did you know
that storage units, which are a subclass of industrial, pretty much operate the same way
as multifamily without the headache of dealing with residential tenants?
You may find another asset type that is more attractive to you as an investor.
There are 5 primary types of commercial real estate that you can invest in:
1. Multifamily 1. That’s anything from a single duplex
with two units, to hundreds of units spread out across a garden-style apartment complex.
2. Office Space 1. Office buildings can be as small as a commercially
zoned home housing an attorney’s office or a skyscraper downtown.
3. Retail 1. Retail real estate can be anything from
that Starbucks around the corner from your house to a massive regional shopping center.
4. Industrial 1. Industrial real estate is made up of warehouses
and distribution centers of all sizes - think Amazon delivery!
5. Hospitality 1. Hospitality real estate are the hotels
and motels that serve business and leisure travelers. Short-term rentals are often included
here, too. So after you’ve determined which commercial
property type is right for you, it’s time to decide upon an investment strategy.
Investment Strategy There are many different investment strategies
and just like choosing a property type, it’s important to find a strategy that’s right
for you. Depending on your goals and what piques your interest, you may find yourself:
1. Land Banking 1. Land banking is where you purchase larger
tracts of land that are in the path of development with the hope that they will appreciate in
value as the development moves your way. 2. Development
1. Commercial real estate development is where you take raw land and re-imagine what could
be constructed on that property. 3. Fix & Flip
1. Just like it sounds, fix & flip in commercial real estate investing is the same as it is
in residential where you buy a property, make any necessary repairs and upgrades, and then
resell it. 4. Wholesaling
1. Wholesaling real estate is where you find a good deal, put the property under contract,
and sell the contract to another real estate investor or owner-occupant.
5. Owner-Occupied 1. Similar to “house-hacking” in residential,
owner-occupied commercial real estate investing is where you purchase a piece of real estate
where you plan to run your business. 6. BRRRR (Value-Add)
1. Finally, the BRRRR strategy. And this is my favorite investing strategy and one I have
used time and time again. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat.
Step 2: Learn How To Underwrite Commercial Real Estate Investments
You Need To Know The Math Inside And Out Get your underwriting tools together (you
can create these yourself or you can find some templates online)
Most investors will use some variation of an Excel spreadsheet where they can type in
various items, such as purchase price, estimated rehab, projected rent, and financing. These
spreadsheets will then crank the expected returns for the investor on this deal.
You should also have a “back of napkin” formula that you can apply to any commercial
real estate investment to determine whether or not it’s even worth underwriting. Now,
I do recommend when you first get started that you underwrite every deal you possibly
can. This way, you can actually learn what makes a deal work. This “back of napkin”
formula can be any single metric that works for you and can give you a quick green or
red light. For me, I like to look at the asking price per square foot of the investments I
make. Having a background as a commercial real estate broker, I have in-depth knowledge
of what market rents are per square foot. By utilizing the prices per square foot on
the purchase and rent, I can quickly determine if the deal will make any money.
Take a CCIM course and work for your designation CCIM, which stands for Certified Commercial
Investment Member, is a designation offered by the CCIM Institute.
This commercial real estate designation is comparable to a CPA for an accountant and
is basically a master-course on how to invest in commercial real estate. They teach you
how to analyze project financials, research real estate markets, determine user criteria,
and make investment decisions. While this designation won’t be important
for everyone, the CCIM course is pretty in-depth and you’ll walk away knowing just about
everything you need to know about investing in commercial real estate.
Step 3: Build Your A-Team When you’re first getting started in commercial
real estate, it’s crucial that you have a team of experts on your side that have a
fiduciary responsibility to you. Building this team will ensure that nearly every aspect
of a deal will be investigated and it never hurts to have another set of eyes review your
deals. Find A Broker That Specializes In Your Chosen
Property Type 1. Get on their mailing list and review every
email they send 2. Underwrite & tour everything they put in
front of you 3. Have conversations with them about the
properties 1. Why do they like this site? What are the
drawbacks? What is their anticipated OpEx? 2. Brokers want to bring you deals that will
be successful so they can continue selling you properties in the future
Next, Hire A Commercial Real Estate Attorney Hiring an attorney that specializes in commercial
real estate is an absolute must in my mind. Not only do commercial real estate attorneys
review and negotiate purchase and sale agreements on your behalf, they also check to make sure
that the property doesn’t have any zoning restrictions, land-use issues, environmental
issues, and they can also help you negotiate your loan agreements.
If the property needs any physical improvements, you’ll also want to Work with A Contractor
That Specializes In Commercial Real Estate Are you starting to catch on here with the
commercial real estate specialty? Everything is different in commercial real estate than
it is in residential real estate. You wouldn’t call the Fire Department to stop a bank robbery
- the same goes for contractors that specialize in commercial real estate.
Your contractor will be able to walk through properties with you and help you get an idea
of what the expenses will be if the property needs any maintenance & repairs - depending
on your relationship with them, you may only be able to walk through while you’re under
contract and not every single deal you tour. Find A Commercial Property Management Company
Having an outstanding property manager on your side makes all the difference when you’re
investing in commercial real estate. I highly recommend keeping a property management fee
in your underwriting, regardless of whether or not you intend to hire a management company.
You never know what could happen and if the deal doesn’t work with a management fee,
it probably doesn’t work at all. Property managers will be able to walk through
and assist you during your due diligence just like a contractor would. They can help, along
with your broker, point out the pros and cons for tenants and any issues that may arise
during your acquisition of the property. Build Relationships With Commercial Lenders
Commercial lenders will have specific underwriting criteria, as well, and can also help you determine
if a deal makes sense. Chances are good that if you’re unable to get approved but multiple
commercial lenders, it’s probably not a deal. Treat lenders like they’re your partner
in the deal and be sure that you put together a solid presentation on the property.
Step 4: Underwrite At Least One Deal A Day Practice Practice Practice.
The more you’re looking at deals, the better you’ll be at realizing what a good opportunity
is. Underwriting a deal a day is a good habit to get into because it forces you to review
the pros and cons of a property and why you would or wouldn’t pursue that as an investment.
Michelangelo didn’t become an expert painter overnight - he practiced! Just like you need
to do with your underwriting so you can become an expert at reviewing commercial investment
opportunities. Underwriting Is Probably One Of The Most Important
Skills You Can Have As An Investor. In fact, underwriting properties is so important,
I know individuals that will charge between $3,000 and $5,000 to underwrite larger commercial
real estate deals for you. $3,000 to $5,000! I mean, if you’re willing to pay that, send
me an email and I’ll underwrite your deals for you!
Yes, it can be a bear, I get it. Underwriting a project can be a very labor intensive process,
especially if you do it correctly. But if the numbers don’t work, it doesn’t matter
how amazing you think the property is or where it’s located, it won’t be a good investment.
Set Your Investment Criteria And Stick To It
Having a set investment criteria that works for you is a very important part of underwriting
commercial deals. If you want to get an 8% return on your money, don’t settle for 7.5%!
Every piece of commercial real estate that you buy takes away from the capital that you
can invest into a deal that actually does fit your investment criteria.
Step 5: Make At Least One Offer Per Week I Got This One From My Friend, Brandon Turner,
Over At BiggerPockets. If you’re not making an offer a week, you’re
not looking at and underwriting enough properties! Commercial real estate investing is a numbers
game and you may have to look at 100 properties just to find 1 that works. However, that 1
property will be worth it. It doesn’t cost you a dime to put together
a letter of intent and make an offer on the terms that work for you. You never know what
could happen - that seller may be under a time crunch with his loan coming due or they
may have another property they want to purchase with the proceeds from this sale. If you don’t
make the offer, you’ll never know.
So there you have it - the 5 steps to buying your first commercial real estate investment.
For a deeper dive into the world of commercial real estate investing, you can find many different
resources on my website: TylerCauble.com, which will be in the show notes below.
If you enjoyed this video, don’t forget to like it, share it, and subscribe to my
channel for more content on all things commercial real estate.
If you have any questions about investing in commercial real estate, please leave me
a comment below and I’ll be sure to get back with you.