first time into Commercial Real Estate

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atlanta_dad
Posts: 174
Joined: Wed Aug 07, 2013 12:04 pm

first time into Commercial Real Estate

Post by atlanta_dad »

Hi everyone! I'm interested in venturing into commercial real estate investment (forming an LLC with a couple of friends) and would love some guidance. We have some experience in residential real estate.
What are the key steps or tips you would recommend for someone starting out in commercial real estate investment?
Any recommended resources or courses to get started? What factors should I consider when selecting my first commercial property?
Any online free or for purchase excel spreadsheet available for commercial property analysis?
What are some common beginner mistakes to avoid?
If you've started in commercial real estate, what challenges did you face initially, and how did you overcome them?
Thanks in advance for any insights!
bankerguy2013
Posts: 28
Joined: Wed Sep 25, 2013 8:10 am

Re: first time into Commercial Real Estate

Post by bankerguy2013 »

First off you’ll need at least a 25% down payment. Secondly, you’ll want to ensure the tenant is stable with at least a current 3-5 year lease remaining as commercial tenant properties can be challenging to fill. Third, ensure the property has a clean phase 1 environmental as this will be required by most lenders ( and for your future recourse). Fourth, ensure your net operating income (NOI) is greater than 20-25% after expenses inclusive of mortgage debt or you’ll be challenged to qualify for financing. You can offset this shortfall with good secondary source of repayment( w2 wages etc). Experience as a landlord/investor matters as well. Best of luck!
CascadiaSoonish
Posts: 552
Joined: Tue Feb 13, 2018 10:44 am

Re: first time into Commercial Real Estate

Post by CascadiaSoonish »

I'll just say "be careful" as there's a lot of turmoil in certain CRE sectors and markets right now. We bought an office building for our business just before the pandemic, which turned out to be the absolute top of the market. Now post-pandemic the office market has cratered. Broker we worked with said that in the current market the building is currently only worth a little more than half of what we paid + put into the building. Our business is no longer operating in the space, luckily we have a new tenant paying enough for us to break even but only on a month-to-month basis. If that tenant leaves we will be in a really bad spot as it's going to take years for the market to recover. Not at all where we thought we'd be when we bought the building.

Caveat emptor....
PuhDad
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Joined: Sun Oct 29, 2023 3:44 pm

Re: first time into Commercial Real Estate

Post by PuhDad »

I work as a commercial broker. Specifically, institutional assets in a niche asset class. MD on a team of 17 ppl that includes admins and analysts. We close $1.5 billion a year in sales. I would tell you there is a lot of minutia in the business that folks don’t understand who don’t work day in and day out in the space. As such, you can be the schmuck who buys an asset because they don’t understand some minutia type hair on an asset. I think most folks in your situation recognize this and they have a decent understanding of single family so they opt to invest in multifamily, given the similarity. I’m not a multifamily broker but the smaller “private capital” multifamily deals feel overly competitive due to this. Lot of folks similar to you chasing these types of deals. If you really want to dive into commercial real estate, I’d highly recommend you pursue industrial, as there’s less competition compared to multifamily from a private capital/smaller deal space. Industrial is a super simple asset class compared to hotel and retail.
Second Round
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Re: first time into Commercial Real Estate

Post by Second Round »

Are you looking to buy an existing building, or get innvolved in constructing one on raw land?

If the latter, you're talking rezoning (far from automatic), permits, surveys, environmental and traffic studies, etc etc. But in the end, the local planning dept, zoning board, and/or city council (or equivalent) hold the ultimate go/no-go power. You have to know how to work with them and make your case effectively. So those are some things to be aware of.
Topic Author
atlanta_dad
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Joined: Wed Aug 07, 2013 12:04 pm

Re: first time into Commercial Real Estate

Post by atlanta_dad »

Looking into buying an existing building
Valuethinker
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Re: first time into Commercial Real Estate

Post by Valuethinker »

atlanta_dad wrote: Sun Jan 21, 2024 7:46 am Looking into buying an existing building
One thing. Understand landlord liability.

John Dizard was the very arch credit columnist at The Financial Times (but US based). He wrote a piece about landlord liability in Florida, during the credit crisis. I remember the hairs standing on end at the back of my neck when I read it.

Make sure you have gone through with your lawyer all the ways it can go wrong and you get sued by a tenant, by the municipality etc.

Generally I would say this is not an easy way to invest -- tying up a lot of capital in a very specific risk, no diversification benefits. Plus big structural changes caused by "black swans" like Covid - which have put huge pressure on types of CRE. As Amazon was already on retail CRE.
NYCaviator
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Location: NYC

Re: first time into Commercial Real Estate

Post by NYCaviator »

atlanta_dad wrote: Sun Jan 21, 2024 7:46 am Looking into buying an existing building
What kind? What location? Is there already a tenant? Are you going to need to build anything out? What does the market look like in your area?

Saying you want to invest in "commercial real estate" indicates that you probably need to spend more time thinking this through. CRE spans a HUGE variety of properties, so it would be helpful to know what you are looking at and why you want to get into commercial real estate to begin with. Unless you or one of your business partners has experience with CRE, this could be a bad idea.

1. The CRE market is a mess right now. Don't expect to just buy a commercial property and hope it is profitable.

2. Financing is MUCH different than getting a loan for a residential rental property, and is often much harder. You're going to need to have a lot of cash up front for a downpayment, and enough assets to qualify for the loan. The bank is also going to want to know that you know what you are doing and are going to be able to pay the loan, so they will almost certainly require a personal guarantee, and do a deep dive of your finances and assets.
Dave55
Posts: 2056
Joined: Tue Sep 03, 2013 2:51 pm

Re: first time into Commercial Real Estate

Post by Dave55 »

atlanta_dad wrote: Sat Jan 20, 2024 8:44 pm Hi everyone! I'm interested in venturing into commercial real estate investment (forming an LLC with a couple of friends) and would love some guidance. We have some experience in residential real estate.
What are the key steps or tips you would recommend for someone starting out in commercial real estate investment?
Any recommended resources or courses to get started? What factors should I consider when selecting my first commercial property?
Any online free or for purchase excel spreadsheet available for commercial property analysis?
What are some common beginner mistakes to avoid?
If you've started in commercial real estate, what challenges did you face initially, and how did you overcome them?
Thanks in advance for any insights!
Get mentored by an experienced commercial RE pro, be it a GP, broker, institutional investor. I was mentored in Private Equity Boutique Commercial RE firm on the job by an old pro and I learned a lot from the brokers. Look at as many deals as possible. Let the Brokers talk and sell their deal, all you have to do is listen. Don’t worry if you don’t understand everything at first. Over time if you stick with it you will. Ask them questions. You ought to give yourself a few years to learn the business before buying a property unless you can engage an experienced Commercial RE investor to check your assumptions. I worked with several firms and they all developed their own in house proprietary spreadsheets. PM me if any questions.

Dave
Last edited by Dave55 on Mon Jan 22, 2024 11:42 am, edited 1 time in total.
"The big money is not in the buying and selling, but in the waiting.” Charlie Munger
FoolStreet
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Re: first time into Commercial Real Estate

Post by FoolStreet »

atlanta_dad wrote: Sun Jan 21, 2024 7:46 am Looking into buying an existing building
The basics are to talk to a syndication lawyer to write up the joint venture. You aren’t creating a syndication, but those lawyers have the most experience. They will help you build the operating plan. Map out ownership % and define responsibilities in an operating plan which the lawyers will memorialize.

Those are the basics, but not the minimum. You still need to do lots of due diligence. Supply, demand, market rents, value add strategy, property mgrs, contractors, brokers, etc, etc. do you have specific questions?
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unclescrooge
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Re: first time into Commercial Real Estate

Post by unclescrooge »

atlanta_dad wrote: Sat Jan 20, 2024 8:44 pm Hi everyone! I'm interested in venturing into commercial real estate investment (forming an LLC with a couple of friends) and would love some guidance. We have some experience in residential real estate.
Why are you pursuing this?
Do you have some insider knowledge of your local CRE, or excess capital, or are you just bored?
Aquasphere
Posts: 1
Joined: Tue Jul 09, 2024 8:00 am

Re: first time into Commercial Real Estate

Post by Aquasphere »

Dave55 wrote: Sun Jan 21, 2024 8:44 pm
Get mentored by an experienced commercial RE pro, be it a GP, broker, institutional investor. I was mentored in Private Equity Boutique Commercial RE firm on the job by an old pro and I learned a lot from the brokers. Look at as many deals as possible. Let the Brokers talk and sell their deal, all you have to do is listen. Don’t worry if you don’t understand everything at first. Over time if you stick with it you will. Ask them questions. You ought to give yourself a few years to learn the business before buying a property unless you can engage an experienced Commercial RE investor to check your assumptions. I worked with several firms and they all developed their own in house proprietary spreadsheets. PM me if any questions.

Dave
Were you on the job full time or was this more informal mentorship? I am trying to engage with folks locally to get involved with their work and provide value as able. But not sure how to necessarily approach it
Dave55
Posts: 2056
Joined: Tue Sep 03, 2013 2:51 pm

Re: first time into Commercial Real Estate

Post by Dave55 »

Aquasphere wrote: Tue Jul 09, 2024 8:05 am
Dave55 wrote: Sun Jan 21, 2024 8:44 pm
Get mentored by an experienced commercial RE pro, be it a GP, broker, institutional investor. I was mentored in Private Equity Boutique Commercial RE firm on the job by an old pro and I learned a lot from the brokers. Look at as many deals as possible. Let the Brokers talk and sell their deal, all you have to do is listen. Don’t worry if you don’t understand everything at first. Over time if you stick with it you will. Ask them questions. You ought to give yourself a few years to learn the business before buying a property unless you can engage an experienced Commercial RE investor to check your assumptions. I worked with several firms and they all developed their own in house proprietary spreadsheets. PM me if any questions.

Dave
Were you on the job full time or was this more informal mentorship? I am trying to engage with folks locally to get involved with their work and provide value as able. But not sure how to necessarily approach it
Formal mentorship, full time. Do you know any of these folks you are trying to establish a relationship with? Feel free to PM me with details of what you are trying accomplish and I will offer some suggestions.

Dave
"The big money is not in the buying and selling, but in the waiting.” Charlie Munger
SubPar
Posts: 526
Joined: Mon Apr 27, 2020 11:48 am

Re: first time into Commercial Real Estate

Post by SubPar »

I'm also in the industry (professionally) and have done dozens of institutional-scale multi-family & mixed use developments -- market rate, mixed income, affordable (LIHTC), etc.

Realize this is a six-month old thread, but...be careful OP. There's both art and science involved, and way too much to communicate in a generic fashion. Multi-family has generally fared better than other CRE asset classes (looking at you, office), but those that haven't were largely Class B/Class C apartments acquired at frothy cap rates with too much leverage under some optimistic "value add" investment thesis that completely fell apart when rents moderated and low-rate debt matured.
skepticalobserver
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Re: first time into Commercial Real Estate

Post by skepticalobserver »

atlanta_dad wrote: Sat Jan 20, 2024 8:44 pm forming an LLC with a couple of friends
Unless it’s a joint venture (every partner has equal say/management responsibilities) that LLC is probably a security. Check with an attorney for compliance with federal and state securities regulations.
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