You don’t have to be a Daddy Warbucks to get involved in commercial real estate. Often, even the most seasoned investors utilize private money along with conventional financing in acquiring large commercial assets. Investing in Commercial real estate has the ability to provide long time stable income for you and your family for generations. Before jumping into the commercial arena, you must clearly understand how to perform proper due diligence interviewing tenants, projecting the total cost of renovations, commissions paid to brokers to lease vacant spaces and tenant improvement costs. These are all critical elements to a successful acquisition and investment. Here is some advice to help.
- get to know commercial brokers in your target market
- study your market and the key ingredients of a great location
- understand timing and perspective of a seller
- focus on all your costs – not just the acquisition cost or purchase price
- buy based upon what is and not based upon what may be
- over leverage your properties
- get emotionally involved in an asset
- neglect the dynamic between tenants within a building
- cut costs on curb appeal
- get into the position where you have to sell
In the residential investing world, realtors are occasionally frowned upon, but in the commercial world brokers are an absolute must. In a good market, they are as important to you as you are to them. Explain what you're looking for, capital you are working with, and the hot buttons that get you to buy. It is paramount to communicate with brokers on an ongoing basis so that they don’t forget you when a deal comes their way that fits your buying criteria. Don’t expect them to remember you when a good deal pops up. It’s up to you to make the lasting impression on them.
When it comes to true commercial retail, location is, has and will always be the key ingredient to a successful property. But what constitutes a great location is more than just a property located in a well populated area. Some determining factors to consider:
- How is the building situated on the lot? How visible is the building when driving in either direction?
- How is the monument or pylon signage?
- What's the daily traffic count on the road in front of your property and how fast are those cars typically going on that road?
- Where are the curb cuts located? You must be able to access the building easily from both directions.
- How’s the parking? Parking ratios typically need to be around 5 spaces per 1,000 sq ft of leasable space.
- Are there vacancies in the neighboring properties and what are the rental rates in the area?
These are critical questions that must be addressed before determining if the property can deliver the income you're projecting. A good location means that all of these things are optimal.
There are many reasons why a seller wants to sell. It’s not fair to simply discount a property just because the current owner no longer wants to own. Many times, long-time owners sell because they have exhausted all the tax benefits for holding a property, or maybe they just lost a long term tenant and are busy with other facets of their life to focus on back filling vacant space. Perhaps their loan is coming due or they are focusing on estate planning and it may be beneficial to the heirs to sell now. Get to know your seller by asking some probing questions and many times you can find a solution without effecting the economics of the deal for yourself.
Many investors get so enamored with a low purchase price that they neglect to focus on cost to renovate, market, tenant improvement costs and leasing commissions. But what most fail to do is determine what your true carrying costs of the asset will be, and add a cushion to your numbers as a contingency to keep you out of trouble and at risk of losing an asset you just purchased.
Every real estate downturn in US history has taken the financial lives of so many savvy and experienced real estate investors for one main reason: they bought based on projections such as what will happen to the area down the road or automatically factor in rent increases due to inflation and other variables that are just that – variables. By buying based on what is, and not buying simply based on what will be, will keep you out of the abyss of commercial real estate. You may have less selection to choose from, but in this business it is quality over quantity.
If history is any lesson, it has taught all of us that just because a bank says it is good enough of an asset to lend on a high loan to value doesn't mean you take it. Rely on your own conservative underwriting. There are so many real estate investors that will never pull themselves out of the ashes of the latest downturn simply because they over leveraged their assets.
I too have been guilty of falling in love with a property simply because of the time spent analyzing it from a due diligence perspective to managing the asset for so long that it becomes a part of me. This is simply a recipe for disaster. Stay focused on the numbers and make sure that all aspects of your deal pass the logic test. Trust your gut. If something doesn't smell right at inception, get out. Even if you just can't put your finger on it, pull out. Sometimes the best investment is the one you never make.
Whether it’s an office building, warehouse park or retail center, your tenants are the lifeblood of your building. You must treat it that way. You should not place an alcoholics anonymous meeting center in the same plaza as a sports bar. There must be synergy between the tenants. Maintain a good mix of tenants that work well to support each other’s businesses and you have a winning plaza that will serve you and your family well for years.
The look and feel of your plaza or building will dictate the type of customers you will attract and ultimately the businesses you will be able to retain within your property. Don’t cut corners or costs on the exterior look. They say “Paint will make it what it ain't,” but you may have to occasionally go beyond that theory. Keep your property up to the caliber of your area and demographic.
Don’t paint yourself into a corner to have to sell your asset. Many investors spread themselves too thin with other assets or get overzealous with their numbers to convince themselves that it’s a good deal. This goes back to the idea of buying based on what is and not on projections. So many people get concerned that they aren't buying enough in a great market and they begin to fudge the numbers to convince themselves that they are staring at a great deal. Approach every deal with the mentality unless it is not glaringly obvious to get into this property, you should pass. The deal of a life time comes 3-4 times a year!
Whether you are buying one building to rent out or a whole plaza, commercial real estate can be a rewarding investment. Following the advice above can put you in the right place to make money on your property for an extended period of time. Remember that location is everything in this market, but if you can find the right spot, you may be able to find a sustainable business venture.