Commercial Real Estate Investing : need your help, BP!

[Miki M.]

Dear BP,

This site offers a LOT of useful info (and great calculators) helping newbies to start investing into residential real estate: rental SFRs, multiplexes, condos... That is great, and I did it for some time. Worked well.

But now, I would like to start transitioning towards commercial real estate. It is simply where I would like to go as RE investor... So I combed BP for useful info but it is not exactly easy to find... Precious few threads, and some of the lingo in them feels kind of confusing to simple-minded me... So I need your help. Some questions below, hopefully not too foolish for your taste. I am no Shakespeare, and I admit, my thoughts are a bit scattered. Help me focus. I will greatly appreciate it.

1) How do I make the step from individual SFRs and small multifamily towards a Commercial property? How do I know if it's the right time? Is there a specific target net worth? A level of liquidity? A minimum capital needed to make this step?

2) What are the different types of commercial properties, and which types flow better? Are the better-flowing properties riskier? What does the risk consist of? How do I evaluate a commercial property? 

3) How do I recognize a good deal vs. a mediocre one? Or a dangerous one? I hope you can share some rules of thumb with me.

3) How do I evaluate the location / market? What are the important things to consider? 

4) If the commercial property is listed a specific price online, is that price pretty much locked, or can that be somehow negotiated down a bit? For example, if the cap rate seems low.

5) What is the difference between an N, NN and NNN property? Can you help list some caveats that a less experienced investor should be careful of.

6) Does low- or no-money-down financing exist for commercial properties, and how can that be obtained? Where do I look? 

7) Working with a commercial real estate agent or broker: how does the great professional get paid for protecting your interest? Is the system similar to residential real estate? How do I interview an agent, what do I look for, how can I know the agent is on my side? How do I avoid conflicts of interest?

Phew... please help! Thanks in advance.

Miki

[Danielle Fattizzi]

I have never worked with SFR. I just jumped straight into commercial real estate. So I am going to do my very best to answer the questions I know the answers to. I know that a lot of these questions DO have threads throughout the forums. A comprehensive description of what you are trying to accomplish can be listened to on the Bigger Pockets Podcast - Episode 4 with Frank Gallinelli.

In the meantime: 

1. As I said, I am not learned in how to make the transition from SFR to MFR but there are plenty of resources to teach you how. It is certainly the right time to begin this transition. Commercial real estate isn't valued the same way residential real estate is - and that is to your benefit. Feel free to jump in anytime. There is not a specific target net worth, level of liquidity or an amount of minimum capital. This business is about creativity and finding GOOD deals. You do not necessarily need to have any skin in the game to make this work.

2. I am not sure what you are asking by "types" of commercial properties. You could be referring to the classes of properties - A, B, C and D. We purchase Class A properties for their appreciation possibilities with very little to no cash flow. We purchase Class B and C properties for less appreciation possibilities and better cash flow. I don't recommend purchasing Class D properties as they can be in potentially dangerous areas. Regarding risk: There is always a level of risk. But in commercial real estate your risk is lowered extensively by doing proper analysis of properties and only moving forward with the ones that are numerically "Good Deals." What's great is how much easier it is to figure out the value of commercial real estate because it is based on much more concrete factors than SFR. The analysis will quickly tell you if you are looking at a good deal or a bad deal. We walk away from bad deals, therefore the risk is low.

A commercial property is evaluated/assessed by finding the Net Operating Income. NOI = Revenue - Operating Expenses. We then take divide the NOI by the market cap rate to get the property value. We take it very seriously to find out from the broker or seller of the property exactly what the rent (or other) revenues are (through obtaining the rent roll) and exactly what the operating expenses are (by obtaining the 12 month Trailing Profit and Loss Statements) to determine the NOI. The NOI for the year minus the Debt Service for the year is the amount your property will cash flow. And that is the most important number of all.

3. Does your property cash flow? How much? Typically we like to get about $100 per door cash flow. Anything under that is mediocre but any positive cash flow is better than none or being upside down. Start researching hot rental markets. I would even start by looking at your local area. Get on Loopnet.com and search your city. See how many properties are for sale. Look at the cap rates for these properties. Call a few brokers and ask questions. Find out the market cap from these brokers. Get on Trulia.com and look at their crime map and stay away from areas in red. Use Rentometer.com to look up the average rental prices in your target market. 

4. Prices are ALWAYS negotiable. 

5. I am not an expert on those lease types. What I do know is that the difference between them is related to how much money the tenant pays in their rent to cover the operating costs of the property. To my knowledge NNN leases cover the most expenses. There is definitely a forum topic about this somewhere.

6. Typically with commercial lending, you are expected to come up with 25% down. This can be raised from private investors, equity partners, or your college best friend. Now, that is not the rule. Financing is multi-faceted. Again, a great place to look for answers to these questions is in the Multi-Family and Commercial Forums. 

7. It is not required for you to work with a commercial agent or broker. You can if you like but I have yet to do this to date. I cannot really give you any solid answers on this topic, sorry. 

Hopefully this helps!