Diving into Commercial Real Estate

[Tim Rostro]

Hello BP Community,

I have been a residential investor for the last 10 years with a small portfolio of 5 properties, in TX and OH, a mix of SFH and duplexes. I've decided to take the next big step and scale up even higher. I'm pulling profits from my stock market holdings and pivoting to commercial properties, specifically in the Dallas/Fort Worth area. After having lived in TX for over 10 years, I've seen such tremendous growth in that state. And the pandemic has seen more growth as people have flocked there. From my research, the barrier to entry for commercial properties is enormous. Not your run of the mill residential investment. You need a couple of hundred thousand dollars for a down payment for just a single unit but the profit is huge and you don't need to deal with individual persons (and drama), just a business that sign multiyear leases.

A friend of mine, one of my former Soldiers, is currently a realtor there, and has been sending me listings, around the top suburbs of the Dallas/Fort Worth metropolitan area. I spent this past Saturday learning what a triple net lease (NNN) was (wish individual renters were subject to this), price per square footage (where is the monthly rent?), and focusing on a specific commercial property. That would be professional services such as a law firm or tax preparation and medical services such as dental, physical therapy, or a general practice. I've ran the numbers and they manage to be favorable, profitable, despite the high interest rates (I can always refinance in the future). My next steps are to find a bank, a property management company, and set up an LLC in TX as I don't want to be the owner, the LLC will be the owner and me as it's sole employee for now (and receiving a W-2 in the process). I'm hoping to purchase my first one by the late fall.

Apologize for the long post.  For those with commercial properties, what advice would you offer to someone just starting off?  Thanks!

[Michael K Gallagher]

@Tim Rostro I work mostly in retail site selection for commercial properties, all over the country, and I'd say the biggest thing to wrap your head around is the concept of the value coming from the income of the property.  Meaning that the lease on the building that is currently there is the real value, and that the future plans or future uses are the future value of the property.

Also, when it comes to being the LL of these properties there is substantial investment you'll traditionally have to make in the form of TIA or tenant improvement allowance when the unit turns.  You don't have to do this, you can lease spaces in an "as is" state, but that will impact the $$/SF you can get for the space.  

Commercial leases and deals truly need to be looked at from a "holistic" view, its not just the rent, or the NNN expenses, but the total view of the lease in place. Things like cancelation rights, or first rights of refusal, etc can impact your valuation and lend-ability on the property, so I'd say your next "homework" is to study some leases on this property or others and learn the ins and outs of the lease dynamics and the different levers you can pull in these days to make them better/worse etc.