why dont more people invest in commercial real estate?

[Account Closed]

how different is it from residential? 

[Tim Shoultz]

I started out in commercial real estate and I think honestly most people are just scared of it.  I honestly don't agree with what a people are saying about it being so much more risky or needing to understand the business's that much more.  There are certainly different factors involved in Commercial, but I don't think it is any more complicated than a Multi-Family deal.

Going out and buying a large single tenant building certainly has some big risk factors, but starting out in commercial strip or flex use warehouse can be an excellent avenue to generate both wealth and knowledge.  The key is to understand a cash flow model and understand vacancies in the market as well as leverage. Down payments can be a bit higher of course so some people will shy away from it.

When I started I had a few rules:

1. Must cash flow today.

2. Won't go over 70% LTV.

3. Must have upside.

4. Must be in an appreciating market, though I do not factor appreciation into my cash flow model.

5.) Must have 3+ tenants.

By putting some basic safety nets in and not going outside of these, you can find some great commercial properties with the protection of a multi-tenant operation.  Some of your tenants will fail and you will have to factor in rolling new leases into your underwriting.  Understand how much professional property management cost, understand how much professional leasing cost and get an idea of what Tenant Improvements might be for a new lease in a building you are buying.  Some of my C class buildings I put almost no TI money into them and some of my A class buildings might be $20+ a sq. ft.  You need to know the market you are buying into, but that is just a variable in your underwriting. 

Figure out the fundamentals of real estate from an income/expense perspective.  Play with best & worst case scenarios a bit and buy something that seems solid that you believe will perform.  I intentionally avoided M.F and S.F.R as I wanted to go down the path less traveled.  I took my time, was patient and have found plenty of great deals in the commercial space.  As I gained knowledge and credibility I was able to buy large properties including some large single tenant building's that are very strong.  Don't start there though.  Keep your risk in check and you can enter that market.

IMO, the Seattle market is out of control when it comes to both SFR & MF. I would not buy either right now. I think the risk in buying MF that is at a severely compressed CAP is higher than buying a quality strip center.

Tim