How can I get started in Commercial Real Estate?

Question

Hello everyone!

I am here to discuss some of the obstacles I have been facing thus far. My interests are in commercial real estate (specifically industrial) and I have spoken to multiple brokers all over the country about certain deals I am interested in. Once I have shown my interest I go to a mortgage lender to see what I can get approved for. Time and time again mortgage lenders are telling me I need several hundred thousands of dollars liquid to get started. I then began scaling down to smaller commercial properties in the 1.5 million and under range and I am still running into the same roadblocks. There was even one deal I found where the seller was willing to carry up to 40% AND roll in the closing costs and I still hit the same roadblock from the lenders I spoke to. Am I just talking to the wrong lenders? Obviously there are people out there who are just starting out like me and don't have 200k sitting in their back pocket to get started. If possible, I would like some advice or a path as to how I can get my first commercial real estate deal done as a brand new investor. Any help or guidance would be greatly appreciated. Thanks!

Cason Acor · Answer

I'll give you my perspective as an industrial broker. Most first time investors in this space do actually have a couple hundred grand they're sitting on. But they got that cash from starting out in residential investing, or business successes in similar industries like construction, development, etc.

If you want to start getting deals with a lot less cash on hand, I suggest you find a partner, or several, with industrial experience who can invest with you and provide most of the equity. That's the only way you're going to get a traditional lender to take your seriously.

Mark H. Porter · Answer

Christian, as some of these very smart minds have stated you need to start smaller or be willing to only take a piece of the pie.  Even joining others in a purchase will be tough for you as they’ll ask what you bring to the game that they don’t already have.

I owned a 4-unit MF for 19-years, 1031’d it into 10 townhouse that I purchased in 2017, then sold them this past November to 1031 into a single-tenant national retail unit.  It takes many years to get your hands in the hundreds of thousands of dollars you can invest AND be attractive to a bank willing to loan you millions.

Joel Owens · Answer

If you have limited to no money you need a partner. Really the best assets in each class have lot's of either all cash or very qualified buyers to purchase with getting a loan for the rest.

Most commercial lending is net worth close to loan balance after down payment and 10% liquid thereafter. So 1.5 million deal say 300k down minimum or more up to 450k to get started plus all the due diligence another 30 to 60k in costs. Then you would need about 120,000 left over. Just talking in generalities and not your specific situation.

If you really find a deal then a partner can come in and KISS the note to qualify for the loan. When starting out if you have limited experience and little to no money that can equate to higher risk so a partner investor will want most of the deal and you might get just a small percentage to start otherwise the investor can go with proven seasoned investors where spit is more 50/50 on the upside etc.

Logan Hartle · Answer

Try a master lease option. Look for properties that are under leased and see if the owner would entertain a master lease with an option to purchase. If you can  then increase the NOI via lease up of the property you can increase the value and then approach the lenders to exercise your option to buy.

Paul Moore · Answer

@Christian Sidaros. You are facing the question that many face as they transition to CRE. The barriers to entry are real and difficult to scale. Brokers, lenders, sellers, etc. are all players that like to work with people they know and trust already... with a lot of net worth, liquid cash, and experience.  You may need to be a problem-solver - buying a deal with "hair" on it and fixing it. And/or getting owner-financing.

That said, I would recommend you consider one of these 7 paths (these apply to many CRE classes)...

1. Deal finder. Find deals for larger groups and stay in the deal w/a % ownership and chance to learn the business.

2. Capital raiser. Join a syndication group as a principal to raise outside cash for the deal.

3. Stacking. Start small. Buy, rehab, raise revenue, sell, repeat with a larger asset.

4. Start large. You have to have a lot of cash to do that so you may need to partner with someone like that.

5. Get a job. Start as a lender, commercial broker, financial analyst, property manager, or asset manager. Leverage your contacts and growing experience to launch your career.

6. Invest passively - in a syndication (not your desire I'm guessing!)

7. Get a (paid) coach or (unpaid) mentor. You can likely partner with them by finding deals or raising capital over time.

Good luck!

Henry Clark · Answer

@Christian Sidaros

Christian lets see where you at first, before you head down the path.

You need three things:

1.  How much money or Collateral 60% of asset value; can you bring to the table?

2.  What finance method are you going to use?  This will determine how much equity you have to put in.  Example:  SBA 10% of value; Traditional 25%; Traditional 40%.  You need to see if you qualify.  SBA will not do loans where you do not have at least 51% of the occupancy for your own business.

3.  Your investment track history.

Adjust the figures as you see fit:

Lets say you have $100,000 cash or Collateral at 65% of value:

SBA 10%  means a $1,000,000 project, with you investing $100,000

Trad 25%  $400,000 with you at $100,000

Trad 40%   $250,000 with you at $100,000

You need to start with the above or your wasting your time, if you go it alone.

If you partner, and don't have the money, you have to bring something to the table.  Sweat equity, live on premise, management, etc.

Limitations-  Do you have a business to house in this investment, 51% of sqft?  If not, then SBA can't be used.  Unless your doing something like Self Storage (what I invest in).

As mentioned above, look out on Loopnet for Raleigh.  Use commercial or industrial.  Use the sort key and sort from lowest to highest.  Where your number hits, are the properties you "might" be able to do a project.  Keep in mind you can't go all in with your cash.  There are always issues.  Slow to rent up.  Rent levels you thought are to high.  Added repairs.  Client build out requirements.  Etc.

Catch us up on your status.  Based on that we might be able to bring more options to the table.

The above will set your expectations, and give you more focus on your efforts to get started.

"Start small and Make Your Big Mistakes Early"

Steve Morris · Answer

If possible, I would like some advice or a path as to how I can get my first commercial real estate deal done as a brand new investor.

1) Get some more money

2) Get a partner that has money

3) Find a prop owner that trusts you enough to do a carry-back.

Christian Sidaros · Answer

Thanks everyone for the advice! A lot of great info here, I really appreciate it.

Andrew Tripp · Answer

I would also add that you’re best off finding a small, local bank who’s got some commercial real estate presence in the market you want to enter.  At a granular level though.  Like have they lent in that particular town where the asset is located?  A good local broker should be able to make an intro or two.  Look for fully stabilized assets in overlooked submarkets if you are shopping in major metros.  These won’t have much value add or appreciation.  But you’ll get started and get some cash flow and management experience.

For partners, look for a few people that are also looking to be active industrial owners and are willing to take some recourse on the loan with you.  The collective guarantor strength will make you more attractive to a lender.  Try to get some folks with some real estate investment experience and high paying day jobs.

Different landscape from multi family.  Not nearly as much debt (or equity) sloshing around in this space.  You’ll see seller financing from time to time (although in my experience that usually only happens if there is some hair on it), but banks are pretty much the dominant lenders here.

Steve Morris · Answer

Go onto some place like LoopNet or RMLS and search for the types of properties you're interested in.

See who has the most listings.  Get aggressive and call the broker and tell him you want to be part of his team and you have game (like making cold calls, organization, etc).

Brokers are almost always willing to take on a junior with some skills and motivation.

How can I get started in Commercial Real Estate?

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