Feasibility of beginning my RE journey in Commercial Real Estate?

Question

Hello Bigger Pockets Community!

I'm brand new to REI and am very excited to begin my journey.

I'm looking for input on the feasibility of beginning my real estate journey in Commercial Real Estate (specifically multi-family residential).

From my research, it seems like building your CRE team (broker, realtor, lenders, legal, etc.) is crucial to success. Where do you find the most success when searching for reputable contacts for your REI team?

What are the best ways to overcome the high down payment hurdle for CRE?

Do you have any advice on first steps?

I look forward to hearing about your experiences and learning from you all!

Greg Dickerson · Answer

The first step is to educate yourself thoroughly on the market and the business. You need to immerse yourself and become an expert to be able to convey confidence to investors and get the attention of brokers etc.

Bjorik Mutize · Answer

Welcome!

Most of my CRE contacts come from referrals.

Most popular ways to solve the capital issue is to partner/raise money.

First steps are to get educated(also pick a few multifamily residential guru's, guage credibility, then mirror their steps) and learn your market.

Jon Schwartz · Answer

I see myself making the move to commercial multifamily at some point, but I'm in no rush. Residential interest rates are so low right now, and the mortgage is fixed for 30 years. I mean, it's amazing. Commercial lending means refinancing every 5 to 7 years -- it's much more active.

Plus, I invest in LA, where you can find $4M duplexes! So it's not a question of pricing out of residential. It's just a question of goals.

Good luck!

Jon Schwartz · Answer

Francine, welcome to the playground!

You ask a lot of great questions, and I have lots of thoughts to share, but first I want to clarify one thing that took me sometime to grasp when I was first learning. Multifamily properties are divided into two categories, "residential" and "commercial." Residential multifamily describes any building that has four units or less -- so, fourplexes, triplexes, and duplexes. Commercial multifamily describes any building with five or more units.

Residential multifamily and commercial multifamily are financed and valued differently. Commercial multifamily takes an education; it's not hard stuff to learn, but you have to become familiar with commercial financing and terms like NOI and cap rate.

Residential multifamily is more straightforward because it's financed and valued just like single family homes. The same bank that would loan you money for a house would loan you money for a fourplex. For that reason, residential multifamily can be an easier starting point.

Now lemme answer your questions:

The best place to find your team is right here. When I'm looking for a lender who does a particular type of loan, I ask the forums. Whatever you need, this is a great place to look for it!

The high down payment for CRE... Again, I would point you toward residential multifamily. I'll give you an example: here in LA, where I also live, to buy a 5-unit building, you might need to put 30% or 40% down. There's a lot of math behind that (which I'll be happy to go into later!), but long story short, because of how commercial multifamily is valued and financed, very large down payments are the norm.

However, there is a way to "hack" the down payment problem with a fourplex -- and I actually think this is the best first move for a new investor. You can househack a fourplex! That means buying a fourplex and moving into one of the units. In this scenario, you can get an FHA Loan with a 3.5% down payment. Also, since you'll be buying an owner-occupied investment property, you'll have access to the lowest interest rates (rates tend to be higher for non-owner-occupied investment properties).

I also think, if you live in a high-appreciation market like Los Angeles, and you have income outside of your real estate endeavors, the best first step is to househack a multifamily property. You won't see cashflow, but your living expenses will actually go down, allowing you to save more, and the property's value and rent potential will really snowball over the years. You can eventually move out for cashflow, and then eventually refinance for increased capital with which to buy cashflowing properties in other markets.

I could talk about this for hours -- and I'm happy to! Last year, my family moved into a duplex in Hancock Park. We have great tenants downstairs who pay most of the mortgage, and the equity we're gaining is much more than if we were in a house. My long-term plan is to roll the equity gains from this duplex into cashflowing properties in 7-10 years.

Please let me know if you have any more questions. I love nerding out on this stuff.

Best,

Jon

Francine Hernandez · Answer

@Jon Schwartz

Thank you for your great and thorough response! It sounds like house hacking was a great place to start for you. I can definitely understand the benefits of starting with this strategy. Do you see yourself staying in multifamily residential long term or making the jump over to commercial multifamily at some point?

Bjorik Mutize · Answer

Absolutely! The strongest characteristic is knowing your criteria and being able to/being prepared to act quick when a deal arises. Even in this market good assets trade quick.

Networking is key as you probably know as well. Talk to alot of people every day and let them know what you are doing/looking for.

Francine Hernandez · Answer

@Bjorik Mutize

Thank you Bjorik for the great information!As a real estate broker, what traits, strategies or characteristics do you see the most successful CRE investors utilize to land property deals?

Francine Hernandez · Answer

@Greg Dickerson

Thank you for your tip on first steps Greg!

I'm currently in the education & saving phase of CREI and am reading everything I can get my hands on, researching as much as I can on effective investment strategies and property considerations as well as practicing running deal analyses using the BP calculators.

I think one of my biggest challenges will be determining which market to dive into. I'm based in the LA area and the real estate market buy in cost is steep which is making me consider other areas (possibly even out of state) if the numbers are right however it may not necessarily be the best decision for someone just starting out. I've got a lot to learn.

Best,

Francine

Feasibility of beginning my RE journey in Commercial Real Estate?

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