Choosing the Right Property Type for Your Investment Goals
There are numerous property types to consider when investing in commercial real estate, such as office buildings, retail spaces, warehouses, and more. Each property type has its own set of characteristics, risks, and potential rewards, and any of them can be profitable if you know how to find, run, and operate the deals.
Key Considerations for Property Type Selection:
Investment Goals:
Determine whether you’re looking for steady cash flow or long-term appreciation. Understanding this helps narrow down your options.Tenant Types:
Decide what kind of tenants you want to manage. Do you prefer corporate tenants in office spaces, or are you more comfortable managing individual renters in a multifamily setting?Management Requirements:
Different properties come with different levels of management responsibilities. For example, managing multiple tenants in a retail space may require more hands-on involvement than a single-tenant industrial property with a triple net lease. Consider your available time and resources. You can also hire a property management company to handle the day-to-day tasks.Your Skills and Interests:
Are you a hands-on investor who enjoys tackling property maintenance, or do you prefer a more passive approach? Understanding your strengths and preferences is key to choosing the right property type.Specialization vs. Diversification:
Specializing in a specific property type can provide expertise and efficiency, while diversifying your portfolio can help spread out risk and optimize returns. Consider what works best for your goals.Market Research:
Conduct thorough research on sub-sectors with strong fundamentals, like areas experiencing population growth, economic development, and infrastructure improvements. Focus on promising niches to increase your chances of success.
Common Commercial Real Estate Types:
Multifamily Properties:
These include duplexes, apartment buildings, and other residential properties with multiple units. Multifamily properties offer multiple income streams, which helps mitigate risk if a tenant moves out.Office Spaces:
Office buildings can house anywhere from one to dozens of tenants and are classified as A, B, or C depending on their age and quality. Office real estate can be capital intensive but can also command some of the highest values.Industrial Properties:
Industrial real estate has gained popularity, especially with the rise of e-commerce. These properties can range in size and use and often have long-term tenants, making them a stable investment.Retail Properties:
Retail real estate, despite changes in the industry, remains relevant by focusing more on experiences and services. These properties range from standalone restaurants to large shopping centers.Hospitality Properties:
Hotels and temporary stay residences, such as Airbnb properties, fall under hospitality. These properties serve travelers and can include entertainment options like water parks or resorts.
The type of commercial real estate you choose doesn’t necessarily dictate how much money you’ll make. It comes down to what you like and how good of a deal you can find.
Funding Your Project
When it comes to funding your commercial real estate project, there are three main approaches: creative financing, traditional loans, and owner-occupied options.
Creative Financing:
This can include options like seller financing, where the seller carries the note on the property, requiring no down payment. This strategy is great for larger properties with little upfront capital.Traditional Loans:
With a traditional bank loan, you’ll typically need to put down 20-25% of the purchase price. While this can be a significant amount, it’s possible to raise that capital from investors.Owner-Occupied Financing:
Options like SBA 7A or 504 loans allow you to put down as little as 10%. Again, raising capital from investors can help cover these costs, and your contribution is largely in the form of sweat equity.
Finding the Right Deals
Finding good investment opportunities can be one of the most frustrating aspects of investing in commercial real estate. Many new investors assume there’s nothing out there, but often they’re just not looking in the right places.
Strategies to Find Deals:
Consistent Outreach:
Successful investors stay in contact with their network to let people know what they’re looking for. It’s important to become your own advocate – you never know where the next opportunity will come from.Leverage Social Media:
Share your investment interests on platforms like Instagram. I once secured a $400,000 deal from an Instagram post while traveling, which led to a highly profitable investment.Work with Commercial Real Estate Brokers:
Brokers can be your best resource for finding investment opportunities. They often have access to off-market deals and can guide you through the entire buying process.Snail Mail Campaigns:
Sending physical mail to property owners, especially in commercial real estate, can yield surprising results. Since few people do it, your letter could stand out.Utilize Online Listing Platforms:
Browse platforms like the MLS, CoStar, or LoopNet for investment opportunities, and sign up for email alerts to stay informed of new deals.
Brokers, social media, and even snail mail can all help you find that hidden gem of a deal. Just remember, you need to constantly seek out opportunities and be prepared to evaluate multiple deals before finding the right one.
Takeaways
In this section, you're diving deeper into the process of making offers and conducting due diligence when buying commercial real estate. Here's a breakdown of key takeaways:
Making an Offer: The process typically begins with submitting a Letter of Intent (LOI), which outlines deal terms like purchase price, due diligence period, and closing date. Your broker may draft this, but some investors handle it themselves, especially in direct negotiations.
Proof of Funds: Sellers will likely request proof of funds, such as a letter from your lender, to ensure you have the financial ability to close the deal.
Negotiating Terms: This involves a back-and-forth process where you refine key transaction details. Your broker should advocate for you, and once terms are agreed upon, the Purchase and Sale Agreement (PSA) is drafted—this is where attorneys come in.
Due Diligence: This is where you review all key documents related to the property, including leases, rent rolls, permits, and zoning. You’ll want a thorough review to ensure the property is performing as advertised. Use a due diligence checklist for this step (download available).
Physical Inspection: Spend significant time on-site, inspecting every aspect of the property. Bring key team members like a property manager, general contractor, or inspector to help uncover potential issues.
Environmental, Survey, and Geotechnical Reports: These are the "big three" tests that will determine the property's structural and environmental suitability. If you're dealing with new development or major renovations, you'll need these reports.
Financing: Begin discussing financing options early on. Reach out to 3-5 lenders and get term sheets to compare rates and loan structures. If you're a small business owner, explore SBA loans, which offer favorable terms for commercial real estate investments.
Loan Costs: Don't forget to budget for associated loan costs like origination fees, closing costs, and reserves for future expenses.
Closing the Deal: Before closing, conduct a final walkthrough to ensure everything is in order. Make sure your funds are ready, and communicate with your lender and investors well in advance to avoid last-minute hiccups.
Post-Closing Tips: After closing, consider making upgrades that can add value to the property and engage with tenants early to establish a strong relationship. Maximizing operational efficiency, controlling costs, and maintaining tenant satisfaction are keys to long-term success.
