Commercial RE … first steps!

I am working on my first US commercial real-estate deal right now and by coincidence received the following question from MoneyMonk:

I plan to buy commercial Real Estate (strip mall) in the near future within the next 4 yrs. I want your advice on some things.

I want a property between 350-400k, I plan to put down $80K <- which will take me 4 yrs to save/invest

I want a commercial re agent to search for me, Im think Im looking at 8-10% commission to give the broker;
I want to form an LLC for my company, apply for a federal id, get a good CPA, a lawyer to form the LLC, umbrella insurance for about 1 million (u never know, The U.S. like to sue).

For as cap rate I want something above 7%. Am I’m missing something???

I also want to visit a banker and ask about financing. Is commercial re different from personal RE? for as terms?
I know any decent bank want you to show a good income, credit and some cash in the bank. What are good questions to ask a banker?

First I would like to congratulate MoneyMonk on being so forward thinking; it doesn’t hurt to talk to a Banker upfront, but my suggestion as to the very first place to start is with the following four steps:

1. Identify the type / location / price ranges of properties that you want to buy – MoneyMonk is targeting “strip malls … between 350-400k”.

2. Start researching the types of properties in the areas that you are interested – with 4 years to go before MoneyMonk has saved sufficient deposit, nothing else matters right now other than the research: LoopNet and RealtyTrac are great places to do this research.

That’s it for now; when the deposit has been saved:

3. Find a real-estate broker – you’re looking for the trifecta: (a) a broker that you like/trust, (b) one who works with commercial RE in the area/s that you are interested in, and (c) somebody who invests in commercial RE herself.

Keep in mind that the best deals are NOT usually on Loopnet /Realtytrac – they are what the brokers haven’t been able to offload, so are probably NOT the best deals around – the best deals are still probably with the brokers. It’s still an “old boy’s club”, so don’t expect your broker to bring you these deals first time around … your first acquisition is unlikely to be your best!

4. Find a property that you like / can afford / that meets your criteria and put a refundable deposit down (subject to: finance, partner’s approval even if you don’t have a partner, and due diligence).

… then approach the banks for funding.

6 Responses to “ Commercial RE … first steps! ”

1. Kent Shaffer says:

   December 12, 2008 at 10:17 am

   Congrats on your first US commercial deal!

   I just helped launch a new commercial listings site called http://www.AcreScout.com

   It is free to sign up, add listings, and search listings. I would love to get your feedback on it.
2. moneymonk says:

   December 12, 2008 at 10:58 am

   Thanks. I have not thought about the refundable deposit part.

   The main thing is finding a broker that I am comfortable with. I am a virgin to this market, therefore I do not want to be taken advantage of. It’s always best to talk to someone that has already achieved what you are trying to do. A mentor is always good.
3. Adrian says:

   December 12, 2008 at 1:59 pm

   @ Kent – I’m not allowed to advertise on my own site, so why should you?! Seriously, I have left the link in because (once you get enough content) your site could be a useful alternative to the other sites that I mention in this article. Good luck with it …

   @ MoneyMonk – Yes, spend the next 4 years trying to become best friends with a reliable, investor/broker
4. Scott says:

   December 12, 2008 at 4:13 pm

   Great post. Thanks for all the useful info, as this is my next step as well! I have my first residential rental now and it’s been a great experience so far and my plan is to purchase the building that my practice is currently in sometime at the end of the next year when I have the down payment saved up. There is a pet grooming business next door to me in the same building that i’m happy exists because their lease payments will pay a large chunk for my mortgage on the building!

   Congrats on making the decision to do this Moneymonk!

   Adrian, are the lease terms on commercial RE 10 years only?
5. Kent Shaffer says:

   December 12, 2008 at 5:49 pm

   @Adrian

   Pardon the “advertisement.” I appreciate that you think AcreScout has the potential to be a useful alternative. If you ever have additional feedback, I would love to hear it.
6. Anatomy of a Commercial RE Investment - Part 1 « How to Make 7 Million in 7 Years™ says:

   December 22, 2008 at 2:58 am

   [...] estate Tags: 7 million, 7million7years, millionaire, money, real estate, Rich, wealth I just answered a question on commercial real-estate investing and thought that there’s no better way to explain the process than by showing [...]