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.

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6 thoughts on “Commercial RE … first steps!

  1. 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.

  2. @ 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 😉

  3. 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?

  4. @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.

  5. Pingback: Anatomy of a Commercial RE Investment - Part 1 « How to Make 7 Million in 7 Years™

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