How to Buy Your First Commercial Property
Episode Transcript
Welcome to The Commercial Real Estate Investor Podcast - I am your host, Tyler Cauble, and today we’re going to talk about how you can get started investing in commercial real estate.
There are five steps that I recommend you take to help ensure that you approach your first commercial purchase correctly.
In fact, it’s the same strategy that I used during my first year of investing to acquire 4 office buildings here in Nashville.
So, let’s go ahead and dive on in.
Step 1: is to Choose your niche and become the expert.
It is imperative that you educate yourself on commercial real estate because it can be a very complex investment
You need to decide which path you want to take and focus on it.
You know, there are many “shiny objects” in commercial real estate - and, honestly, that’s one of the most beautiful things about this industry!
And while diversifying your portfolio by investing in different types of buildings with tenants in different industries, is certainly an important aspect of commercial real estate investing, I highly recommend that you dial in and become the expert on one specific type of investing, first.
Here’s the thing with commercial real estate and real estate investing in general, though.
The most you’ll ever learn about commercial real estate is actually during and after you’ve done a deal - some parts of the investing process just can’t be learned from a book, watching a video, or listening to a podcast.
However, you do need to have a decent understanding and road map for your investing strategy.
So that’s why I recommend that you educate yourself as much as you can on the front end.
You can listen to podcasts (like this one)
Read commercial real estate books - I’ll post a link in the show notes on my 10 favorite books on commercial real estate investing.
You can watch videos on YouTube (if you’re not following me on YouTube, I’m also posting weekly content there where I explain some of these concepts more thoroughly with visual aides - so go check my channel out, it’s just under my name, Tyler Cauble).
You can have conversations with other investors. Find yourself a mentor or a coach that is willing to teach and help you. Learn from people who have done it already!
You could also join Real Estate Investing Groups. Joining a real estate investing group here in Nashville (the Real Estate Investors of Nashville) was one of the first steps that I took towards becoming a real estate investor. Not only do these groups offer educational classes and events, you can network with other investors to find deals.
And, you know what? You might even get a job in commercial real estate! That’s actually what I did - I got my start as an in-house leasing agent for a boutique development firm. In the 4.5 years I was there, I learned how to build single family homes, develop townhome projects, manage office / retail / industrial properties, and how to masterplan communities! It would’ve taken me a lifetime to learn that any other way and the best part was that I got paid to do it. I got paid to learn!
Ok, so after you’ve educated yourself on commercial real estate investing, it’s time to narrow in on a property type. And the reason that I actually recommend you choose your property type after you’ve educated yourself on the industry, is that you don’t necessarily know which property type will be right for you before you get started.
Sure, you may have an idea, but I think it’s smart to keep an open mind.
For example, if you’re a single-family residential investor, you’re probably thinking that the next step is to buy multifamily - basically single family at scale. But did you know that storage units, which are a subclass of industrial real estate, pretty much operate the same way as multifamily without the headache of having to deal with the residential tenants?
You may find another asset type that is more attractive to you as an investor.
There are really 5 different types of commercial real estate that you can invest in:
Multifamily, which is anything from a single duplex with two units, even though that’s technically not commercial, to hundreds of units spread out across a garden-style apartment complex.
There’s office space - office buildings can be small, like that commercially zoned home down the street from you occupied by the local law firm or a skyscraper downtown, headquartered by a national bank.
Retail. And retail ranges from that single-tenant Starbucks around the corner from your house to these massive regional shopping centers that draw in shoppers from miles and miles away.
Industrial. Industrial real estate is made up of warehouses and distribution centers of all sizes - think Amazon delivery and the local plumber or electrician, who might need a small office with their warehouse.
Then there’s hospitality. Hospitality real estate are the hotels and motels that serve both business and leisure travelers. I would also include short-term rentals here, too - you know, something you might list on Airbnb or VRBO.
So after you’ve determined your property type, it’s time to pick an investment strategy.
There are many different investment strategies and just like choosing a property type, it’s important to find a strategy that’s right for you. That will vary, depending on your goals, risk aversion, and really just what piques your interest. Here are the six different strategies that we use, but that certainly doesn’t mean that this list is the end all be all of investment strategies.
First is land banking, which is where you purchase larger tracts of land that are in the path of development, hoping that they will appreciate in value as the development moves your way.
Next is development and construction, which is where you take raw land and completely re-imagine what could be constructed on that property.
Then we have fix & flip. Just like it sounds, fix & flip in commercial real estate investing is the same as it is in residential where you buy a property, make any necessary repairs and upgrades, and then resell it. Flip it.
Wholesaling. Wholesaling isn’t nearly as common in commercial as it is in residential, but it’s where you find a good deal, put the property under contract, and sell the contract to another real estate investor or owner-occupant.
Which brings us to owner-occupied investing. This strategy is similar to “house-hacking” in residential, where you purchase a piece of real estate and operate your business out of it.
Last, but certainly not least (and definitely my favorite strategy) the BRRRR or Value-Add. I’ve used time and time again. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. So, the value-add strategy.
Ok, so now you know which type of commercial real estate you’re interested in and likely have a chosen investment strategy, so it’s time for step 2.
Step 2: learn how to underwrite commercial real estate investments.
You really need to know the math behind these deals inside and out, forwards and backwards.
Get your underwriting tools together - you can create these yourself, using Google Sheets or Excel, or you can find some templates online. We’re actually in the process of preparing our underwriting software for sale, so keep an eye out for that, as well. It’s the tool I use to underwrite every single deal I’ve bought.
Most investors will use some sort of variation of a spreadsheet where they can break down different items, such as purchase price, estimated rehab, your rent projections, financing terms, and more., and then these spreadsheets will then crank out the expected returns for the deal.
I do also recommend having a “back of napkin” formula that you can apply to any commercial real estate investment to determine whether or not it’s even worth underwriting. This “back of napkin” formula can be any single metric that works for you and can give you a quick green or red light. Some investors like the 1% rule - I think that’s mostly residential.
For me, I like to look at the asking price per square foot of the investments I make. Having a background as a commercial real estate broker, I know what market rates are and what concessions or improvements I’d have to make to get a tenant. By using prices per square foot on the purchase and rent, I can quickly determine if the deal will make any money.
Now, I do recommend when you first get started that you underwrite every deal you possibly can. This way, you can actually learn what makes a deal work. Like I said - you need to know the math.
There are also classes where you can learn how to underwrite commercial investments, as well, and one that I highly recommend is through the CCIM Institute - the certified commercial investment members.
They have a course and a designation on commercial real estate investing, which helped me tremendously when I first got started.
This designation, in my opinion, is comparable to a CPA for an accountant and is basically a master-course on how to invest in commercial real estate. They teach you how to analyze project financials, research real estate markets, determine user criteria, and make investment decisions.
And while this designation might not be important for you, unless you’re a broker, the CCIM course is pretty in-depth and you’ll walk away knowing just about everything you need to know on commercial real estate investing. It’s a very well put together curriculum and is taught by real estate professionals.
Now, for step 3, you’ll want to assemble your team. Gather the A-Team.
When you’re first getting started, it’s really important to have a team of experts on your side that have a fiduciary responsibility to you. That means your best interests are in their best interest. Building this team will help make sure that you have your bases covered and that almost every aspect of a deal will be investigated. It also doesn’t hurt to have a second or third set of eyes reviewing your deal.
The first member of your team should be a commercial real estate broker that specializes in your chosen property type. There are many different specialties within commercial real estate brokerage and there’s no point in trying to work with a single-tenant net lease broker if you’re hunting multifamily projects.
Get on their mailing list and start reviewing every deal they send out. Run it through your underwriting process - tour anything that could make sense for you.
Have conversations with them about the properties. After all, they’re the professionals and see these types of deals every day.
Why do they like this deal? Are there any drawbacks? The quick answer to that is yes - there are always negatives in a deal, too - sometimes you just have to find them. What capital expenditures do they feel are necessary?
The right brokers want to bring you deals that will be successful. The better you do, the better they do because they can continue selling you properties.
Be sure to give them thorough feedback on why the deal does or doesn’t work for you so that they can better learn your criteria and bring you deals that fit.
Next, find an attorney that specializes in commercial real estate.
Hiring an attorney to make sure you’re protected on the legal side is an absolute must in my mind.
Not only do commercial real estate attorneys review and negotiate purchase and sale agreements with you, they’ll also check to make sure that the property doesn’t have any zoning restrictions, land-use issues, environmental issues, and they can also help negotiate your loan agreements, which can be beasts.
I speak with my legal counsel pretty frequently, but other investors only engage them once they’ve gotten to a contract - it’s totally up to you.
If your property is going to need any physical improvements or renovations, you’ll also want to work with a contractor that specializes in commercial real estate.
Your contractor will be able to walk through or go on tours of these properties with you and help you get an idea of what your renovation budget should be for any maintenance & repairs. Depending on your relationship with them, you might only walk through the project after you’re under contract.
I’m sure you noticed that each of these team members need to specialize in commercial real estate. You have a commercial real estate broker, a commercial real estate attorney, a commercial real estate contractor.
Everything is different in commercial real estate than it is in residential real estate. You want a specialized team that focuses on what you’re investing in. You wouldn’t call the Fire Department to stop a bank robbery - the same goes for your team members.
You’ll also want to find a commercial property management company.
A strong management team can take a decent deal to an outstanding deal because of their ability to properly run and manage the investment.
Property managers will be able to walk through and assist you during your due diligence just like a contractor would. They can help, along with your broker, point out the pros and cons for tenants and any issues that may arise during your acquisition of the property.
Even if you intend to manage the property yourself, I still recommend keeping the property management fee in your underwriting. You never know what could happen - if you get sick or decide you want to go on an extended vacation, someone will have to run the property.
And, I’ve said it time and time again, if the numbers don’t work when you include a management fee, the deal probably doesn’t work at all.
You should also start building relationships with commercial lenders.
Each lender will have different underwriting criteria and varying appetites for different types of commercial properties.
They can also help you determine if a deal makes sense. If multiple lenders aren’t willing to give you the money to acquire the property, that should be a major red flag for you. Look at lenders as your partner in the deal - because really, they are. They’re going to give you a significant portion of the money you need for the purchase, which means they want it to be successful, too.
The 4th step is to underwrite a deal every day. That’s right - I said every day.
Practice makes perfect.
The more you review and look at these investment opportunities, the better you’ll become at understanding what makes a deal work. Underwriting a deal a day is a wonderful habit to get into because it forces you to review the pros and cons of a property and why you would or wouldn’t pursue that investment.
Michael Jordan didn’t become the best basketball-er overnight - he practiced! Just like you should do with underwriting so that you can become an expert at reviewing commercial investment opportunities.
This is probably one of the best skills you can have as an investor.
In fact, underwriting deals is so critical to the investment process that I know people that charge between $3,000 and $5,000 to underwrite larger commercial real estate deals for you. $3,000 to $5,000! I mean look, if you’re willing to pay that, get in touch with me and I’d be happy to do some underwriting for you!
Yes, I know it can be a bear. Trust me - I get it.
Underwriting a project can be a labor intensive process, especially if you’re doing it the right way. But again - if the numbers don’t work, it does not matter how amazing you think the property is or where it’s located, it just won’t be a good investment.
That leads us to another important point - set your investment criteria and really stick to it. Don’t move off of this criteria just to make a deal work.
Having set investment criteria that works for you is an important factor to ensuring you’re on the path to success. If you want to get an 8% cash on cash return, do not settle for 7.5%! Every property that you buy takes away from the capital that you could invest into a deal that does actually fit your investment criteria, which means you’ve just lost a better opportunity.
The final step? Submit an offer each week until you’ve bought your first property.
I actually got this one from my buddy, Brandon Turner, over at BiggerPockets.
If you don’t make an offer a week, you’re not looking at or underwriting enough properties!
Real estate investing is a numbers game and you might look through 100 properties just to find the 1 that works. However, that 1 property will be worth it.
It also doesn’t cost you anything to submit a letter of intent and make an offer on the terms that work for you. You never know what could happen - that seller might be in a time crunch with his loan coming due or they may need the proceeds from this sale to acquire a different property. If you never make the offer, you’ll never know.
So there you have it - my step-by-step process for buying your first commercial property.
If you’d like to take a deeper dive into the world of commercial real estate investing, you can find many different resources on my website: TylerCauble.com, which will be in the show notes, along with links to my YouTube channel and Instagram account.
If you haven’t already, be sure to subscribe to this podcast for weekly investment strategies, leasing & management tips, market updates and more.
And that’s it for this episode - see you next week!
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
In an upcoming discussion with Jacob Kromhout, my project manager from Bentwood Construction, we'll share the latest construction updates at Salt Ranch, my boutique hotel in East Nashville.