Transitioning from Residential to Commercial Real Estate Pt. 1 | Investors Round Table
In this conversation, we'll dive deep into the challenges and strategies involved in transitioning from residential to commercial real estate investing. Logan, Matt, and I will share our expertise and insights to help you navigate this significant shift in your investment journey. We'll explore the common hurdles investors face when making this transition and discuss proven strategies for success.
Whether you're a seasoned residential investor considering the move to commercial properties or a real estate professional guiding clients through this transition, you'll gain valuable knowledge and practical advice. We'll cover crucial topics such as adapting your mindset, building the right network, and mastering the nuances of commercial deal analysis and execution. By the end of our discussion, you'll be equipped with the tools and understanding necessary to confidently take your first steps into the world of commercial real estate investing or to guide others through this transformative process.
Matt Anderson, Anderson Legal
Logan Freeman, FTW Investments
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com
Key Takeaways:
Relationships and networking are crucial when transitioning from residential to commercial real estate investing. Building connections with experienced commercial real estate professionals, such as through industry associations and mastermind groups, can provide valuable mentorship and guidance.
It's important to start small and limit risk when making the transition. Doing a smaller, lower-risk commercial deal first, potentially with a partner or using seller financing, can help mitigate the learning curve.
Adopting the right mindset is critical. Commercial real estate requires a longer-term, more analytical approach focused on steady income and capital appreciation, rather than quick flips.
Comprehensive education through books, courses, and hands-on experience is necessary, but should be combined with building relationships and getting practical guidance from experienced commercial investors.
Protecting one's reputation is paramount in the relatively small commercial real estate industry, as word can spread quickly about an investor's conduct and capabilities.
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.
Episode Transcript:
0:00
Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Series central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level, series Central has the resources you need. Visit www. cre central.com. To learn more. Welcome back to the commercial real estate investor Podcast. Today we are diving into another round of the investors roundtable. Matt Logan, excited to be with you guys again, today we're gonna be diving into transitioning from residential to commercial real estate. That is a question that I get asked all the time. I'm sure you guys get asked this all the time. Because at some point, as an investor, you get tired, maybe you get tired of dealing with tenants and toilets, right? Maybe you realize, hey, it's not as easy to scale and grow. As I thought it was maybe you realize, hey, this actually doesn't make me as much money passively, as I was hoping it would. This is a lot of work. And you start considering commercial real estate. So if that is you, you're here today. And you're gonna get a treat, because we're going to dive into really transitioning from, you know, residential to commercial real estate, all the challenges and strategies. We're going to cover education and networking and commercial real estate and analyzing and executing on commercial deals. So be high level overview. But feel free to jump in the live chat if you've got any questions. And of course, as always, we are happy to do a follow up call if there are enough questions. So Logan, I'm gonna kick it off with you, man. I mean, what are the most common challenges that residential investors face when they are transitioning into the commercial world?
Logan 2:05
Yeah, I mean, there's a lot, right. You're you're you're talking about going from a somebody somewhere where somebody's living into a more business oriented focus, right. And I think that's really important, because the key people that you are you're serving are using the real estate for a different purpose. And so that creates some, I think, main challenges, like the complexity of the deals, right? I mean, commercial real estate deals are inherently more complex due to factors like zoning laws, you got tenant mixes, you've got longer lease terms, your tenants likely or should not be living in the real estate that they are purchasing. Right, then let's talk about financing. Because that's huge, right? securing financing for commercial properties, is a lot more challenging and different, stricter, I would say lending criteria, and you got a lot higher downpayment requirements, most scenarios, and you got your market knowledge, right. So investors often lack the deep market knowledge required to understand commercial real estate trends as well as vacancy rates, capitalization rates, market demand, we're talking about property management now. So managing commercial properties can be more demanding, due to the risk and challenges of different various, you know, tenants and the need for more specialized management skills. Then lastly, I would say it's the risk assessment. So Commercial Investments, usually, you know, can carry higher risks and require a different approach to that risk management and mitigation. And so to me, the main challenges are, I just labeled five, you know, and those are just five of the different components that it takes to get into commercial real estate and understand and you can read books, you can go to classes, but until you start actually investing and or helping other people to invest in those real estate deals, everything is going to feel really foreign. And so I think that when I talk to folks that have made the transition and made the transition myself, knowledge is important, yes, like, you have to have knowledge but, you know, these, there's an area that I didn't even mention, which is the contracts, you know, I'll give a quick example of a story because we have a lot of folks that will on our listings be from the residential side and bring a buyer to that to that to that property. Well, it was this was a you know, this was a small multifamily project and you know, earnest money deposit had already gone hard non refundable. We had you know, we had already gone past the due diligence phase, we've already gone past the financing and there actually wasn't even you know, financing or appraisal contingency in the commercial real estate contract. which most residential agents investors are used to having in their contracts for protection? Well, it comes down to it, you know, and the financing changes on him at the last minute. And he's like, Hey, I gotta pull out of this deal. And we're like, hey, that's fine. But we're keeping your earnest money deposit, and then the agent on the other side is like, No way, that's not gonna fly, like, you have to give it back. I said, Would you be able to show me in this commercial real estate contract where it stipulates that we have to give you the earnest money deposit back and why. And he was like, I don't care what the contract says. And it's like, whoa, whoa, you know, hey, we're talking about a legal document that was signed that you signed, and you probably didn't read or educate your client on that. And that's a big issue. And that just blew the deal up. And now we'll probably go into court to try to figure out, you know, who's going to keep their earnest money deposit? And, and who's going to give it back? So, I mean, I think that there's a lot of differences and a lot of challenges, the complexity, the financing, the market knowledge, property management, risk assessment contracts, those are all main differences, because the single family home space and the residential space is very standardized, right? It's very similar. In a lot of different components. Yes, there might be some changes based on the size of properties that you're selling, but like, the way that the process and transaction process goes is a lot different, you know, then then a commercial real estate contract and a commercial real estate deal. For
Tyler Cauble 6:27
those of you that are listening on the podcast, you obviously cannot see Matt's face. Matt is an attorney. So hearing the words, I don't care what's in the contract is. So I mean, it's mind bog
Logan 6:36
word. That's what I heard on the other side of that.
Unknown Speaker 6:40
That's what I like to hear from the other side, not from my client.
Tyler Cauble 6:43
Can they put it in writing to? That'll
Unknown Speaker 6:46
help with the judge? Right, please? Yeah,
Tyler Cauble 6:48
commercial real estate is definitely more caveat emptor. Right? It's buyer beware, there are not nearly as many protections, as you have in residential and, and, you know, as Logan kind of said, like, look, commercial real estate isn't more scalable. Is it potentially more profitable? Is it better? Yeah, of course, but it's not all rainbows and butterflies, there's a lot of risk, there's a lot of other, you know, there's there's some educational learning curves, you got to get past, you need to find partners, you need to find good mentors, it can make the entire process a lot easier for you. But definitely don't consider going on this on your own. At least when you're first getting started. I still partner with people on every deal I do to this day, simply because of the different perspectives, viewpoints, balance sheets, cash flow, etc, that they can bring to the table. There are strategic reasons for doing so. I mean, Matt speaking, you know, from from the attorneys perspective, I mean, you've worked, I think you've transitioned from residential to commercial yourself. And being an attorney, I'm sure you see quite a few people that are kind of going from that residential to commercial side and maybe experiencing some problems, maybe not. But I mean, what are you seeing that is a good way for somebody to do that transition smoothly?
Speaker 1 7:57
Yeah, I think, you know, a lot of residential investors get used to doing everything on their own right, and just sort of figuring it out in kind of, like Logan said, like, a lot of times, there's a lot of things that are standardized, and you've got your tar forums, and you've got your home inspection, you get your appraisal, and then your lender sort of hold your hand, you know, and, and so you really need to come in eyes wide open, and just realize that you really need to be careful and diligent, and there are more risks in the in the under contract period, and in the diligence period, you know, diligence on the properties and things of that nature. And so the things so when I did my residential transition, it was it was a slow transition, where I started learning, I started reading, I started to network with people who are more in commercial. And I think one thing that I did, that's probably good for most people is you, you start with your strengths, and you limit your downside, you find a way to get in with limited risk, right, anytime you're doing anything new or a little bit riskier. And so we were able to do that by by doing a little bit of a smaller deal. And by getting some seller financing, and with the partnership, right, so we spread the risk among partners. And so that allowed me personally to get more comfort on my first deal. And then I, you know, I leaned on mentors and relationships, you know, brokers and contractors and, and, you know, I was fortunate in that I was pretty sophisticated when it came to the leases already. And then you just put in, you got to put in some extra work to is the other reality, right? Like, it's anything when it's new is going to take significantly more work for you to do than somebody who's done it 100 times, right. If you've got a 20 page lease in front of you, and you don't understand it, you're gonna have to either spend some money to get some education with the lawyer, probably what you're going to need to do, and, you know, if you're trying to figure it out, you're gonna spend a lot of time being very diligent, right, and that goes for everything, right. So I think, start with where You're at what you have, what relationships you have, if you're a contractor, it might be smart to do a construction heavy, deal, smaller deal on your first one. If you're somebody who has a relationship or a mentor, who's very experienced and commercial, it would probably be a good idea to do your first deal with him. So that's kind of one of the ways I see it is figuring out a way to do your first deal or first few deals, where you're not taking all of that risk on you. And you're not, you know, there's a learning curve there. And what you don't want to happen is your first deal to go completely sideways, you need to figure out ways to mitigate that, in my opinion.
Tyler Cauble 10:37
Yeah, that's right. You want to have a quick and easy win, right? Because you have enough to learn going through that process. You don't need to try and swing for the fences at that time. Matt, I've got a I've got a quick follow up question on that one. Because I'm sure it's what everybody's thinking right now. Where did you meet those mentors? And how the hell did you convince them to mentor you?
Speaker 1 10:57
Yeah, well, I mean, I spent, I did spend a lot of time in residential. And so I started meeting people at the local RIA is at the meetups and networking events. I tried to add value however I could to everybody I could. And so I had people who I had relationships with who I met through residential, who'd already made that transition into commercial. So if you're in residential, that could be a really good way to do it, is find mutual relationships, who have been in residential, but have already bought their first commercial deal or have their third or fifth commercial deal, that can be a really good way to do it, or to work with your existing relationships, a friend of a friend, right? Start telling people that, hey, I'm interested in now pursuing commercial or something even better, more specific, right office or retail or whatever, industrial, whatever you're pursuing, and get connected through people you already have relationships with. That would be my advice.
Tyler Cauble 11:52
Yeah, I think that's brilliant. I mean, that's how Matt and I met was at a Ria, a Real Estate Investors Association, I couldn't speak more highly of groups like that. Because they are phenomenal to get you connected with other like minded people that are doing the same thing that you are doing, or what you want to be doing. Logan, speaking about, you know, being around the right people, you know, you're you're an absolute expert, in my opinion, my humble opinion, when it comes to mindsets, right. I mean, you know, being a former athlete, we'll certainly do that to you. I mean, what what kind of mindset is required to shift from the residential space into the commercial space? Like, how can investors actually adapt to this new type of business? Yeah,
Logan 12:39
I think the first things first is you got to move from a transactional basis to a relational basis. And that is so crucial. I think having a long term vision, you know, because commercial real estate requires a longer term investment horizon, you got to focus on steady income and capital appreciation over time, instead of a quick flip, maybe on the residential side, right? I mean, the analytical approach, you know, you've got to adopt a more analytical mindset, emphasizing financial metrics, such as net operating income cap rates, Internal Rate of Return, return on investment. And that takes patience, right transactions and commercial real estate can take longer to execute. So that requires patience, and persistence. I mean, I've had deals that take 678 months long to get done. I mean, if we're talking about a development site, we're talking multi year to get that site completed. You know, and that takes a lot of patience. I would say in that, you know, the professionalism. You know, I know, a lot of residential, real estate investors and agents will work on the weekends and will work on the evenings and things like that, if you're a top commercial real estate broker, you're likely not trying to be, you know, active and or available. 24/7. So, I mean, I think a higher level of professionalism is expected with investors. And I think there's a big component to this. And then last thing I mentioned previously, but is risk management, you know, I mean, you've got to have a greater emphasis on risk management, because you can look at a residential house and say, Okay, well, I'm going to sell it at this, or I'm going to target this. And that's really the only component, the exit strategy might be to lease it up and have it as a rental or, or sell it on the open market, you know, or to another investor, but like, a commercial real estate transaction. I mean, you've got to look at, you know, the different exit strategies in regards to Where's financing going to be at that time, where's the net operating going to be net operating income? where's that going to be? What am I going to do if this tenant leaves, right? So that's a lot of risk management, that has to be thought through. And you have to have multiple scenarios for each one of your properties. And that is also dependent on the type of property, the location, the class and the business plan that has been thought through for each one of those investments. So, I mean, I think the two things that stand out to me are probably the long term vision and really Eat the patience piece, but also moving from transactional to relational. Because, you know, yes, there's a lot of residential agents. And you could probably burn bridges in that space a lot more than you can in the commercial real estate space. But you start doing that, and people aren't going to want to do transactions with you.
Tyler Cauble 15:15
Yeah, you've got to really be protective of your reputation in this industry. I mean, Nashville is a small town, so as Kansas City, right, and that gets around quickly. And then commercial real estate is an even smaller industry within those towns, and you know, your town, commercial real estate is not the biggest, I mean, think about this commercial real estate in Nashville was probably 300 agents that work in the business here. There's over 13,000 residential agents in that same market. So think about how small that is something happens. It gets around very, very quickly. Matt, you mentioned earlier you were talking about, you know, reading the books, you were talking about taking the courses, learning as much as you can, I mean, what what resources or educational materials do you recommend for those that are looking to transition out of residential and into commercial real estate?
Speaker 1 16:02
Yeah, there are some good books, they're harder to find than the residential books. You know, I know, when I started in residential, real estate, I've probably read 3040 bucks or something like that, you know, at a minimum. And then when I started to try to dig into commercial, it was a little bit more challenging. But there's some good ones out there. I remember I read crushing it in apartments, I think it was, yeah. But I think it was maybe Brian Murray, I remember I read Joe Fairless, his apartment syndication book, I read some commercial, more like textbooks. So it's a little, it's a little more challenging, I know, you've got some great educational resources, I think you really just want to put your hands on anything you can to just start learning. And then, you know, I think a great thing to do is also get into some sort of mastermind group. Because if you get into some of these networks, in mastermind groups, some of these people are really amazing, and how much they will pour into you. I know when I you know, when I started doing larger apartment buildings, which was a little bit outside of my comfort zone. I was because I was in a network group, I reached out to half a dozen guys that I knew were experts in it. And they looked at deals with me, they spent half an hour an hour sometimes going through it helping me understand make sure I wasn't missing anything. Same thing when I did retail. So it does go back to the relationships too, because kind of like what Logan said earlier, reading and learning is crucial, as much as you can, right. But at the end of the day, you got to get out there somehow you got to get some, you got to make some relationships you got to make offers, you got to get some practical experience. And so having people in your corner, I think it's irreplaceable. I think you have to have you know, that's, that's my opinion. So I would I would mix the two of those together, use people as resources and just use every educational resource you can. Yeah,
Tyler Cauble 17:54
I mean, I think one big theme you're going to pick up on today, as you're listening to this is relationships, relationships are almost everything. When it comes to commercial real estate, that old adage, it's not what you know, it's who you know, is incredibly important when it comes to this industry, because who you know, can teach you what you need to know. Right? And they can also introduce you to the other people that you need to know in order to get these deals done. And it just makes things a lot easier that way. I mean, you know Wogan touching on that. How important is networking and commercial real estate compared to residential? I mean, sometimes I feel like residential is better at networking in some aspects, and that sometimes I feel like a lot of residential real estate investors kind of siloed themselves off from the rest of the world. How would you compare that to commercial?
Logan 18:36
Yeah, I think that it's critically important. And especially if you're making the transition from residential to commercial, you might not do your first deal until 12 months after you make the transition, right. But what you can do is get out there, meet the other players and hitters in the space, start telling them what you're trying to accomplish, and get that message out to the market. Because I think that's a big component of trying to get your brand created. You know, I just had a meeting with a gentleman who was a property manager. And then, you know, during that first transition from property manager to broker, he said, I didn't do a deal for 12 months, but I was out there meeting with developers, I was meeting with buyers, I was meeting with sellers going to networking events, going to the CCI M events, all these different things. And people thought that I was out in the industry doing deals all over the place, and I hadn't done a deal. And I didn't do it the whole month. But they thought they he had because he came and he gave value, right? I think that's really important is making sure that you're coming because what you can do is you can come armed with market statistics with knowledge of what's going on in your market. And you can come and ask questions to people who have already done it or are doing it. And that's going to add a lot of bit of value, you know, to those individuals. So I think attending conferences, joining associations focusing on an online presence, you know, I mean, now more than ever, being able to clearly, concisely and compelling way, get out to the market on a regular basis, what you're doing, why you're doing it. And what makes you different is extremely, extremely important video is the new sales. That's what we're doing right here, right now is the new communication mode and methodology. Because, you know, people ask me, Why do you do a video on LinkedIn every single day, because I'm showing up in 27,000 people's feeds every single day, not even talking about commercial real estate all the time. But look, I want people to make sure that they know I'm alive. I'm here, I'm doing things and I'm going to be able to add value to you in your in your in your life. So the other part, I think that just from a networking standpoint, is leveraging brokers, you know, building relationships with commercial real estate brokers. On a monthly basis, I probably meet with my what they might call my competitors in the industry to hear what are you guys seeing, you know, what are you working on? What conversations are you having with buyers and sellers? Has that gap been bridged? You know, where are you at in regards to that deal that I know you were working on? Right? And what can we do together this year, you know, and just keeping open lines of communication going sometimes those meetings are kind of humdrum, because you know, nobody's doing anything, or we're all waiting for the market to come back or what all whatever's happening in the industry, but at the end of the day, you're gonna have a time that comes in your career, that you need some support, either from another broker or you're going to be working with another broker. And having those relationships started before you start doing deals is a great way to make sure that you know when that loi comes across from your desk to theirs, that they know exactly who you are.
Tyler Cauble 21:47
I love the point you made earlier about how intense you're going in on LinkedIn. I mean, one thing to take note, we all have our own soap boxes today. Unlike any generation ever before us, we have an opportunity to share our insights, share our story and connect with people in a better way than anybody else in history has ever been able to do take advantage of that. You don't necessarily have to start with the seven platforms or 10 or however many there are. Pick one become the expert at that. Right I mean you look at like Justin Welsh who Logan.
Unknown Speaker 22:44
Don't think we can hear you Tyler?
Logan 23:04
I can't hear anybody.
Unknown Speaker 23:05
I can hear you.
Logan 23:09
All right. I can hear. I can hear you as well. I just can't hear Tyler. I even reloaded because I was like, is it on my end over here?
Unknown Speaker 23:21
Alright, we'll give it a minute.
Logan 23:28
What was Tyler talking to me now? Oh, yeah, no, no, he's barely go.
Tyler Cauble 23:32
I don't know what the hell that was. It happens. Sorry, guys. I was I was in the middle of saying, you know, Logan had mentioned earlier that, you know, he was talking about industry associations. You know, we all know about Uli, cci Sar. Matt, have you ever joined any of those associations? And you know, what's your experience been with them? I
Speaker 1 23:55
never have to be honest with you. I've never, I don't really have a lot of experience with those. I've heard great things from fellow brokers from people I've networked with and mastermind with. I mean, I don't have a lot of first hand experience. But from my point of view, it's hard to go wrong with joining something like that, right? Anything where you can grit create a network, and a base layer of education is only upside from my point of view. Talk
Tyler Cauble 24:19
about the masterminds because you and I are obviously both in the same mastermind. Go bonnets. Talk to me about how impactful that's been.
Speaker 1 24:27
Yeah, I mean, it's been enormous. It's it's one of those things where you get what you get out of it, what you put into it, right. But as as for like transitioning into anything really, but specifically real estate to commercial. It really is a learning curve. And so part of the problem is you don't know what you don't know. And having people in relationships overcomes that because I can read as many books as I want to, or, you know, go visit do site visits and make offers and things of that nature. But if I'm somebody transitioning from residential to commercial You know, I don't have like a decade of a brokerage experience or some other way to get that exposure. So the best way, in my opinion to shortcut it is have somebody with you who already has that experience and that exposure, right? Well, if that can't be a partner, then let that be a relationship or multiple relationships that you can have as a as a mastermind. In connection with the deals you're looking at, right? Like your business plans, your your market strategy, hey, I'm looking at this market, ABC relationship you have experienced in this market, or you have experience in this asset class, what do you think about this market? Hey, I'm looking at this deal. What do you think about this deal? Hey, here's how I'm coming up with the NOI for this property. And I think I'll be able to push the rents to this number, and that's going to result in this evaluation. What do you think about that? Right? And it's a really, in my opinion, it's a really, it's a way to shortcut your learning process. There's no, there's no way around it. But there, you know, there are some people who hop on a bike and some people who hop on a plane. And I think working with somebody who has great experience is a great shortcut.
Tyler Cauble 26:08
Yeah, makes your life a whole lot easier, right? Learn from somebody else to touch the stove, instead of you having to do it yourself. Gentlemen, we are going to run out of time. So we're not going to get to analyzing and executing commercial deals, you know what that means, we're going to have a part two, where we will dive all into the differences of analyzing and executing commercial real estate deals. However, let's, let's leave our listeners with just final thoughts on you know, transitioning from residential to commercial real estate, the challenge is the education, the networking logon, I'm going to kick it off to you first,
Logan 26:38
remember the gap in the game, meaning you've got an ideal version of where you want to go. And that gap seems to be very, very big. But if you operate out of that gap, you're going to create a lot of anxiety, a lot of paralysis by analysis, you've got to be focused on the gain, meaning breaking that strategic goal down from a I'm trying to make this transition from residential to commercial, what are the steps that other people have gone through, and then put a plan in place that you can be 1% Better than you were yesterday, just be who you were, yesterday, there's so many resources available to you now, so many people around you that if you are coming from a good place with purity of intention, you're really going to be able to make some strides. So make sure to remember, operate out of the game, not the gap. It takes time. Nobody just started doing, you know, 100 million dollar transactions, or 100 million dollars a year. That's not the way that this works. And so break it down, chunk it down and take good steps every single day.
Tyler Cauble 27:39
I love it. Matt, what about you?
Speaker 1 27:41
Yeah, I would say just go back to the mentality you had when you started in residential. Right? You know, when you started in residential, you were reading all the books, you were soaking it all up. You were going to all the networking events, you were calling the real estate agents and saying, you know, nervously Do you think the seller would take any less, right or, you know, whatever you were doing, you're just putting yourself out there you were trying to learn. You're trying to get exposure, and you're trying to build relationships. And I think at the end of the day, you just got to do that again, in a little bit of a different arena and just take it one step at a time.
Tyler Cauble 28:12
Awesome. Matt Logan. Thank you guys. Audience tune in next time. For part two, we're gonna be diving into the differences between analyzing and executing commercial real estate deals. And we'll see y'all in the next one. Are you looking to take the next step toward investing in commercial real estate but don't know where to go? Cre central offers a comprehensive education and coaching platform designed to help you get started. Our online courses cover a wide range of topics from the fundamentals to advanced strategies, ensuring you have the knowledge and skills needed to thrive in this competitive industry. As a member, you'll gain access to our exclusive online community and monthly group coaching calls, providing you with valuable networking opportunities and personalized guidance from experienced professionals. Whether you're a beginner or looking to take your career to the next level. Cre Central has the resources you need. Visit www. cre central.com To learn more
Each week, I'm going live at 8:30am CST for my "office hours" to answer your questions about commercial real estate on the show. Let's hear what you'd like to know when it comes to brokerage, investment, and development!