Myth #1: Most deals can be found on Loopnet or another online MLS.
The truth is that most commercial real estate deals are off-market, especially if you’re talking about higher-end deals. Sellers are experienced real estate investors, and they aren’t interested in entertaining every Tom Dick and Harry who has an interest in their property.
And although technically the job of a broker is to filter out unwanted deals (or buyers) before they make it to the buyer, commercial real estate is still very much a word-to-mouth business. An investor will usually have a close relationship with their broker, having worked with them in the past, and will naturally turn to them first to find out if the broker has a potential buyer.
This doesn’t mean of course that the deal isn’t marketed; in fact, it will be heavily marketed, but only to a select group of investors. The broker will typically reach out to an extensive network of contacts – the most successful ones can literally have tens of thousands – and work hard to find the ideal buyer.
Myth #2: Commercial retail properties are easier to manage and make more money than multifamilies.
The fact is that commercial retail properties require a great deal of expertise to purchase and manage than multifamilies.
Not only are there many more factors that need to be taken into account, but those same factors are more volatile than in multi-families. For example, finding good retail tenants may be quite difficult, especially when the smaller ones are competing against big-box retailers and online e-commerce stores.
In addition, placing new tenants in a retail property is much more expensive than in multifamilies. In the latter, a new coat of paint may be enough to satisfy a new tenant; retail tenants, on the other hand, require what is termed a “build-out,” which means space must be totally renovated to suit the new tenant.
You could end up spending tens of thousands of dollars on a build out, only to have the tenant break the lease or refuse a renewal option on the lease. And because build outs are particular to each business, the next tenant would still require you to rip everything out and start all over again.
Myth #3: You can save money on off-market properties by finding your own deals.
There are several methods you can use to find off-market deals:
- advertise locally
- approach commercial real estate owners in the location you’re interested in
- check online sites like Loopnet, Reonomy, and Zillow
- checking public tax records
- attending auctions of commercial properties from banks or credit unions
Here’s the thing: if you’re a serious investment property owner, you have other things to do than do the immense amount of work required to find a property.
Don’t forget, you’ll still need to do a tremendous amount of due diligence, and unless the property is a triple net, there will be plenty of management responsibilities.
The question then becomes, “How valuable is your time?” and “how experienced are you?”
If you have plenty of time and are very experienced – though those would seem to be oxymorons – then yes, finding an off-market property on your own might be the way to go.
But if you have less experience or have a full-time job that occupies your time, as most investors do, then hiring a broker is no different than hiring a lawyer, accountant, or other professional.
Myth #4: The market value of a commercial real estate property is the same as its replacement value.
Market value is the amount buyers are willing to pay for a property. Replacement value, on the other hand, is the amount it would cost to rebuild the building, for example in the event of a natural disaster or fire.
They not only aren’t the same, but both amounts can vary greatly. Market value is determined by a number of factors that may only in small part be related to the physical building. These include location, the desirability of a particular tenant, as in triple net real estate, and value-add potential.
The replacement value, since it only takes into account the physical building, would necessarily be drastically less.
Myth #5: You can’t finance commercial properties that are too old, ready to be torn down, etc.
Any commercial property can be financed if you can show the lender that the property has good potential for profit.
A teardown in an up-and-coming neighborhood, for example, can be a great opportunity, allowing the investor to cash in on low vacancy rates and high demand.
Old or outdated buildings can be renovated, and if you provide estimates on how much those renovations will cost, the vast majority of lenders will be happy to offer you financing as long as the rest of the numbers work out.
The bottom line in commercial real estate comes down to doing your due diligence and making sure you have a network or team of experienced professionals on your side.
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