I’ve been involved in residential real estate for about 10 years. During that time, I’ve purchased and sold several properties, ranging from condos, to offices, to single family houses.
I found that I was quite successful, and had even managed to score a few properties in prime areas – like an apartment in a building not far away from the Dakota, the noted residence of John Lennon.
Somewhere along the way I realized that if I could manage to swing the financing, I would be able to significantly increase my profits. I felt like I was ready to try for something a little bigger.
The first property I decided to tackle was a multi-family apartment building, mostly because it felt similar to residential.
First Educate Yourself About Commercial Real Estate
In order to get started, I decided the best way to find the right building was to get to know the various brokers and owners. I set myself to the task of calling at least one broker or agent a day.
This allowed me to familiarize myself with the agents, and at the same time I was able to ask plenty of questions so that I could learn more about what I was getting into.
Eventually I developed good relationships with the owners, agents, and property management companies, and they would call me with leads, knowing I was seriously searching for a commercial property.
I also spent quite a bit of time educating myself on the ins and outs of commercial real estate. I think I filled two or three shelves with books alone, but those really helped me understand the process and the numbers on a basic level.
Build Relationships With Experienced Investors
However, I still didn’t feel completely comfortable. So I widened my net, and spoke to anyone in real estate who might have bought a commercial property, or knows someone who did. That ended up being a lot of people in an incredible variety of fields: everyone from insurance providers, to lenders, to property inspectors.
Fortunately they were happy to talk with me, and I was able to supplement my book knowledge with a wealth of real-life experience.
In the end, a broker gave me a tip about a 32 unit apartment building in an area that was rapidly undergoing gentrification. It actually wasn’t even on the market yet officially, but I was lucky enough to get first call. It’s in an area that was low to middle income, but there are some popular stores there, like Sam’s Club, that seem to get a lot of business.
Also an apartment building right across the street was torn down and another one built whose units are going for more than double the price of what this building’s apartments are.
There are some maintenance issues, for which I’ve hired a property management company, but overall, I’m pretty happy with it. The vacancy rate is about 5%, which isn’t bad, and there seems to be a demand for these apartments since the building has underground parking in an area where parking is hard to find.
Make Sure the Numbers Work Out
Here are the numbers.
- I spent a lot of time working out the numbers- my wife thought I was getting obsessive, but I wasn’t ready to jump in with both feet until I felt the numbers worked for me.
- The purchase price was $1,120,000 with $100k seller credit to go toward the deferred maintenance so effectively a $35k per door purchase before figuring in deferred maintenance costs.
- I was able to get a local bank to finance it with an 80% LTV @ 4.625%. 25 year amortization. It is a 5 year note with a balloon at the end, but the bank has an option to extend for additional 5 year periods instead of re-financing. I wanted a longer term, but banks didn’t want to go any longer without a steep rise in rates or larger down payment.
- Closing costs were $18,000 along with $2,100 for an inspection.
- Total cash in was $144k.
- Expected NOI (per property managers budget) $59,000
It’s Not As Hard As You Might Think
Investing in commercial real estate seems like a natural progression if you’re already thigh-deep in residential real estate. It offers you an opportunity to scale your profits, and to grow a source of income that you can use to boost your retirement portfolio.
I wouldn’t even say you have to give up residential real estate first- you could certainly do both- and you don’t have to go as big as I did. A triplex, for example, could be a good middle point for some investors, instead of the 32 unit that I took on.
And of course, in addition to making sure you develop good relationships, it’s incredibly important to make sure your numbers work out. Fortunately my broker was a tremendous help with that, and in helping me get the financing I needed to close the deal.
So, if you’re considering expanding your investment portfolio, or would like to diversify your portfolio, don’t assume a commercial real estate property is out of your league. Educate yourself, build good relationships, and be ready when the deal you’ve been waiting for shows up.