When I bought my first piece of commercial real estate, I was a property manager. Serving various types of properties such as retail, office and apartment communities, I worked with countless clients and investors who seemed much smarter and more financially put together than me. It was clear that they had their “stuff” together – they earned well, didn’t overspend, etc. They also knew how to buy investment real estate.
These clients would work with the brokers in our office or other offices to purchase a property. When the deal was done, they’d bring it to the management side of our company and the property would get assigned to me or one of the other property managers.
Even though I was around it every day, I thought investing in commercial real estate was for “rich” people.
I was wrong.
Anyone CAN purchase commercial real estate.
That is an exciting concept because a new world of opportunity will open for you when you realize it.
Now, the real question is SHOULD you purchase commercial real estate?
What’s the Difference Between Residential and Commercial Real Estate?
I put together the quick table below so you can compare the differences between residential and commercial real estate. I’ll address these later in more detailed posts, but you can get an overall feel from this side-by-side comparison.
What Type of Commercial Real Estate (CRE) Should I Buy?
If you want to venture into the CRE market, the first thing you must do is decide on the market sector that works best for you. Apartment communities might be to your liking. There is a line of thinking that whether the economy goes up or goes down, people always need a place to live.
Perhaps you like the idea of an industrial building. A solid warehouse structure doesn’t need to be fancy, but needs amenities like loading docks and a fenced yard.
For me, I like smaller retail buildings. Since I’m a retail broker, I’m very comfortable in this market segment. Most of my clients have much larger centers so I don’t feel as if I’m competing with them either.
Whatever market segment you want to participate in, it would be in your best interest to start learning about not only the physical attributes of that type of property, but how it’s doing in your selected market. For example, office space may run above 10% vacancy in your market. If that’s true, you need to factor that into your proforma and determine how you will market the property in that competitive of an environment (I’ll address these ideas in later posts).
Investing with Partners
One of the aspects I love about CRE is investing with partners. All of my projects have partners in them. While this might dampen the potential of my overall cash return, it also lessens my risk.
Investing with partners is a great way to get into your first project. If you’re new to the process, team up with someone who has some experience and pay attention. It’s exactly what I did.
I spread my risk throughout these projects by being in various parts of the region with various tenants. Even if the market takes a turn for the worse, not all of them will suddenly hit bottom. I’m not naïve, I know some of the tenants will be hurt in a recession, but most of them will survive and so will my properties.
I’ve invested in one commercial property for as little as $8,500.00. It got me 10% of the project, but at the time I was only in one other property. It was a humble start, but that little investment has grown considerably since then as we bought out one partner and refinanced the property to purchase another property without putting more cash in.
For residential properties, I don’t invest with partners. You can, I’m definitely not saying not to. However, for the couple that I currently own I’m 100% invested. When I tour with my agent (yes, I have a residential broker even though I’m a commercial broker), I’m not looking to assemble a partnership, I’m looking to pick up properties for myself. Why? Typically, these deals are going to be small so dividing it up with partners to spread the risk seems counter-productive.
I like both commercial and residential real estate and will continue to add both product types to my portfolio for the reasons explained above. It doesn’t have to be an “either or” decision. By jumping into CRE, I spread my risk and I’m increasing my reach with my dollars. I can get into bigger projects that I couldn’t afford on my own. With residential properties, I can buy smaller properties and increase my cash flow by working to get debt free.
Should You Buy Commercial Real Estate?
Once you realize that you can buy CRE you move to a different position on the game board. Now, you can analyze a piece of commercial property against any other asset (residential single family home, stock market) to see if it makes sense for YOU.
You’ll need to decide your level of day-to-day involvement and how comfortable you can be letting someone else manage a property for you.
Instead of letting fear or inexperience lead you away from investing in the commercial real estate market, you can make the decision for yourself.
It’s YOUR decision. You CAN buy commercial real estate.