A Complete Guide to Investing in Commercial Property

First thing’s first… Capital!
You can finance your first investment property if you have the credit, but as a rule of thumb, I prefer to pay cash for all my real estate investments. This way I can hold onto the investment until the time is right and guarantee myself the ROI that I am looking for. If you choose to purchase your investment property through financing you must be ready to do the job and do it fast. Financing only works in a situation where you can flip the house for at least cost plus fees to avoid interest payments cutting into your profits. Also you must consider that anytime you finance, you will have payments. Granted a year’s worth of payments will total much less than if you purchased the property with cash, you will need to have a guaranteed cash flow and emergency fund that can cover the payments until you are able to cash in on your investment. Sometime it can take months or even years.
The second thing you need is value.
Know your market and know your product. I fortunately have a good close friend who is a realtor. She can look up comparable homes that recently sold and let me know what features they had, what problems they had, how long it was on the market, and how much it finally sold for.
I comb , and keep an eye out for auctions or homes that are “for sale by owner.” When I see one that I think could be listed at a great value (10,000 under market is my minimum to even consider the place) I call up my realtor, tell her the address and tell her to pull up some comparables. She first searches for homes with just similar square footage, lot size, rooms, bathrooms, parking, and location. This usually gives me a great idea of what I could get for the house as is.
If the value is still there I’ll go in and check the place out. I’m looking for easy updates and problems. Problems cost money, updates make money. So I like to find a place that doesn’t need much work to be in good condition but has things like, outdated cabinets, carpet over a good hardwood floor, outdated bathrooms, and little cosmetic problems. These are the things that give you opportunity to make money. If you update bathrooms and kitchens, and lather on some new paint, replace carpet, or better yet buff some hard wood floors, you’ll make you investment back ten fold.
If I don’t see anything major, I’ll look through my comparables for things that I plan to do to the house. For instance, which comparables had hard wood floors, which ones had updated kitchens or bathrooms? Add all these things together and you get a great feel for what you can sell the house for. But remember to be realistic!
I like to think that I’m giving a family a good deal. I’m taking a POS and turning it into the American Dream! I don’t want to rip anyone off, but I do want to turn a profit.
If I feel that I can do this job I’ll put in an offer and bring in an inspector. If the inspector finds problems like, the AC doesn’t work, the heat won’t run, electrical problems, mold, plumbing problems, etc, these are all problems that will eat away at your time and profit. As such, I make sure the seller will cover the cost of these problems or have them fixed themselves. If they won’t, I walk away, unless the house is such a great value that I can fix the problems myself and still make a boat load of cash.
The next thing is the updates.
Vanilla is the flavor of choice. You don’t want to do anything that expresses you because, well, you aren’t going to live there! Watch the show “Income Property” on HGTV. Now you have the options here of doing your own updates or hiring someone. DIY has one BIG pro and many cons. The pro is that you save $$$ the con is that, it takes a long time to do, you often have to re-do thing since you’ll likely do them incorrectly every once in a while, and it is an overall pain in the butt.
I have a friend who is a fire fighter and owns his own general contracting business. He works one day on at the station and two days off. I employ him for those two days. He knows me and knows what I’m trying to do. I need things done right the first time, I need it to look good, function properly, and be cheap as possible. He knows me by now and honestly we do a lot of our renovations identical to the others. Same paint color on all the walls in the house “eggshell”, same cabinets in the bathrooms and kitchens “mocha”, same countertop and sinks if need be, same toilets, bathtubs, etc. We only make minor changes if for instance kitchen has existing tile that is good, we buy cabinets to match it, or sometimes just paint the cabinets and install new hardware makes the place look brand new. The name of the game here is to make the place look good and function properly. Don’t go overboard, if the cabinets work but are dated, just paint them and put on some hardware, or if the bathroom is in good shape, just put some trim around the mirror, replace the fixtures and paint the walls, it’ll look brand new and cost a hundred make you thousands!
Another piece of advice here is know your market!
Drive around and see how the others in the neighborhood live. People like to be around people like them, so whoever buys your home, will likely be just like the others in that area. Here is a mistake I once made. I though a house I had lacked curb appeal. So I installed a sprinkler system and planted new grass seed in the yard. I fertilized and by summer the house had curb appeal galore! I even got more inquiries about the house. But I lost money on the investment. It turns out a nice yard wasn’t something the people in the area cared for. If I had just drove around the block I would have noticed that most people had multiple cars and their houses, like the one I was selling, had an enclosed garage and small drive way. Many of the people in the area parked in their yards!!! So here I was mowing every week and paying a big water bill and it turns out my buyers were just going to neglect it and park on it! Don’t make mistakes like this! If the other houses in the area have really nice lawns and yours is bad, then update it because people will drive through the neighborhood and then pull up to your neglected yard and thing the house is neglected. I saw a house be bought for $ 158,000 and then the people were relocated due to work and had to leave right away. They turned the water off to save money and the yard went down hill. The listings sat for months and finally closed for $ 125,000! The yard was scaring people off because the house was in a nice neighborhood where people took care of their yards. But if the other yards suck, then your listing will fit in and look fine. Know your market and know your area well. You want to make you house function just like the others on the block, but be nicer than the rest. Now lets discuss selling the property.
Flip or Finance?
This mostly depends on where you are in the game. If you are just starting out with commercial property you are going to need capital and large cash flows. If this is you, I’d flip the thing.
You can choose to hire an agent or go it alone. Most agent’s will charge a commission of 3-6%. If you are listing your commercial property for $100,000, this means the agent would get up to $6,000. Consider this against your profit. The advantage to having an agent is they can get your place sold quicker than you can in most instances. If it takes you agent 1 month to sell you place and would take you 4 months, you’ve effectively opened up capital for another 3 month long flip project. In this instance you can sell 2 homes in the time it would take you to sell 1. So if you’re profiting $20,000 per home you could make $20,000 on 1 home selling it by yourself, or $28,000 selling 2 homes through and agent. [($20,000 x 2)-($6,000×2)]
The choice is yours. It depends mostly on your market. If houses are selling fast in your area, you’ve got a good chance of selling yours by yourself. If times are slow, use an agent. That’s my approach.
What if this is your 10th commercial property investment? You might want to start thinking about owner finance. Now there are loop holes to jump through, especially since congress just passed new legislation that effects the credit markets. This is why I recommend starting owner finance after your 10th or so flip.
If you are making $ 20,000 profit per flip, you should have roughly $200,000 cash to work with plus your initial working capital. This can buy you 4 homes that cost a total of $50,000 to buy and fix. Using your previous formula for valuing homes, you’d estimate that these homes can be sold for $ 70,000 each. Now I’ll get into the number so get ready to follow me here.
You sell each home for $ 70,000 at 9.5% interest (my current default rate) plus require $10,000 down.
After you complete the sell of each home, you’ll have $40,000 to invest in another commercial property. Additionally, you’ll be receiving payments of $500 per month per house. (actually around 504 but lets stick to 500) This means you receive $2,000 per month from your financing activities.
Remember you still have your initial working capital that you’ve been reinvesting into each home. So take that money and your $40,000 from down money, plus your $ 2,000 per month and start the cycle over again and start flipping houses. I’d save the $2,000 per month plus money you make on any of your flips for a year. If you can flip each commercial property investment in 3 months, making $20,000 each, you could have $184,000 at the end of the year. ( Use your $40,000 from the down money to start flipping and use your initial capital to start flipping too. This way you’re flipping 2 at a time. Add in $24,000 from mortgages people are paying you.)
Now buy and finance 4 homes again. Just do this every year if you can add $24,000 to your per year income until Most Important Selling Points Of A House you’re happy with your level and then retire. In 5 years you can be making $120,000 per year and retire.
Just remember that properties get paid off and loans mature after 30 year.
By applying these principals, I’ve grown my commercial property investment company into a company bringing in $250,000 per month in revenue.
Renting
Renting can be a great way to;
Decrease your mortgage
Increase your “fun money”
And Pay for a Vacation Home!
But what do you need to consider before jumping into the Landlord game?
The first thing I would think about is location. Can your property make a large amount of money per month or are you better off just flipping the property?
Homes in college towns, vacation destinations, and towns with very low rental inventory are ideal for becoming a landlord!
Things to consider before renting
There are many things that make renting a pain in the butt. That is why I tend to flip or finance my investment properties. But every now and then there is a piece of commercial property you just have to rent out. If that is the case I suggest you prepare yourself via classes or seminars. I can not go into enough detail on the liabilities you as a landlord hold. You will first need to check with your state to see what all the regulations are. For instance, you may want a certain type of person to rent your space, say a middle age single mother with jr or high school children. These types of tenants are usually good at paying and they treat the home with respect. But in some states, you can not choose your tenants. If they meet the financial and background requirements, you are obligated to rent the property to them. This could lead to a college kid renting the other half of your duplex and keeping strange hours, being loud, and not taking great care of the place. This is just a heads up on some of the headaches that come with Rentals! So once again, you should visit and attorney or attend seminars within your state before deciding to rent out your property
Here is the good news. When I do rent a place I usually make back my investment in 24 months or less! I’m not talking about the total purchase price of the place, but I do make back the cost of any renovations within Real Estate Investing 2 years. From that point on the payments go straight toward paying me back for the property. Within 10 years every rental property you own or rent out should be paid for and the next 50 years are pure profit.
But as a landlord you are responsible for all the little fix-its that need to be cared for. As such, I find that you need to put about 10% of all the payments into a fund strictly for maintaining the property. Sometimes you don’t need as much, other times you need more. A lot depends on your tenant.
If you are renting out another part of your home to offset your mortgage, do not rely on the payments coming from your tenant. They are often late and some times don’t pay at all. Then you have to evict them and next thing you know, you haven’t made a dime from your property in 3 months! My point is, pay your payments out of your own pocket and save the payments from your tenant until you have at least 1 years worth of rent saved up. This should make up for any improvements you have to make as well as any times of vacancy.
If you are renting a vacation home, congratulations!
I think this is one of the best ways to rent. I have a place on Balboa Island in California that I rent out every year. What you have to consider here is;
1. how much can you get in rent
2. what are your payments going to be
3. how involved do you want to be
I have to fly to California to go to my vacation home so I can’t be the person checking on things and cleaning after people leave. I can’t show them the place before they rent it for the weekend or police them while they’re there. So I hired an agency that does it all for me. The great part is that they do the contracts and get the deposits and clean and police and everything! I have to rent my place out about 17 weeks out of the year. And I have to rent it out during the peak summer months. If I do this, I can pay my payments on the house, pay my rental agency, and I have a cool place to hang out 35 weeks out of the year! This is an ideal vacation rental home.
So please consider that if you live close by you can save money by not having an agency do the renting, but you will have to form a contract, do repairs, clean after every guest, a way to accept credit cards and place a security hold, market your property and police the people renting your vacation home. For instance, I once had a rental that was supposed to have no more than 12 people in it. I drove by and sure enough there was a party going on! It must have been at least 45 people there. But because it wasn’t in the contract that they would be evicted if they had more than a set number, I couldn’t do anything about it!
My advice is to look for a property in a place you’d like to hang out. Check with local agents to get a good idea of how often you could rent it and for what price. Then decide if you can afford an agency or if you have to do it all yourself. This way you get a “free” vacation home!

READ  Commercial Real Estate Appraisal Income Approach