2 Vital Steps to start Commercial Real Estate Investing
How to start if you’re new to commercial real estate investing? When I think back to how I got into commercial real estate investing, it was really by fluke.
I’d been working at the City of Calgary in urban planning, and in the evenings I was bartending and on weekends flipping houses.
One evening, a guy I knew, came into the bar I was working at and we got to talking. He told me where he was working (Sun Life Financial) and that he lent money on commercial real estate properties in Alberta. I was interested, telling him I was investing in residential properties, but would love to learn more about the commercial world.
He said they were hiring for a new position and that I should apply. In spite of my lack of industry experience, I applied and got the job.
Looking back, I really had no clue on how the game of commercial real estate investing was played. I didn’t understand the game of lending money, how brokers fit in, why we worked with some borrowers and not others. Why we lent on some properties and not others. How we looked at different markets. Why we underwrote properties differently.
It wasn’t until I met my first mentor, Jim, that things started to click. He was a broker, a private money lender and invested in commercial properties.
He took a liking to me and over the course of 2 years, over lunches and coffees- explained how commercial real estate worked. He first introduced me to the idea of becoming a commercial real estate broker (but wasn’t until I met my father-in-law) that I became one.
So, how then does someone who is busy making good money owning a business, or as a professional (maybe you’re a doctor, lawyer or dentist) but still want to own commercial real estate.
I’ll layout the way that I help my clients who are new to investing.
Step 1. Is to have a basic understanding of what commercial real estate is.
Step 2. Understand how the different players fit in. This is best done with someone who’s been in the business for 10+ years. They should be able to explain how brokers, mortgage brokers, lenders/banks, appraisers, different types of sellers all fit in. Maybe I’ll create a video of this one day, or podcast- but for now, read this article and it will help.
Now, if you had these two foundational pieces in place, you might think the next step would be to start touring commercial properties to make offers on. This would be a mistake.
Without a map for where you want to be in 3, 5 or 10 years- you’d waste tremendous time and possibly make the mistake of investing in the wrong type of property.
What do you want out of your investments?
The most common answers I hear are:
- I want Future wealth for my kids and family- to create a legacy and generational wealth for my family.
- I want Cash flow today– I want to put my money to work and earn a predicable stream of income every month.
- I want a hedge against inflation – if my money is in a bank earning .02% and inflation (the cost of things, including real estate is going up) – I want to preserve my investments alongside inflation
- I want to own tangible, hard assets (like commercial real estate vs. a stock or bond).
- I understand commercial real estate investing – people need a place to live.
The reason I ask this question early on, is it helps new commercial real estate investors decide which asset class they should be focusing on and narrowing down where to invest.
Why do you want it?
This question is generally answered with more superficial, knee-jerk responses, without the benefit of someone probing deeper. Because money is such an emotional topic for people, they generally don’t dig deep enough (I’m guilty of this).
Here’s what I mean: When going through this exercise with a recent, new commercial real estate investor (a doctor), we’ll call John. He wanted to own commercial real estate and move some of his net worth out of the stock market.
Shane: “what do you want to achieve as a result of owning a commercial property? How does commercial real estate fit into your future?”
The first answers were reaction or surface answers-they were not the real reasons.
John: I want more Freedom
Shane: Ok, what does more freedom mean to you?
John: Well,I guess I’d like more Flexibility.
Shane: Sure, can you tell me what having more flexibility would do for you? Why do you want flexibility?
John: I want more time?
Shane: Yes, to do what?
John: To spend time with my family.
Shane: Great, how come?
John: Because I want to be there for my kids and my wife when they need me. I don’t want to be a dad that works all the time and doesn’t really know my kids. I want to go skiing on weekends with them. Be there for their soccer games. Go on vacations and not be thinking about work (or the fact that I’m not at work). I want to make sure that one day I don’t have to trade time for money. I want to have time to show them and teach them things. To help them grow.
This was the real reason Jim wanted to invest in commercial real estate. Once we understood his driving force for commercial real estate investing we could design a game plan that would get him where he wanted to go.
Knowing what he wanted and why, we determined it wouldn’t make sense to start looking at properties 3 hours away that needed a bunch of work and real estate expertise (on leasing up, or repositioning). John is a successful doctor. Spending more time managing a new commercial property wasn’t going to get him closer to his goal of more time with his family.
He wanted an asset that was going to pay him every month, without John trading time for money. John wanted to be able to pass it along to his kids one day.
And, he wanted to be proud of his asset (so we found a well located property, that was built in the last 3 years).
He was already busy making very good money in his profession, it made sense for him to focus his energy and time on what he does best, and leverage other people (like me) who understanding commercial real estate investing and how money is made, to help him find the right property.
Invest his money in a safe, low maintenance property with predictable monthly cash flow.
When you go through this exercise – think about the Experiences you’d like to have more of.
Think about the feelings these experiences will give you. These are the emotional reasons that will keep you on track and committed to you investment plan.
The reality is, many business owners and professionals make very good money each year. Yet, only a handful have a plan to create financial certainty for their families.
The ability to delay spending money on fancy vacations, or buying the new sports car- so you can make a significant move a property requires, at a minimum, $100k. With more equity, like $500k or $1M (does not need to be all your capital, more on this later) your options to invest in a commercial real estate expand.
Once you own a commercial property paying you $5k/month or $10k/month or $20k/month, passively and predictably – you’ve started to buy back your time.
Here’s a quick example of my why and what below (condensed):
Shane’s what and why:
I want to have $30k/month in passive income coming to me from commercial real estate I own (mainly 50 unit+ multifamily and service based retail properties), so I can wake up every morning, knowing that I have the freedom to chose where I spend my time.
It doesn’t mean I’ll stop working- it means, I can do things that bring me joy and where I feel I’m making the biggest contribution.
Money allows me to buy back time- meaning I can do more of the things I want.
NEXT BIG IDEA:
What is your Philosophy on Money?
Said differently- when you think of money, what images and thoughts do you have? Here were some of my limited beliefs that held me back for a long time:
- money doesn’t grow on trees
- money takes a lot of effort to earn
- I have to work hard to make money
- It’s hard to make and even harder to keep
It has taken me years to reprogram the way I look at money. Growing up with a scarcity mindset, I thought making money was a zero sum game- the more I had, the less someone else had.
It was flawed thinking.
Today, I see money simply as a tool. It’s not good or bad- it’s all in how I use the tool.
So, if I earn money and invest it wisely, it allows me to buy back time.
One new belief I learned (and applied) from being around wealthy people was this: Rich people invest their money first and spend what’s left.
What does Financial Independence mean to you?
The ability to live comfortably from the predictable cash flow of your personally invested resources.
Let’s say commercial real estate investing is something you’re committed to. And, you know how much you’d like to earn, passively, each month.
Using the example above: to earn $30,000/month investing in commercial real estate, the next question is: what do I need to own that will pay me $30,000/month? And – how much capital (cash) do I need to own it?
This really depends on 1 key factor- your expected annual cash on cash return?
I like conservative numbers (even though many investments I’m involved in can range from 8%-15%/year). For this example, we will use 6% cash on cash return each year.
So for every $100,000 invested, I will earn $6,000 in cash flow each year.
To hit my goal of $30k/month x 12 months = $360,000/year
$360,000 / 6% = $6,000,000
This is my target:
Create $6M in capital that I can invest in assets which will pay me 6%/year to generate $360k/year.
(Yes, this does not take into consideration taxes, but let’s keep things simple. There are many tax advantages owing commercial real estate- so we are focused on 1 number: Cash on cash returns).
The new money game becomes:
– Get to $6,000,000 fast (expand my income- my money or other people’s)
– Make sure I don’t lose on the way there.
We have the What and Why invest in commercial real estate clear.
Once you have the basics on where you want to be and why you want it- you can start to look at the how.
Getting the Right knowledge from the right people.
The right knowledge includes tools and beliefs which will help you move in the right direction, while avoiding common investing mistakes.
Investing in commercial real estate can be done using a specific system. There is an art to investing, but 95% of the time, you can rely on a predictable system for investing that will deliver a consistent result each time you follow you.
Next week, we’ll dive deep into this.
I have created a 3 step system that I teach over a 12 week course to new commercial investors. I’ll be sharing the big rocks of commercial real estate investing in the coming weeks to help you get started.
Request the 3 Forms for Investing in Commercial Real Estate
- 8 Non-Negotiables to Investing in Commercial Real Estate
- The Debt to Cash Calculator
- The Commercial Real Estate Small Business Plan