Day 1. How to Get Into Commercial Real Estate Investing
Creating Your Investment Plan - How to Start Commercial Real Estate Investing like the Wealthy
I was recently at a mastermind/workshop in Orlando. It was hosted by a good friend, Ryan where he had assembled a group of predominantly residential real estate investors. They were there to learn how to grow and scale their real estate investing business. When the conversation moved to me and I shared what I was doing in commercial real estate, investors wanted to know more.
Realizing I could only teach so much in a few hours- I said I'd figure out a way to help those committed to investing in commercial properties.
Today, a month later, here's the plan:
A 30 Day Road map on How to get into commercial real estate investing - to help someone new to the game of investing in commercial real estate, walk away with a clear Investment Plan you could put to work.
I realize a new venture like, could seem overwhelming. So, the goal is not to teach you everything there is to know about commercial real estate investing.
In working with my 1-1 clients, the first step is helping them get clarity on what they want.
Why they want it?
Really digging deep on understanding the ultimate goal, where they are now and then putting a personalized plan in place to help them move from point A to point B.
And, this is what I'm going to do here for you for the next 30 days.
I'm going to share a 30 day plan I did with a client.
As every client I work with is private, I'll be changing specific numbers.
The Outcome: To help you design a Personalized Commercial Real Estate Investment Road map.
Why: Without knowing where you are going- it's hard to advise what properties to invest in.
Without knowing where you're starting- how do you know what you'll need to get there?
Is it time?
Money- from you or others?
Quick story; I took took on a new client (A.L) with significant assets who was earning less than 1% on his assets (combination of rental properties and stocks).
I see this all too often.
A professional or business owner who's amassed assets that are paying less than 2%/year.
Which is why most people, when I start working with them think they need $10-20M in assets in order to retire.
If they're only getting 2% on their assets, $10M @ 2% = $200k/year.
(Most do not want to draw down/sell off their assets in order to live. The goal is to pass on a legacy to their children).
Back to the A.L.
Before we met, A.L believed he was 15-20 years from replacing his income.
After doing a deep dive into where he's at and what he needs- if he follows my recommendations, he could get there in 5-7 years.
Without changing his lifestyle or selling anything he owns.
It's a matter of unlocking equity and utilizing it in commercial properties that will fit his goals.
So, today is decision day.
Will you commit to doing the work each day to create your Commercial Real Estate Investing Plan?
Is this important enough for you?
If not, that's ok. It's not for everyone.
If you decide to commit- expect a minimum of 30 min a day M-F of work. Some days are less.
The biggest hurdle will not be the 'know how'. I will show you where to get the information or who to talk to.
The biggest obstacle, in my experience is belief.
When I first created this challenge - I saw 2 types of people go through it.
The first- looked for all the reasons it would not work.
- I'm in the wrong market.
- I don't have enough money.
- I don't have any connections.
- It's hard to find commercial properties online
- I don't know what to say to a broker..
Lots of reasons to stay still.
Now, I'm not going to say investing in commercial properties is easy or that you can do it with no money.
I don't teach that.
The harder it is- the less competition.
The reason, in my opinion, so many investors remain buying single family homes or putting their money in the market is it's 'easy'.
You can go on MLS and find thousands of properties.
Residential realtors are much easier to work with.
You can buy and sell stocks on a computer or making a call to your broker.
In commercial real estate- it's not like that.
Which, is why so few ever take the time to master.
Week 1. Getting Clear on how much passive income you require. There will be some exercises for you to go through (How to start investing in commercial real estate)?
Week 2. Understanding the Game of CRE. I'm going to use the Calgary Market as the reference point as I live here.
Week 3. Programmatic Investor. How do you decide on what to focus on (Multifamily, Retail, Industrial, Mobile Homes...)
Week 4. Taking Action and Mistakes to Avoid. I introduce you to my Safeline Investing.
Each day, M-F I'll release a new video and write up.
There will be a short exercise to complete.
Now, I considered waiting till April to do this 30 day challenge.
But, I realized just because my schedule of travel in March is going to be crazy (San Diego for 5 days and then Maui with the family for a week), doesn't mean I should wait.
Which is why I'm launching today.
Now, here are a few questions you may be asking yourself:
1. Who is Shane and why should I listen to you? It's a fair question and I don't expect you to take my work for anything. I will show you what has worked for me (investing in more than $65M in CRE) and my clients ($260M). But everyone is different and I don't claim to have all the answers.
2. Is investing in Commercial Real Estate even the right vehicle to achieve financial independence for you?
That is a personal question. It's a proven model and many of the wealthy and large REITS, Pension funds invest in commercial properties because of the scale and predictable cash flow.
This 30 days, I won't go into all the reasons why I believe you should consider investing in CRE.
There are many examples of wealthy investors and business owners who have a large % of their net worth invested in cash flowing CRE. In some cases, you might be a business owner and just want to own your own building. That might be a perfect way to get started.
Or, like a doctor I helped not long ago, buy a retail property that is paying him $6,500/month and his mortgage is being paid down an additional $7,500/month.
Not enough to replace his income at his practice- but, once the property is paid off (20 years) - he'll own it outright and earning over $24,500/month (*assuming no increases in rental income over the next 20 years).
3. The last- and probably the most important belief, will be in yourself.
I understand this one the most. It's the voice in our head telling us- "who am I to buy a $3M Commercial property".
I don't have the connections. The time. The money.
You don't need to have all the answers today.
As you'll see, investing in commercial properties is all about leveraging other people. You must have a basic understanding of the game of CRE.
So you don't get taken advantage of.
But, you don't need to be the expert at everything related to apartments, retail, office, industrial etc.
Just commit to the process and journey.
1% daily improvement for the next 30 days.
I'll say it again- this is not a get rich quick or easy thing. I don't believe in that.
Which is a good thing. Because anything quick and easy generally gets crowded very quickly.
Recently, I committed to 100 burpees a day for 30 days.
When I first saw the challenge- I came up with all the excuses for not doing it.
10 days into the challenge, I noticed how the community of people who had committed were transforming their bodies.
Not just physically- but emotionally and in other area's of their life.
So, I decided to go all in. And, I was nervous.
I never missed a day, even thought I was sick for a week where I could barely breathe.
Since that challenge in September- I created new little challenges for myself.
Run 5Km everyday. Week 1, run twice in under 25 min. Week 2, 3x in under 25 min. Week 3, 4x in under 25 min (I only achieved 3x). Week 4- 5x in sub 25 mins.
I also cut sweets out of my diet.
Now, I'm committing to teaching you (if you commit) for the next 28 days, on how to start investing in commercial real estate. Creating your investment roadmap.
I've read probably 300+ books on how to invest in real estate. I've been at it for 14 years.
One of the biggest frustrations I had when reading these books was not having a clear action. No next step.
I love the Robert Kiyosaki books and they have laid the ground work where I'm at today.
And, he often discusses: that you need to have an investment plan.
- But- there is no plan to follow.
- What goes into the plan?
- How do I actually create it?
So, I spent the last 18 months breaking down this for my own investing business (and I'm constantly refining it).
Today, I've created a blueprint for investing in commercial real estate.
I've developed my own set of investing principles and non-negotiables. This allows me to look at most properties in 5 mins and know if it's worth spending time on.
If this sounds like something you'd want help with - then commit to the next 30 days.
The last challenge was closed. I really don't know how to do that here- so, it will be open to anyone committed.
If you get value out of the training- the 'price' is to invite/share this with someone you think could benefit each day. If you're not getting value, I don't expect you to do anything.
All I ask is this: if you say you're in- follow through.
Comment below to say you're " ALL IN".
I will be doing this if I have 1 person that commits or 20.
The other thing I want is for you to share your journey.
No complaining or winning.
CRE is for those who take 100% responsibility for their outcomes.
I'm here to guide you and show you what I do. It's not the only way. But, it is a way and has worked for many others.
DAY 2: Step 1 How to Start Commercial Real Estate Investing Basecamp 1.
How much money do you want/need to retire?
When I start consulting a client, I find that's a hard question to answer. So, we start with determining what I call Basecamp 1. "How much income do you need to cover your monthly run rate"?
Quick Story: when I was a kid, every summer my parents and 2 sisters and little brother would pack up our suburban and drive across Canada to visit our relatives in Nova Scotia.
The drive would take us 5 days, if we drove 12-16 hours a day and took the shortest route.
But, as we (the kids) got older, my parents would let us decide on the route across Canada. And, made it more fun.
We'd go through the US and stop off and camp in cool places along the way.
We had a clear destination: Chimney Corner, Cape Breton. And a clear starting place: Whitecourt AB.
But, the route was dependent on us.
The same goes for you.
The first step in reaching your financial target (covering your monthly expenses) is to figure out what that number is.
We will get into the 7 step process below, but I want to first tell you how I developed this framework.
If you saw my library, you'd see well over a thousands books. About 150+ are on on the topic of personal finance.
Many of the books are good, but don't really give you a step by step process for financial certainty.
One day, on a call with my coach, Niyi, he mentioned a book he was reading, 'Financial Freedom in 8 minutes a Day'.
He didn't make a big deal out of it- because Niyi reads a lot and gives me recommendations for new books every time we connect.
As I do, when I hear good things about a book, I order it.
The inside cover says this: "To all those who understand that the real purpose of money is to assist us in fulfilling our dreams".
If you want to grab a copy of the book- you can probably still find a copy of Amazon (edition I have is 1994).
How to create your own Wealth Management System.
To be clear- I'm not a financial planner or wealth manager. I have 2 very specialized skills: 1. identifying great cash flowing commercial properties and how to raise the money to acquire larger deals.
The goal of today's lesson is just so share foundational elements I found helpful in creating my own plan for financial independence which I will share with you below.
The 50,000 View
The What: At the end of the 4 weeks you will have a clear Commercial Real Estate Investing Roadmap.
The Why: When you add something new into your life, you are essentially saying no to other things. For me to do write these lessons and record the videos each morning, I am giving up going to the gym or working on anything else.
But, if it's a priority and I've made the commitment- then, I follow through.
The same for investing in commercial real estate. Without a roadmap or plan, it's far too easy to resort back to you old habits.
The How: The new habits required to create lasting wealth investing in commercial real estate are:
i) you will start looking at properties everyday. When your driving. When you're picking up food or a getting your tires changed. You will start to look and think like a commercial investor.
ii) The excess money you save and then invest- will be used to reinvest. The goal is replace you active income with leveraged income from your real estate holdings. For most, this requires discipline to continue to build your war chest.
iii) You will eventually tell others what you're doing. One of the keys to investing in larger properties is having a good network of people around you to tell you about opportunities and contribute capital to your deals.
These are the condensed notes taken from the book, Financial Freedom in 8 Minutes a Day, Ron and Mary Hulkick Phd.
1. Truthful Analysis - how much are you earning now and how much are you spending?
- Where are you starting from?
- Assets/Liabilities and Net worth.
- Where are you today?
- Create Your Cash flow Statement.
2. Set Your Future Vision
Where would you like to be in 5, 10 , 20 years? I like a 5 year plan as this is long enough out to see the benefits of real estate, but not too far, that it seems unattainable.
Create a clear target for what you want and see in your future.
- Example when I first did this: I own 3-5 well located commercial properties that pay me $500k/year.
- They in growing cities, with strong economic fundamentals.
- With low leverage (less than 65%) and require little time from me to oversee and manage.
3. Determine and Set Your Financial Targets
Determine what it will take to achieve your dreams/vision.
Have a 90 day Financial Target and then Longer Term (maybe 5 and 10 Year Goals)
If you are in debt - then you need to get out fast. And, start putting money away to invest. Build the muscle of investing and saving.
4. Set Your Cash Flow Target
Simply: If you want $500k/year x 20 = $10M. Assuming a conservative 5% return on your investments.
Exercise: Take Your Current Net Worth (NW) ($1M of liquid capital) today -> 5 Yrs later $250k Passive Cash Flow + $5M NW
5. The Right Tools to Achieve (How do you make Decisions?)
- What are your guidelines for achieving those goals?
- What is your Vision/Mission and Values?
- These will help you decide on where you invest and who you invest with. How much risk you take on.
- How are you measuring and tracking your progress?
- What you Track and Measure can improve.
- Primary Function of a business is to financially benefit the owner.
- How is your Financial Company doing?
- Working for 5 years, 10 years, 20 years etc.
- How much do you have put away now? Saving 2k/year. 5k/year. 10k/year.
- What is a reasonable return on investment today? 6-10%.
- How do you actually become Wealthy- By earning excess income to invest and have your money earning you money.
Example: Vision- to have Financial Abundance, where I have the resources to do what I want, when I want with who I want.
I’m not constrained by location or forced to work with anyone I chose not to.
Mission- to invest in CRE assets I understand and have a value add opportunity in growing cities, within 3 hour flight of where I live.
To partner with people I trust and are aligned with me. Targeting 12% returns after stabilization
Values: Growing, Helping others, Abundance, long term approach, control over my future
6. Commitment To Taking Action
To achieve anything meaningful in life requires Consistent Action in the right direction.
What will your Niche Be to invest in?
- Value Add CRE from $3M- 10M | MF, Retail
- Development where I can get an anchor tenant or enough time to confirm the market demand.
7. Your Investing Criteria
- Appreciation- growing cities
- Rate of Return - 12%/year after 2-3 years stabilization
- Cash on Cash Return- on Developments min 50% on cash. Buy and hold 12%
- Hold Period- Value Add- 3-7 Years. Core Assets - 10+ years (until depreciation drops and makes better sense to trade up)
- Max Amount/Deal - Personally - no more than 25% of Net worth
- Location - 3 hour flight or less. Cities I like and believe have long term fundamentals going for them
“Wealth Flows in the Direction of those who know how to Care for it”
Ron & Mary Hulnick Phd.
Today's exercise is to complete the work above.
You may not have all the answers to questions 6 and 7. That's fine. Get 1-5 done now.
As we progress, there will be specific exercises to work on for taking action and creating your investing criteria.
While it would be more fun for me to just show you how to invest in CRE properties- in my experience without having this foundation built first, most of people give up to early.
The reason: lack of clarity and focus. There will be many opportunities to invest your money along the road.
One of the hardest things is to say no- this doesn't fit my plan. If I could take back just 1 or 2 of the biggest investment mistakes I made along the way, I'd be 5x further today.
But I can't go back in time.
So, I take those lessons and try and teach others to avoid them if at all possible.
The foundation work isn't sexy. But like Tom Brady or Araon Rogers, they still show up to training camp and do the basics. Warm up. Running. Passing. Handing off the ball. Mastering the fundamentals is how you build a solid wealth management foundation
Day 2 Homework:
1. Complete your Assets and Liabilities. What is your starting PNW (Personal Net Worth)
Complete a rough Cash Flow Statement: List your income sources. List your expenses.
Set your financial Vision- how much would you like to have? PNW (personal net worth)? Cash Flow.
I'll introduce a tool tomorrow that will help you determine how much you'll need to save and for how long, depending on how fast you want to retire.
2. Comment below- what was the single biggest take away from today's exercise?
Tomorrow, I'll give you a tool I use to actually reverse engineer the math for financial certainty.
Day 3 What's Your FU #?
I heard about the concept of having an FU # from a speaker (I think Dan Lok- I believe he wrote a book on it).
How much money would I need to be able to leave your job or business if you wanted? Enough money that you chose what you wanted to do on a daily basis.
The first time I did this exercise, I was single and was only thinking about myself (thinking small).
Priorities and goals change when you have a family.
Initially I focused on growing my net worth.
Well, I can tell you, after working with some very wealthy (on paper) clients, just because you have several million dollars in assets, they still worry about running out.
Because assets that don't pay you monthly, can be, under utilized.
The reason I like commercial real estate, is that these assets pay you every month.
This is important. Having confidence that each month the asset you own will pay you a set amount.
* Caveat- commercial real estate is not guaranteed to pay you every month. There are months you'll lose a tenant and need to find a new one.
But, over a long period of time, with the right property in the right location purchased with the right level of debt, can be a reliable and predictable source of monthly income.
Well located Commercial Property.
Net worth is good- but it's hard to live on.
So, the will be on building net worth (long term) with cash flowing assets (so you're paid now).
Based on the exercise you did yesterday- you should know your monthly Run Rate.
For this example, I'm going to use my personal situation as an example (rounding numbers for ease).
Basecamp 1. Security. How much cash flow I need every month to cover our household expenses.
$12k x 12 months = $144k year.
Owning CRE has many tax advantages- but, I'm not an expert in that so we won't go into that now. Just know you're able to depreciate your building and in some cases if I earn $144k/year in cash flow from my real estate, I may be able to keep it all. I'M NOT AN ACCOUNTANT- and every property and situation is different- do your own diligence on taxes.)
But, let's play it safe and say I need $200,000 to net $144k (rounding up).
If I can earn 10% cash on cash from my real estate- I only need to have $2M in assets that pays me $200k/year.
If I only earn a conservative 6% cash on cash - to earn $200,000 year, I need $3.33M.
For many investors, finding properties with a 6% cash on cash return is not out of reach.
I prefer value add commercial real estate (which we'll talk more about in weeks 2 and 3).
Now, here's where I see many new investors screw up.
There are really 3 levels of financial freedom: Security / Comfort / Legacy
Level 1. Security = Your FU #.
How much to passive cash flow every month to cover your living expenses.
But I don't actually believe that is the # to aim for. It's too low. If something unforeseen happens, you're in trouble.
You could be forced to sell assets to cover a shortfall.
Or, if you lose a tenant and your cash flow drops. I don't like being just on the edge of security. It's a nice place to visit- but the goal is to have more than you need.
Level 2 is Comfort.
This is more than you require to live. You have excess and things are comfortable when everything is going smooth.
Level 3. the ultimate goal, is Legacy Wealth.
Where the passive income coming in every month is so high that you're able to reinvest and grow and purchase more assets.
This abundance allows you to contribute back to the community and helping others while still growing.
It's not a 0 sum game- you can give and still grow.
It's not for me to say what you do with your money. I will say, in my experience, the most successful investors are also the cities biggest philanthropists.
This is just 1 side of the coin.
Here's the other side of the coin.
Experience shows, that during your initial stages of investing- to build your net worth and equity, you will likely take on more risk.
The fact you're new to CRE investing increases risks.
You can mitigate- learning how to invest from people like me and others- but the truth is, there is risk.
The 2nd type of risk is that you're buying properties with the right problems.
- Low rents.
- Potential to repurpose or expand.
Your Goal: increase the NOI (Net Operating Income) - definitions tomorrow.
Having a clear plan on what you'll purchase, where and why is key. You can change or modify your investing criteria overtime.
Some new investors will do more work on the front end to find properties and increase the value so they can either refinance or sell and recycle their capital faster.
Their goal is to acquire larger properties and 'stair step' into bigger deals.
Others are happy to play the long game. Buy core assets in the best locations (A locations) and hold them for generations. They are OK to accept low returns today for certainty and capital preservation.
As you increase your Net Worth, you may decide to move to this model and take less risk. Focusing on properties in better locations and in more stable markets.
We will dive into this once we get to Programmatic Investor. Just know your investment plan is not static.
You're investing criteria today will likely be different 10 - 20 years from now.
Your values and principles are the constants in your investing plan (more on that in the future).
Today let's figure out your target FU # (2 ways).
How much time will you give yourself to achieve your FU target? Watch the video to see the examples and calculate your own numbers.
There are only 4 variables in this equation:
1. How much money you have now (Point A)
2. How much money you can save annually
3. How much time (the distance to Point B).
4. What return you will accept (your risk tolerance)
As you develop the skills of investing in CRE, you will develop the skill to strip risk out of a deal. You'll understand what you control and what is outside of your control.
You will understand the "Critical Investing Assumption" in your deal (what the financial returns are based on).
In today's video, I show you how to use this simple spreadsheet (the FU Calculator) I paid a wiz kid from UofC to build for me.
You can download it free- link will be at the end.
It basically helps you plug in these variables and solve for the unknown.
Let's say you're starting with $250,000 to invest
You are going to focus on value add CRE- and only do deals you can get 10% cash on cash- once the property is stabilized.
(I'm using 10% - but you can plug in 12% or 6% - its up to you).
IMPORTANT: Principal pay down isn't factored into these calculations - it's real equity- but you can't spend it. Plus, without knowing the mortgage you have or interest rate, it complicates things. Just know when you own CRE, you're also building equity as your mortgage is paid down.
10 years to retirement is your goal.
Scenario 1. You solve for: "how much money will I have in retirement, if you save $50k/year to continue investing at 10%/year?
In retirement, you decide you want to reduce your risk and focus on properties that achieve a stable 8% cash on cash.
The calculator says you'll end up with $1,445,000 and at 8% returns, you'll have $115,624/annually.
Same initial capital of $250,000
You earn the same 10% on your investments
Now, you tell me you want to have $150,000/year in passive cash flow.
The only 2 variables left are:
- Time - how long?
- Annual Contribution- how much will you invest?
Let's say, you want to stick to the same 10 years before you retire.
You'll need $1,875,000 in Personal Net Worth (liquid to invest) to generate $150k/year at 8%.
We already know from scenario 1, that all other things being equal, saving 50k/year wouldn't get you to that goal. So, to earn $150k requires you to save $76,961/year.
You could play with the amount of time you have to retire.
This is not meant to be the end all be all of financial planning.
It is intended to give you an idea of what is possible investing in commercial properties that pay you various returns.
Every situation is unique.
Some of my clients start with more money but don't have the ability to save much each year. Others, have more time to invest before retirement.
I hope you can see with this simple tool- you can start to create an investing plan.
There are more advanced spreadsheets I have with clients- taking into consideration inflation and draw-downs.
But the focus here is to pick a target that you're comfortable with and commit to it.
Stick to a single plan and move in that direction.
This tool will allow you create your 3 Targets:
Phase 1. Security: Replace your active income/ pay your bills.
Phase 2. Comfort small excess income- above what you need to live.
Phase 3. Legacy: you have so much residual income, that you are able to reinvest your earnings continuing to grow your portfolio.
We will not cover tax strategies- as this is specific and requires a professional to understand your situation and depends on where you live etc.
Last note: commercial real estate offers tax advantages (depreciation) you can use to lower your taxes. If you want to play it safe, take your Expenses and multiply by 1.30 or 1.5- whatever # you believe to be your tax bracket.
- How much passive monthly income do you want in retirement?
- How much can you save annually? Or, How much do you need to save?
- What returns do you believe you'll achieve?
I don't want to skew your thinking and share the returns I earn on my investments/developments- because it's not realistic for new investors to commercial real estate to double their money in 18-24 months.
But, with proper understanding of how to find the right properties, I believe 6%- 10% returns are achievable.
None of this is simple or easy.
But, doable. If you commit and master the skills required.
If you'd like a copy of the FU Calculator- message me with "FU Calc" and I'll send you a copy of it. (the original link wasn't working)
Please Comment and Post below:
1. Do you know your FU #? And, how does it make you feel? and
2. What has been your biggest take away so far from the Day 3?
If you feel like you're behind on your retirement goals, don't worry. There is no good or bad- just what is. Now we can start to put your investing roadmap into place.
You have a clear Point A (Starting Place) and Point B (Destination)
Day 4. Foundation: How Commercial Real Estate Investing is similar to Rock Climbing
I took my son Easton and my daughter Blake (6) to the climbing wall a few weeks ago.
I remember the first time she tried climbing. She wouldn't go any higher than my head (I had to be able to touch her). This past weekend, she's able to ring the bell (40' up).
I'm not a climber- although I enjoy the workout and testing myself on the level 1 and 2 routes.
On my first day of climbing, I had no idea what was with all the different color of holds.
Or, how to put a harness on.
- No technique.
- No strategy.
- Just start climbing.
I'd watch others climb- but until my brother-in-law Graeme explained the rules and the terminology, I didn't know what I didn't know.
He pointed out the colors were different routes.
And, that going from Level 1 to 2 was not incrementally harder- it was exponentially more difficult!
Here's the interesting thing- once he made me aware of the rules and how to climb- I could see the wall in an entirely new way.
It would be impossible for me to go back to 'not knowing' that there were actual levels to climbing.
Now I could appreciate how difficult the black or pink route was over the purple (I still don't recall the actual terms like a 5.9 or 5.11- I know every route get's exponentially harder).
It's similar when you start investing in commercial real estate and raising capital.
If it's new- you likely don't know what you don't know.
And, when you're dealing with properties in the millions, not knowing can be expensive.
The lessons learned investing have generally cost me and more than 90% were avoidable had I just known the basic rules.
This 30 day challenge is meant to open your eyes and show you what you need to focus on. Because once you see it (like understanding what NOI is and how to calculate it) you can never go back to ignorance.
When I get a call from someone new to commercial real estate, asking about a property I have for sale, or a property I'm developing and they're looking for information on it- I can generally tell in 10 seconds if they're new or seasoned.
And, in this competitive (some would call it - cut throat) business, you don't want to be seen as a newbie.
You'll either be ignored (CRE Brokers are busy and are only paid when they close deals), or worse, you'll be sent deals that no one else wants with the hope, you'll be the bigger fool.
When we get into the game of investing in CRE, you'll understand more of the motivations of the different players. Just understand if you're dealing with commission sales people (like CRE brokers) the don't have time to educate a new investors on the in's and out's of CRE.
First- they are paid for doing deals- not teaching.
Second - unfortunately, about 99/100 newbies that call saying they want to invest in CRE, without proper expectations or an understanding don't take action. They look at properties and talk about doing a deal- but never pull the trigger.
I believe the % could be much higher if they had proper training and expectations.
If they understood the rules of Commercial real estate investing (starting tomorrow).
The language of Commercial Real Estate Investing:
I get it- without a foundation of understanding (the language & Rules of CRE)- as a new investor, it's easy to be overwhelmed.
- What property should you be looking at?
- What's a good deal?
- What's a bad deal?
- How do you finance the property?
- Is this a good location?
- Are these solid tenants or, will they leave when I buy the property?
- How much money will I need to close?
The fear of the unknown keeps many would be investors out of the game.
So, many never get in the game. They're stuck on the sidelines watching.
My parents are teachers and so I've always been interested in how people learn. And, how I can help people learn a new subject, faster and retain it.
Below is the typical progression of learning something new:
- Basic understanding of what terms are (you're eyes are open)
- Understanding why you need to know them
- You have the skill now and are able to apply them. It takes conscious effort, but you're able to do the task (in CRE - you know when and how to use these terms when you communicate to industry professionals
- You're unconsciously competent. You've been doing it so long that it comes second nature. Many of mentors are like this. They've invested for 30-40 years and it's comes second nature. They don't even have to think- they just act.
That's great for them- but hard to learn from.
I learned the business doing it. Not from someone educating me.
Which is not the fastest way to learn something.
But, it worked and I don't regret it.
It's just not a very efficient way to help someone new.
I've taken the 15 years of investing in real estate and 12 in commercial real estate and distilled it down into Frameworks and systems. This way, I'm able to communicate with someone looking to invest in CRE, how to get started much faster.
I'll reiterate. This 30 day crash course is not meant to make a real estate mogul.
After 12 years in this business- I'm still learning and expanding my knowledge. One of the common phrases you'll hear from experienced investors: "No two deals are the same".
Translated- there's always a new challenge on the deal.
So, if something new always comes up, something you've never seen- how do you prepare and protect yourself?
By having a set of governing principles. Having a solid foundation of understanding of real estate and negotiations. Surrounding yourself with a great team to help you.
Investing in residential real estate- I see many investors with the lone wolf mentality (I was the same back then).
In commercial real estate - it's a relationship business.
The top investors are always calling on their network.
If you don't have a network- then you need to find people that do.
My client in Toronto, where I don't sell commercial properties didn't have a network.
So, when he was ready to start talking to broker- I introduced him to a lawyer I'd worked with in the past (on our 1,152 acre resort development).
Because I'm taken seriously (my lawyer did well on the deals he helped us on - and he did an excellent job) - is happy for more business.
So, now the lawyer makes an intro to a few brokers in GTA and my client is on his way to making an offer on his first property (we're actually set to talk in 45 mins).
Commercial Real Estate Terms:
With my clients, I have them define approx 50 CRE terms.
Instead of overwhelming you with 50 CRE terms, I thought I'd include the top 20 terms that if learned and internalized would help you the most.
Top 20 Terms for Investing in CRE
- Cap Rate
- DCR or DSCR
- TI (Tenant Improvement)
- Cap X (also capital expenditure)
- Gross Up
- OP Costs
- Break-even Occupancy
- GP and LP
- PSA or OTP
Climbing at an indoor wall is like looking at commercial properties on your computer. It's safe. Nothing can really happen in this controlled environment.
When you head to the mountains- (preferably with a guide) - you need to know what you're doing.
There is no room for mistakes or wondering if you put your harness on right or if the anchor above is safe.
Your guide- if he/she- is good will keep you safe.
But, what if you're guide is sloppy. Or, unqualified.
In the land of the blind- the one eyed man is king.
Don't follow blindly. Educate yourself to the point that you can tell if someone is there to help or hurt you.
1. Define all the CRE terms above. I'd prefer you type them out and keep them in a place you can refer to them.
If there are additional terms you come across that you believe should be in the top 20- post them below. Initially, I was only going to give you 10 terms.
But, when I was done round 1 of this post- I had 27. I scaled back to 20.
2. Comment below which term you couldn't find.
Having done this with my private clients- there will likely only be 1 term you can't find. If you post below that you've done the Homework, and put in the 1 word you can't find- I'll DM you with it.
3. Last- how well do you think you understand these terms now that you've actually written them out?
(The payoff: next time you listen to my Investing Advantage Podcast - you will be able to follow along much easier as I breakdown deals)
Day 5: The Game of Commercial Real Estate - How to Get into Commercial Real Estate Investing like the Pro's
It was about 3 pages long with 25 questions (great questions BTW).
It was thoughtful and detailed.
As I read through the questions it dawned on me- there would never be enough information to satisfy these questions.
I just ordered a book from Amazon- called, Commercial Real Estate Investing in Canada.
It's 630 pages and cost me $180 USD (not sure why Amazon.ca didn't have it).
Even with this book as a big as a bible- it falls short of answering all the possible questions.
Here's why. Commercial real estate changes.
Every market is different. Market's change as government policy changes.
How easy is it to get debt? That question is the tip of the iceberg.
Here's just one direction we could take it:
- For what asset class?
- Multifamily- today easy.
- Who is the lender? CMHC? That might take 8-12 weeks?
- What about retail? Not too bad, with solid long term leases.
- How about office? If you're in Vancouver or TO, or San Fran- it's not difficult .
- What about Calgary or Edmonton- you're lucky if to get 50% leverage.
Then we could ask these questions:
- Who is the borrower?
- How long are the leases?
- What city is it in?
- how big is the loan?
There is no 'one way' to invest in commercial real estate.
So instead of focusing on 1 off situations - I prefer to teach investing principles.
Frameworks that, once you understand them, you use in multiple situations, regardless of where you're investing, and what the market is doing.
If you were going to build a house - how many tools would you want?
If you only had a hammer or level- you wouldn't get far.
No different investing in commercial real estate. You want to have lots of tools in your tool box to work with.
THE BETTER QUESTION YOU SHOULD BE ASKING IS- What are the Foundational Truths to Investing in Commercial Real Estate?
When you understand the game and how it's played- you're able to better react.
You don't need to understand how to build a car from the ground up to be able to drive it.
In fact- if all you knew was how to build a motor, assemble the car and then you were dropped off in a busy city and told to navigate across town with no training on how to start the car, how to drive (let's say it's a standard car).
Oh, and you don't have a map. Just make it across town?
Where is across town?
You're just a mechanic.
You don't know how to drive this car and you have no map?
Today- I'm going to show you the 50'000' view of the map. Show you who all the players are.
Then, over the next week, I'll show you how to work with these people.
Because, this is a people business.
And, if I could share one of my biggest strengths it's this: I know who to talk to.
I understand what questions to ask.
I understand what the service providers (people with information want) so they benefit.
One big mistake I see new investors to CRE making: they want all the information for free and expect it.
They don't understand that professionals who've taken 10, 20, 30+ years to assemble these relationships and information are not so willing to exchange it with a stranger for free.
Information is not even the right word.
THEY HAVE MARKET INTEL. INSIGHTS. THEY HOLD THE KEY TO THE UNFAIR ADVANTAGES YOU NEED TO PROSPER.
But, don't expect it for free or to be broadcasted to the world.
There is a very specific reason I don't share the exact properties I'm working on. Even deals I have under contract- I don't share.
Because, the last thing I want to do is share what I'm doing with a stranger so they can come in and make my deal difficult.
Last week I made a bid on a property in AB to buy 120+ multifamily units.
We were 2nd place in the bid.
Now, the buyer who 'won' the bid- may drop the deal. In which case, it could come back to me.
Which is why I'm still being a bit vague about the property.
Deep Dive into the Game of Investing in Commercial Real Estate.
Mindset: If you're a taker- you won't go far.
CRE professionals can be some of the most generous people you will meet. But, if you expect it... forget it
You don't earn high 6 and 7 figures a year by luck. These professional know when you're pumping them for info.
There's a delicate balance to giving and receiving.
The Game Map for CRE (taken from the book: The Real Estate Game, William J Poorvu and Jeffry L Cruikshank).
Image in the graphic above
MY SUMMARY HERE:
- Players- investors (I would expand this to "Tenants)
- Properties- MF, office, retail, industrial. hotels and land
- Capital Markets- money. debt and liquidity
- External Factors
This is the map to help navigate you from point A to B.
It requires instructions and an understanding of how these all fit together.
For the most part- I will focus on Player/ Properties and Capital Markets.
Understanding the macro fundamentals- such as policy change are important, but a very large topic.
We're focused on the Pareto Principle: the 20% that will help you get 80% of the results.
#1. Make a list of 5 people in your local market who do the following:
- Sell commercial real estate (brokerages)
- Lend money on commercial real estate
- Lease commercial real estate: Industrial/ Office/ Retail
There would be no point in contacting anyone on this list now.
The purpose is to start creating your database.
HOW do you start?
Step 1. Go online and type in Your City and Commercial Real Estate
I'd use LinkedIn and Google.
Drive around and start noticing signs on commercial properties.
- Some will be leasing agents.
- Some may for buildings for sale.
- Others may be property management companies.
The goal here is to start noticing. Becoming aware.
If you've never looked into CRE before- when I use the short code for the brokerages, it might sound foreign to you:
- CB or CBRE
- AY (Avison Young)
Plus, in every major market, there will be many independent shops with great connections and resources.
Using the climbing wall analogy- once you start to see commercial signs and who the players are - you can't go back to not seeing.
#2. This is a relationship business.
Step 1. Who you talk to you in your market is key.
Step 2. Understanding the drivers behind these relationships.
If you keep in mind: What's In It for Them - you'll be fine. How will this person benefit from sharing information and how can I help them get what they want?
(Not always easy - I too have to remind myself on this).
They know what you're trying to achieve- find great deals (likely off market or pocket listings).
The game the service provider is playing, with a new investor: to verify how credible and serious you are so they don't waste time.
Simple as that. Are you for real (committed) or, are you just interested?
We'll get into that next week.
3. Comment below. This week was a big one.
Based on what you've seen so far- are you still committed to mastering how to invest in commercial real estate?
Remember- even if you decide to invest in someone else deal- you're well suited to be an informed investor.
In my syndication, most of my partners are experienced CRE experts.
Why? Because they bring more to the table than just capital.
When you start to learn this business- you'll understand there's lots of money out there (hence bidding wars for great commercial deals).
So, to invest in the best opportunities - you want to have a great network of investors/partners to bring you deals and ad value.
Something to keep in mind.
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- 8 Non-Negotiables to Investing in Commercial Real Estate
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