The Secret to Successful Commercial Real Estate Investing
What if I could develop a better way for average people to invest in commercial real estate?
Today’s post is a bit different. I’m going to share what I’m working on in my business and why. So, if you have no interest in that- skip today’s post. It won’t offend me.
But, if you’re even vaguely interested… keep reading.
You probably know I got my start to investing in real estate in 04 flipping homes.
The model was simple: Find an older house, renovate it (well, I’d demo it and hire someone that knew what they were doing to fix) and sell for a profit.
I realized, from one house flip, I could earn more than 4-6 months working at a job.
So I asked, what if I could do bigger projects and build houses? I could go from mid 5 figures to 6 figure paydays (if I did it right).
So, I built spec homes and I had success.
Wanting to scale up from that- I looked around and saw commercial real estate as the next step up.
Through some fortunate events- I landed a job at Sun Life financial, lending money to commercial investors. I met a man who came from India and started with nothing, build $150M commercial real estate empire in 15 years (today, he’s closer to $300M+).
He did it in apartment buildings.
And, he was not an anomaly. While working at Sun Life, I witnessed numerous individual investors that built small fortunes. Often earning 7 and even 8 figures from one investment property.
I was fascinated with these investors. I went to every meeting I could to be a fly on the wall. To listen and hear how they thought? How they invested.
What they liked and didn’t like.
Where would they go next?
There was no 1 magic pill they took that created their success: Commercial Real Estate Investing 101
- Some investors buy only in secondary markets (think 50,000-200,000 people).
- Others, invested only in office buildings.
- Some focused exclusively on industrial properties.
- Others bought retail strip malls or apartments.
But, one thing they had in common– they were experts at what they did. They had a system for creating value. They could see value in a deal that others could not.
And, as they increased their knowledge- they were able to execute faster.
I met with a friend this week who showed me a retail property they were buying in a secondary market. I’d seen this same property a few months earlier and ignored it.
Didn’t like the tenants. Didn’t like the town. Didn’t like the access.
But- they saw something I didn’t. They saw opportunities and acted on it.
Time will tell if they execute- but, based on their track record, I expect them to crush it.
And, as these commercial investors succeed- they are then able to raise money- fast to do their deals.
More deals closed- more deal flow.
More deal flow- more money chasing.
It’s a wonderful cycle.
So, how do you attract the money? That get investors excited?
Add value to the property
Figure out how to increase the NOI (net operating income ) of your asset.
Once you have a system for creating value and develop a track record- you attracted successful people looking to invest in your deals. Nothing complicated about it.
What you’ll find… is the community of commercial real estate investors is actually quite small. I’d say, you’re only 1 or 2 degrees away from any of the players in a market.
So, how do you get into this exclusive group? How do you break into commercial real estate investing …
That’s what I wanted to know.
Even from a young age I wanted to be part of these exclusive groups of movers and shakers. Guys with lots of money.
Back then- I didn’t know why, other than, I wanted to be part of the ‘in crowd’ who was doing big things. My mom saved a project I did in grade 1. Where I think the teacher asked- what do you want to be and have when you grow up? I said I wanted to be a brain surgeon (because I figured they made the most money) and wanted a red Ferrari.
As I got older and learned about building businesses and investing- I realized there was better way for me. Giong to school for 12+ years to be a doctor wasn’t in my cards.
But, I knew, I needed to earning lots of money and then figure out how to invest it so I could grow it without having to work.
The people who had created real wealth, had systems or businesses that would pay them a predictable amount of money each month, like clockwork.
If they were at work or on vacation- made no difference.
I had a vision of a pumpjack, that kept pumping out money every month.
In my case- the pump jack was a commercial property.
I discovered early in my investing career, that owning single family homes only produced a trickle of cash flow.
Most of the money was on the backend, once the mortgage was paid down and the market appreciated over 20-25 years.
That’s an ok strategy for people who can be patient.
For me, I was more interested in how investors were creating wealth in shorter time frames in commercial properties (5 and 10 years)
I’m sure there are anomalies who created wealth investing in houses- but, the % of individuals I see investing in CRE, and have created wealth far exceeded the one guy who made it big investing in houses.
So, how does this all work?
Commercial Real Estate Investing Basics : starts with someone who has money to invest.
The question this person with money asks- where should I put my money? How do I grow it safely? How do I generate passive income from commercial real estate investing?
I should point out- this isn’t financial advice on where you should put your money. If you’re in the stock market- I’d recommend talking to guys who live and breathe the market (Jon M).
The problem I’ve seen and done – is focusing all your energy earning money and very little time researching and understanding where to invest it. The idea of abdicating that responsibility to someone else- without fully understanding the investment is gambling in my opinion.
Investing blindly into an opportunity from a slick sales presentation has cost me hundreds of thousands.
Handing over money that took years to earn, in mere minutes, gone.
I made the decision to invest in what I could control and understand – Commercial Real Estate Properties
So, I focused my time on learning how to invest in hard asset, like an apartment buildings, retail properties where I have control over the investment.
And, now, I share that knowledge with others.
On a very simplified formula- I focus on finding a property with low rents and needs some work- that has the ability to create value or what I call, ‘force appreciation’.
The value is created similar to a fixing up a house. You hire a contractor to replace appliances, carpet, paint it and make the property look appealing.
Nothing complicated. But, it’s not easy.
I won’t sugar coat the fact that finding the right property in the right location is simple. It isn’t. This takes skill and experience. But, you only need to find one of the properties every year or 2 and it can produce tremendous cash flow.
Here’s a hypothetical example of what 1 commercial property could do:
Let’s say you find a 100 unit apartment where you know the rents are low. The property is tired and could use some simple renovations. New appliances, paint and flooring.
For this example, lets say, you’re able to do that for $5,000/unit or $500,000 (5,000 x 100 = $500,000)
Sounds like a lot of money.
- But, as a result of investing the $5,000/unit you’re able to increase the rents by a $100/month.
- 100 units x $100/month = $10,000/month in New revenue
- You’ve increased the Net Operating Income by $10,000/month.
- $10k/month extra cashflow x 12 months is $120,000/year.
- That increase in cash flow alone could replace some people’s income.
- But, you say- it cost me $500,000 to get back only $120,000 in return.
That is true.
But, here’s the thing about commercial real estate that savvy investors know and do. I won’t get too deep here- but will give you a simple strategy.
First, you go back to the bank and say, look, I’ve improved the value of the building by $120k, I’d like to get a refinance this property.
The $120,000 increase in income, would be worth in the Calgary market (or most major markets) on a conservative basis= $2M in new value. ($120,000/6% = $2M)
So a building that was say bought for $10M would now be worth $12M. You go to the bank and ask to refinance (or do a blend and extend 2nd mortgage) and refinance 75% of the increased value.
- .75 x $2,000,000 = $1,500,000
- Cost to do renovations = $500,000
- Return to you = $1,000,000 (tax free, because it’s mortgage proceeds) plus increased cash flow for life of property
How could adding a $100/month to 100 apartment units= $2M?
It’s the power of investing in larger CRE properties.
You can do the same for a 50 unit apartment. Just divide the math above by 2.
This simple formula is how the people I’ve studied have created tremendous wealth.
- Find a commercial property that is underperforming.
- Add value.
- Increase the rents.
- Refinance and pull out the money you invested on day 1
- Find the next property.
Why am I telling you all this?
Is it to convince you to invest in CRE?
Not really. It is more to let you know what’s possible.
See, until I’d been shown this- I didn’t know it was even thing to own commercial properties.
Like going to my first jiu jitsu class.
I had no idea what some people knew in terms of self-defense and fighting.
When I saw what was possible- it opened my eyes. Knowing it- I couldn’t pretend I’d never seen it.
Once I knew this, the question I asked was- could I teach other’s how to do what I do? To invest in CRE?
Some of you know, the main ways I helped others do this, was through investing with me. In deals I found and added value to.
The other people I help, are professionals who understand this business. I merely facilitate the transactions and find the properties for them to buy.
But, could I help someone new to this?
I wasn’t sure. A few people asked- why?
Why take the time to educate someone new, when you can do it yourself and help others who already understand the game of commercial real estate?
But, I realized, there was a demand for knowing this. I had people asking me how I did what I did and wanted to know it.
So, I determined- the demand is there.
Could I teach someone new? From scratch?
I’ve been immersed in commercial real estate for 10+ years. I’ve had amazing mentors along the way and learn new distinctions every day. This is not a hobby for me.
I read books and take course, attend seminars and am in the business of buying, selling and investing in CRE daily. Could I take someone with no experience investing in commercial real estate and help them buy their first property?
I got a chance to put the hypothesis to the test.
I had a doctor come to me looking to buy his first commercial asset.
Perfect I thought. Let’s see if I can help this guy.
4 months later, after many meetings, touring properties, phone calls and coffee’s- he closed his first retail plaza.
He earning more than $6,700/month in passive cash flow from his first commercial property.
The challenge, for me (not for him so much) was – it was the amount of time to help him. I had to teach the basics of investing in commercial real estate.
It required a tremendous amount of one on one time to make sure that he didn’t make any mistakes.
Fine to do once in a while, but unscalable as a business model. And, likely why few new investors are able to penetrate the world of commercial investing. Who is going to teach them?
Andy taught me- but I was his son-in-law.
That’s a unique situation. How many would be commercial investor have a father-in-law who’s bought and sold billions in commercial real estate, teach them? Taking them on trip and into meetings for years, without any payoff?
It’s uncommon. And, if you study the world of commercial investing, you’ll see how the community is closed to outsiders. You either have someone bring you in (like me), or, you fight your way in and learn the hard way. Usually by expensive lessons.
So, what could I do to help more people, profitably?
My book introduced basic concepts of investing in commercial properties. To give people who’d never considered investing a high level understanding of what I do.
How I find properties and then raise capital. But, that was only the first step.
Next, was laying out the actual step by step process for doing this.
If I could take someone new and teach them (through video, writing and audio) and get them 90%- 95% of the way there- the last 5%- 10% of a deal could be scalable.
See, if 90% of the learning could be documented and created 1x – it would allow me to work with more investors and help more people.
Good for them and good for me.
I don’t need to explain the foundational investing principles to each investor. Just create it 1x and point people to it.
Ideally, hand someone my commercial real estate investing playbook... how I invest, and asses risk – and I could go beyond the 1 on 1 model. So, that’s what I’m creating today. It’s time consuming- but once complete, will be far more effective than doing the same thing over and over.
Plus, I love it. Putting my thoughts and concepts on paper like this, forces me to be really clear on my own principles.
I refine my thinking and become a better investor. So, it’s worth the time and energy.
Having a compelling vision to pull me forward is exciting.
As a side note- regardless of what business you’re in, I think there’s a growing opportunity to follow a similar model. How can you document what you know and organize it a what that can help lots of people.
As Zig Ziglar says: “If you help enough people get what they want, you can get what you want”.
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