If you’re looking to add to your investments and haven’t considered commercial real estate, it’s time to re-think your ideas of portfolio diversification. While those new to this world may find it intimidating to take their first steps towards buying commercial property, all it takes is a little know-how to put your best foot forward.
Denver and the surrounding areas, in particular, serve as a great market to get started. To better understand what you need to do before starting your journey, read the guide below.
Know Your Motivations
There are many reasons to consider commercial property buying. Regardless of your reason, though, it’s essential to understand why you specifically are looking to purchase commercial property. If you’re unsure, consider retracing the steps that got you to this position:
- Are you looking for a source of steady income?
- Do you already operate a business and are tired of paying rent without gaining ownership?
- Are you looking to quickly rehab space to flip it for a solid profit?
Generally, it is better to have a diverse portfolio of investments. That’s true with commercial property, too. However, as a relative rookie in this field, it helps to focus and specialize in one specific niche. So, even if you have plans for global domination of the commercial real estate world, your focus, at first, should be narrow.
Understand Your Options
As you begin your investment journey, you’ll have the opportunity to purchase a variety of different commercial property types to consider:
- Industrial sites
- Mixed-use buildings
- Multi-family buildings like apartments
- Office buildings
Each option has its advantages and disadvantages. If you’re looking to get reliable monthly income from your investment, office buildings and apartments are excellent options.
If you own a business and are looking to put what you’re paying towards rent towards equity, instead, then you should purchase the building that best serves your business’ operations.
It also helps to know your local market. Spend time researching how many Denver-area office building locations are currently available to rent. Our office spaces only on the rental market for a short period, or are they languishing under excessive inventory weight? You may be happy to wait for rental income as you have an insight into the market that others lack. This is why it’s important to nail down exactly why you’re interested in commercial property buying.
Line Up Financing
Unless you’re among the lucky few, you’ll likely have to engage in some level of financing to purchase a property. Financing can come in many forms, from standard commercial real estate loans to government-backed programs to private investments made by friends, family, or financial partners.
Typically, the first step to securing financing is to know your level of creditworthiness. If you’re purchasing as part of an already existing business, you’ll likely need to provide your business credit report and lenders’ scores. They may also ask for additional information about your business, such as past revenue and future projections. Some lenders will also ask to see your personal credit score too.
Before sending over these reports blindly, you should make sure you know what’s on them. If there are any discrepancies or issues, make sure to clear them up before applying for a loan.
Some loans may require a large initial down payment to make interest rates more feasible. Others may be willing to forgo a significant down payment if you’re able to help reduce the lender’s risk in other ways.
Find the Right Partners
Commercial property buying is an intense experience and one that’s difficult to take on by yourself. This makes having the right team by your side all the more important. Typically, as part of your team, you should consider those licensed and with significant experience in the following fields:
- Commercial real estate purchasing and selling
- Commercial real estate law
- Commercial property financing
- Tax law
You don’t need to, and likely won’t find a single person with expert-level knowledge in each of these areas. Ideally, your team should be substantial enough to handle each of those fields while still small enough to move quickly and decisively. That is, it’s essential to find the right balance for your needs.
Gathering a team with these skills can be costly. Think of this upfront cost as an investment that will pay dividends as you go through the commercial property buying process. If you think you can forgo a team like this, you should understand that mistakes down the road can be just as expensive, if not more so, than hiring a team at the outset.
Identify Potential Property
Once you’ve gathered your team, it’s time to put them to work. A commercial real estate agent can help you identify properties that best suit your needs. Again, this is why it’s essential to know what your needs are. Otherwise, you’ll spend money sending your real estate agent on a wild goose chase. This vein helps to write down the specifics of your needs, such as square footage and location, to ensure your needs are properly communicated and documented.
This is also time to stick to your guns. While you’re looking for the ideal apartment building, for instance, you may find an office space or warehouse space for a price lower than you anticipated. There’s nothing wrong with shifting strategies, as long as the new one still aligns with your goals, but it’s also smart to dismiss “shiny objects” that pull you away from what you’re trying to accomplish.
Do Due Diligence
It’s easy to get excited about your first potential purchase and want to rush through the process. However, in the world of commercial real estate, you’re just as likely to find your dream property as you are to find a mirage. To stretch the metaphor a little further, don’t drink the sand just because you’re thirsty.
This, again, is where your team comes into play. Your commercial real estate agent may help you uncover the history of the location and whether things like zoning laws or business purposes will prevent you from achieving your goal for the property. Your tax lawyer can help you understand the tax liability that comes from purchasing the building, including property taxes. Your accountant can help you understand whether financing the purchase is a possibility.
Close the Deal
The final step is to make the purchase. Your commercial real estate agent can walk you through these steps in detail, but it likely starts with them writing a purchase offer on your behalf. It can help to have your real estate attorney review the offer, too. Ideally, the purchase offer should allow a period of additional due diligence as surveys and inspections take place, so you can also void the offer if you discover an issue with the property.
When people are successful in their chosen field, they can make it look easy and as if they’re natural talent propelled them to storied heights. Yet, most people don’t see the in-depth planning and preparation required to propel someone to success. Put another way; if your skillset is the car that gets you where you want to go, preparation is the gasoline that powers you.
The need for preparation is especially apparent when buying commercial property in the Greater Denver area. No matter your ability to spot undervalued locations or find ideal investments, you’ll always find yourself falling short if you don’t prepare.
In Part 1 of this article, we took a surface-level look at the first steps you needed to enter the world of commercial real estate investing. Here, in Part 2, we’ll dig deeper to look at investment strategies and other ways to prepare yourself for success.
Become an Expert
There are various ways to become an expert in your chosen commercial real estate niche, from subscribing to related podcasts to reading relevant books or blogs to going to seminars or conferences. Whatever your preferred method of learning is, lean into it and continually wade deeper into your chosen niche.
If you’re having trouble deciding on what niche market to pursue, go back to thinking of why you wanted to start purchasing commercial property. What made you want to start investing? Even if you have plans on becoming a significant player in the industry, finding your niche will help build a foundation of success.
As a quick recap, four commercial real estate property types are most advantageous to invest in right now:
- Land Investments. Commercial and residential development land, mineral production land, and farmable land (includes farms, vineyards, and orchards) fall into this property type.
- Industrial spaces. This property type includes distribution centers, warehouses, and anything that helps bring your favorite products to your favorite retailer or your home.
- Multifamily units. This can be anything from a duplex or townhome to a gigantic, multi-residence complex.
- Office buildings. These also have a wide range of sizes, from single-unit, commercially-zoned home offices to towering skyscrapers.
Choosing your niche from among these four commercial property types will help you building your investing skills without overstretching your capabilities. Once you’ve explored all you can within your niche, your gained knowledge can help you choose your next area of expertise.
Which Investment Strategy to Decide on?
Your investment strategy should be an extension of your chosen niche. You don’t want to be a jack-of-all-trades-but-master-of-none when it comes to strategizing. Again, you want to be focused on a single strategy, so you know all the ins and outs. Even if you decide on a different strategy later, going with one plan of attack at a time will help build a foundation of skills, knowledge, and experience from which you can later expand.
With that said, there are seven key investment strategies you should be aware of:
- Buy, rehab, rent, refinance, and repeat. Also referred to by its initials, BRRRR, this strategy involves purchasing an undervalued property so you can conduct a rehab focused on creating value for tenants. With an aggressive sales team focused on finding tenants quickly, you can then refinance the property at low rates. This allows you to pay off the loan, reap massive profits from your initial investment, and retain ownership of the building. Once you’ve done all that, you can repeat the process.
- Development. For those with a vision, development may be for you. This strategy is particularly popular in Colorado due to the frontier-esque landscape. As a developer, you’ll purchase raw land on which you’ll then construct a commercial property space.
- Fix and flip. Similar to BRRRR, the fix and flip process usually ends with you selling commercial real estate after conducting needed repairs and updates. This strategy is also popular in residential property circles.
- Land banking. Land banking can be risky but can also result in significant profits. If you’re using this strategy, you’ll identify parcels of land that sit in the path of a new or growing development. Your goal is to use your leverage when the developers come to you to buy the land you own, and what they need.
- Owner-occupied. If you already run a business and are tired of leasing or renting space, then going the owner-occupied may be for you. You may not necessarily receive a high rate of return with your purchase, but owning the property your business operates out of will add value to your company and eliminate rental costs. If the building has other tenants, you can gain a nice income from the other building businesses.
- Passive investing. Passive investing allows you to contribute money, but little else, to a commercial real estate deal. This strategy usually results in a nice passive income stream and the ability to diversify your portfolio.
- Wholesaling. Wholesaling involves finding an undervalued commercial property, putting it under contract, then selling the contract to another real estate investor or the organization operating out of the property. You won’t gain ownership with this strategy, but you can take advantage of distressed properties for a nice profit.
Each of these investment strategies has advantages and disadvantages. To choose one, think about your chosen niche, your risk tolerance, and your willingness to be actively engaged with the property or its tenants.
We Are Talking About Practice
A skill that goes without practice isn’t really a skill as much as it is a dulled attribute. To hone that skill, you need to practice, practice, practice. With commercial real estate, your practice usually follows two routes.
Underwriting at least one commercial real estate deal a day can give you consistent practice at evaluating properties and borrowers. When you go through the rigors of underwriting a deal, you’ll gain an in-depth understanding of the details that make a deal good or bad. This can also give you key insights into the process appraisers go through to value a property. With enough practice underwriting, your instincts will sharpen and help you learn when you should and should not trust your gut.
The other form of practice is actually making an offer on a property. Ideally, you should do this at least once a week. It’s free to put together a letter of intent and make an offer, so take advantage of the low barrier to entry here. You can’t purchase without making an offer, and you’ll soon realize that a lot of commercial property investing is a numbers game. You may have to make dozens of offers to have one finally accepted.
Partner With Unique Properties
Unique Properties is Colorado’s most experienced commercial real estate brokerage firm. Our full suite of services allows us to help you achieve your intended financial goals. We’ll always put your goals first and ensure your interests are protected. Achieving success in real estate is our expertise, and we’ve helped countless individuals reach their goals.
Featured Image: Fizkes / Shutterstock
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