into have been smaller hotels or motels rather than the larger nationally branded, or as they're referred to, “Flagged” hotels.
One commercial client of ours used a commercial master lease, a form of creative financing (see Chapter 9) to get a 40-unit motel outside of Springfield, Missouri. They changed the name of the motel, hired new staff, and upgraded the units. Six months later they sold it for almost twice as much making almost $500,000. Another student of ours has a 135-unit hotel under contract with plans to convert it into apartments.
Getting Started
What’s the secret ingredient that allows someone to make it big in commercial real estate? If we told you, how long would it take for you to jump up, bolt out the door, and go find your first commercial deal? Well, you’re about to find out, so put on your running shoes. The secret ingredient is none other than motivation. If you were expecting some fancy formula, we’re really sorry. But, in the end, it really boils down to how bad you want it and what you are willing to do to get it.
If you are truly motivated, you’ll find a way. But now that you know the secret, you still need to be familiar with the tools, techniques, and guidance that help you along the way. We explain them in the following sections.
Investing in commercial real estate requires a handful of skills. You don’t need to understand differential equations or know how to rebuild a transmission. However, the skills in the following sections are a must.
Easily meeting people and making new friends
If you connect with people easily and like meeting new friends, you’ll do well at creating a stash of contacts. It’s important to network with the people who will be investing in your commercial real estate deals because they hold the “pot of gold.” People that you meet will eventually be your advisors, investors, and partners, and they’ll send deals to you and connect you with wealth-building resources.
If you’re the shy type, we’re betting that you’ll sooner or later get over your shyness after you see all the money that’s being made by other investors who love having a network of colleagues and friends. If you really want to succeed as commercial real estate investor, you’ll have to gradually come out of your shell.
Doing simple math
You’ll need to be able to look at property information online, properly enter numbers into a simple spreadsheet, and use a calculator. These skills help you determine what a commercial property is worth, what you should pay for it, and what your payday will be. If you need some pointers and guidance when it comes to numbers, a course in business math is sure to get you up to speed.
Accounting and collecting
We believe that if you’re going to be in business, you’re going to need to be comfortable asking other people to pay you the money that they owe you (in rents). The neat part is that you can hire a property management company to do all the collecting for you. And, if you’re starting small, you need to get a good handle on accounting and other business essentials. Why? Because throughout this book, we emphasize that investing in commercial real estate is like investing in a real business where you have to pay bills, hire employees, deal with contractors, and know how to read simple financial reports.
Recognizing Myths and Questions about Investing in Commercial Real Estate
Like any complicated business, commercial real estate investing has its share of myths and questions. Knowing this information brings forth some valuable truths that will rescue you from the trappings of confusion.
The following are some pretty common misconceptions about investing in commercial real estate:
You must start off in residential real estate to get into commercial real estate. There’s no rule, rhyme, or reason stating that you must first invest in residential real estate in order to make the leap into commercial real estate investing. These fields are two different animals, two different languages, and two different consumers. It’s like comparing apples to oranges.
Only the rich need apply. As you can probably imagine, this myth is just that: a myth. It isn’t true that you have to be rich to get involved with commercial real estate investing. You can be as creative in your financing here as you can be when investing in homes.If you don’t believe us, here’s an example: Donald, recently purchased a 24-unit apartment building. The purchase price was $750,000. The owner carried a second mortgage of $100,000 for Donald. That left him $50,000 for a down payment. Donald negotiated $30,000 for repair credits at closing. That left him with an out-of-pocket cost of $20,000, which he funded from a refinance from another property. Donald proves you only need to be rich in motivation and creativity.
This game is only for big-time players. In commercial real estate it doesn’t matter where you start, and it doesn’t matter if you only want to devote part of your time to do it. Having a full-time job or being a single parent doesn’t matter either.Coauthor Peter Harris started his career by buying small commercial properties. His first was a cheap seven-unit apartment building. His second was a small and quaint self-storage building used by the plumbers in town. He did this part time while holding a full-time day job and raising a small family. It all started from there and grew to owning and operating large community properties around the country.
You need a real estate license. A lot of investors don’t have a real estate license, and they often wonder if not having a license poses a problem. Our answer is no. Not having a license will not hinder you, nor has it hindered many of our successful friends and clients who invest full time or part time. Even one of your humble authors doesn’t currently have a license. The fact is that as long as you’re a principal in the transaction, you don’t need to be licensed. (A principal is someone who buys property to make a profit.) Agents and brokers, on the other hand, are those who help an investor buy or sell, and they’re the ones who get a commission as compensation. The duties they perform require a license. As long you don’t receive compensation or represent yourself or someone else in the transaction, you don’t need one.
Commercial real estate investing is riskier. To this we say, “Compared to what?” If you compare it to stocks, do you have control over the companies you own stock in — in areas such as income, expense, debt, management, and insurance? We bet not. However, you do have these five controls in commercial real estate investing. If you compare it to residential real estate investing, what happens if you rent out your single-family home and the tenant moves out? What’s your monthly income then? The answer: Zilch. If, on the other hand, you own a 24-unit apartment building and one tenant moves out, what’s your monthly income? Answer: 23 paying tenants worth of rent! What’s riskier? We rest
