5 Steps to Buy Your First Commercial Property

This video is going to take you from where you are right now to owning your first commercial investment property.

Step 1: Determine Property Type and Area

The first step in buying your first commercial property is to identify the property type and area that you want to invest in. For your first investment, we suggest concentrating on three main types: multifamily, self-storage, and mobile home parks, due to their positive demand versus limited supply.

• New mobile home parks are scarce, so there is a fixed supply.
• The construction of multifamily units cannot keep pace with demand. Our country faces a shortage of four to seven million housing units, and that figure continues to rise.
• The same holds true for self-storage units, there simply is more demand than supply.

These property types offer additional advantages, such as generating steady cash flow and the greatest potential for building wealth over time. They are also considered the most accessible for beginners because they are easier to understand. Plus, multifamily, self-storage and mobile home parks are not only plentiful, they are performing well, unlike office space and shopping centers, which we do not currently recommend for novices or experts.

Property Area

Regarding location, we advise starting locally with your first commercial property, especially if you don’t have a mentor. Staying local, within a two-hour drive from your home can reduce risks because you can monitoring your property effectively. You are more familiar with the demographics, tenant profiles, and it’s easier to manage your property manager. And although many of our coaches and students purchased their first deal out of state, they had our expert guidance, particularly in managing their property managers’ accountability for finances, management, maintenance, and marketing. Efficient management of the property is critical to your success, and most novice investors need help when investing out of state. Unless you have our help, it’s best to stay local.

Step #2: Search and Evaluate

Once you’ve defined your property criteria, the next move is to find and evaluate potential deals. You can start with on-market properties listed on platforms like LoopNet and CREXi. These deals are easy to find but are priced at the top of the market and that can kill your cashflow and any financial upside. Alternatively, building rapport with brokers can lead to on-market deals. Since commercial real estate is a relationship-based business, establishing relationships is always a positive and you need to honor those relationships.

Off Market Opportunities

However, the best way to find a deal is to search off market using direct-to-seller marketing. At Commercial Property Advisors, we work with our students to help them find off-market opportunities because they have the highest potential. Often these properties are priced lower and negotiating directly with the seller allows you to implement creative strategies and structure the deal around the seller’s motivations.

Evaluate the Property

Once you’ve found a potential property, you need to evaluate the deal. When it comes to deal evaluation, it can seem daunting at first. Where to begin? Start with the basics: how to calculate cash flow, cash-on-cash return (your ROI) and capitalization rate. These are the three key metrics to evaluating whether you have a good deal or a bad deal, and you want to avoid a bad deal! I have a training, 3 Simple Steps to Evaluating Multifamily in 5 Minutes, that simplifies how to evaluate a commercial deal. But, if you want to take a deeper dive into commercial real estate evaluation, my book Real Estate for Beginners breaks down the evaluation process with detailed calculations. You can download it for free here: Commercial Real Estate for Beginners

Step 3: Make an Offer

When you’ve found a promising property, it’s time to make an offer. This can be done with a Letter of Intent or a formal contract, depending on your level of certainty in the deal. A letter of intent, which is non- binding, serves as a preliminary step to outline your offer. Once you and the seller agree to the terms, a formal contract can be executed. However, if you are confident about the property and want to secure the deal, you may opt for a purchase contract immediately. Your offer should contain these 5 essential components:

1. Price
2. Earnest money deposit
3. Inspection period
4. Financing
5. Closing date

If you are missing any of these 5 elements your offer is incomplete. Equally critical are the four contingencies that should be incorporated into your offer. Incorporating contingencies for inspection, finance, title, and appraisal, safeguards your interests during the purchasing process.

Inspection Contingency: Allocate at least 30 business days to inspect the property, look through the financials, and do your research on the competition.
Finance Contingency: Again, this gives you 30 days to arrange financing. These days higher interests rates make it more challenging to find good loans, so make sure so make sure you give yourself enough time to secure a loan.
Title Contingency: This allows you to do a title search to verify that there are no liens, confirm seller ownership and ensure a clear title.
Appraisal Contingency: Often omitted in broker contracts, this contingency requires the property to appraise at or above the purchase price. Including an appraisal contingencies ensures you don’t overpay for the property.

All four of these contingencies provide a safeguard and give you the ability to back out of the deal and get your earnest money back. Learn more about how to make an offer here: How to Make an Offer on Commercial Real Estate

Step 4: Due Diligence

Due diligence is where you roll up your sleeves and thoroughly inspect the property before finalizing the purchase. This process includes examining the physical, financial, and legal aspects of the property to identify any potential issues or risks. Remember, in commercial real estate, it’s a case of Caveat Emptor, a Latin term meaning “buyer beware,” so conducting due diligence is essential to avoid any hidden surprises later on.

For residential property purchases, legal disclosures offer some buyer protection. In commercial real estate, there are very few laws that protect you from a lying seller. The risk is all on you, which is why we provide our students with a detailed due diligence checklist.  You must verify all the information from the seller and uncover any hidden problems within the 30-day period stipulated in your contract or risk losing your earnest money deposit, or worse, being forced to buy a property you don’t want.

Step 5: Fund and Close

The final step in securing your deal involves funding through traditional bank loans, creative financing options like seller financing, or pooling funds with investors through syndication.

• If you have the down payment yourself, you might consider traditional bank financing.
• Seller financing is a great way to buy your first commercial property when you can’t qualify for a traditional loan or don’t have the full down payment. This approach is also used when the property itself doesn’t qualify for a loan.
• Another option for funding your deal is syndication. Syndication is when you (the syndicator) pool together other people’s money to purchase commercial real estate. Syndication is a legal process, and I have several trainings where you can learn more about the syndication process:

Basics of Real Estate Syndication
3 Biggest Apartment Syndication Mistakes

Closing on your first commercial property is typically straightforward. Nonetheless, unexpected issues can surface at the closing table. To assist our students, we provide a hotline for closing day. Our coaches are ready to address any last-minute complications or uncooperative sellers.

Every Successful Commercial Real Estate Investor Has a Mentor

If you have any comments or questions, text PETER to 833-942-4516.

Every successful multifamily investor has a mentor. Get your mentor here:  Commercial Property Advisors Protege Program