Successful real estate investors excel at perceiving, analyzing, and leveraging other people’s money. They have perfected the art to invest in commercial real estate with minimal personal funds. This approach is particularly appealing to newer or cash-strapped investors who want to enter the real estate market without substantial financial resources or credit.
Feasibility of Investing with Minimal Funds
It is possible to start investing in commercial real estate without spending your own money. However, if you don’t plan to invest your own funds, you’ll need another crucial resource: a reliable network. The key is recognizing who can assist you and how to collaborate effectively with them.
You don’t need an endless supply of cash to secure a good deal. Instead, you must understand how to invest in commercial real estate with the right methods and strategies.
Strategies for Investing with Little Money
In this post, we’ll explore strategies and steps for investing in real estate with minimal money or experience. You’ll learn how to begin investing without spending hundreds of thousands of dollars. Any property owned purely to generate profit, whether through rental income or market value appreciation, is considered an investment in commercial real estate.
The Myth of No Money Down
There is no such thing as “no money down” in real estate because the funds must come from somewhere. If you wish to invest in real estate with little or no money, you must learn to detect, analyze, and leverage other people’s money.
Steps to Invest in Real Estate with Minimal Funds
1. Identify an Exceptional Property
First, if you’ve found a commercial property to buy, it must have at least two of the following characteristics:
- It’s located in a good neighborhood.
- It’s priced below market value for its condition.
- It already generates enough net operating income (NOI) to cover mortgage payments.
- It has substantial repositioning upside.
These factors could include rentals below market rates, lower-than-market occupancy rates, or opportunities for low-cost operational and aesthetic modifications that allow for rent increases.
2. Secure a 10% Down Payment in Your Name
Next, it’s crucial to raise at least 10% of the down payment in your name. How you achieve this is up to you. You might borrow from your parents or the bank, sell assets, or use a home equity line of credit.
This down payment gives you more influence and control over the situation. Every investor and lender will ask how much you’ve invested, and you don’t want to say “none.”
3. Find a High-Net-Worth Investor or Proxy
Identify a mentor with wealth, cash, and experience similar to yours. This allows you to inform real estate agents and lenders that you’re representing a high-net-worth investor in commercial real estate deals. Doing so can open doors to opportunities.
This investor may not be the principal in the transaction; you might need to find another before closing. Typically, investors make numerous loans, and a competent investor may replace the initial one.
Critical Components for Success
4. Secure a Fully Executed Purchase Contract
Private investors and lenders won’t consider your proposal until you have a fully executed purchase contract on the commercial real estate. This step shows your commitment and capability to invest. You achieve this by putting down the 10% payment mentioned earlier.
5. Explore Seller-Paid Down Payments
Ask the seller if they’re willing to pay your down payment. You may end up paying above their asking price to structure this deal, but it shouldn’t matter if you avoid out-of-pocket expenses. However, getting the property appraised for your new purchase price might be challenging.
6. Gather Critical Property Financials
Your transaction won’t succeed without a pro forma predicting revenue, costs, mortgage payments, and net profit for at least two years or the duration of ownership. These financials should be based on facts, not assumptions in the listing broker’s proposal. You’ll need current and historical rent rolls and profit and loss statements to prove the accuracy of the financials.
Ensuring Strong Financial Returns
7. Present a Strong Pro Forma
Investors need to see solid returns on their investment after the property has been repositioned. A minimum annual cash-on-cash return (CCR) of 8% is required, with 10% to 12% being preferable. More importantly, focus on the annual internal rate of return (IRR), which includes both operating income and appreciation. Appreciation often outperforms operations in commercial properties.
8. Create an Excellent Executive Summary
Your Executive Summary should be top-notch, ideally at least four pages long, to pitch your business to investors and lenders. Start by highlighting the property’s estimated annual CCR and IRR. Then, describe the property, including its location and proximity to key areas like malls and highways.
Include the price you’re paying, the cost of value adds, and a forecast of the property’s worth in a few years. Address potential risks and explain your strategies for mitigating them. Demonstrating that the property can break even with 75% or lower occupancy shows its resilience during economic downturns. Finish with a clear exit strategy.
Additional Financing Strategies
9. Consider Seller Financing
Ask the seller if they’re willing to carry the debt on the property. You might make monthly payments to the property owner rather than going through rigorous lender approvals. However, seller financing may balloon after a few years, requiring you to refinance to pay them off. Alternatively, they might carry the debt for the property’s entire life—this depends on how you structure the deal.
Reasons for sellers to consider refinancing include:
- Avoiding tax obligations from a sale.
- Enjoying a steady monthly income.
- Accelerating the sale of the commercial property.
- Securing more attractive long-term returns.
10. Propose a Lease with Option to Buy/Own
If the commercial property is currently unoccupied, propose a lease-to-own arrangement with the landlord. You can lease the property, operate your business, or sublease it to other tenants. This arrangement can last as long as you and the owner agree, with a portion of your rent payments going toward the purchase price.
Your monthly payments contribute to the building’s purchase, eliminating the need for a significant down payment upfront. All of this can be done without showing money at the initial stage of the transaction.
Conclusion
If you want to invest in commercial real estate with little to no money, follow this strategic guide. Success requires mastering the art of presentation to investors and lenders and leveraging the expertise of a seasoned commercial broker specializing in investments.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets. The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
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