How To Invest in Commercial Real Estate With Little To No Money
Successful real estate investors can perceive, analyze, and can leverage other people's money. As a result, they've perfected the art of investing in commercial real estate with little to no money. This is an appealing approach for newer and cash-strapped investors to break into the real estate market without having the necessary financial resources or credit.
It is feasible to get started investing in commercial real estate without spending any money. However, if you are not planning to invest your own money, you will want another resource: a reliable network. The key is to recognize who can assist you and how to collaborate with them. You don't need an unending supply of cash to get a good bargain. You must understand how to invest in commercial real estate with the proper method and strategy in mind.
We'll go through the strategies and steps for investing in real estate with little money or expertise in this post. You'll learn how to start investing in real estate without having to spend hundreds of thousands of dollars. Any property owned purely to create profit, either through rental income or market value appreciation, is referred to as an investment in commercial real estate. There is no such thing as no money down in real estate since the funds must come from somewhere. You must gain the capacity to detect, analyze, and even leverage other people's money if you wish to invest in real estate with little or no money.
THE FOLLOWING ARE THE STEPS TO INVEST IN REAL ESTATE WITH LITTLE TO NO MONEY OR EXPERIENCE:
- The Subject property must be exceptional or outstanding: Firstly, if you have found a commercial property to buy is must at least have two (2) of the following four (4) characteristics: a) it's in a good neighborhood; b) it's priced below market for its condition; c) it already has enough net operating income (NOI) to cover the mortgage payments; d) it has a substantial repositioning upside. This might include rentals that are already below market, a lower-than-market occupancy rate, or the need for low-cost operational and aesthetic modifications to allow rents to be raised.
- You should be able to put down at least 10% of the down payment in your name: The next step is rather important. You must be able to raise 10% of the down payment in your name. The method will depend on you regardless of how you do it. You may borrow from your parents or the bank, sell your assets, or even use a home equity credit line. As a result of this down payment, you will have more power to influence or control the situation. One thing you can bet on is that every investor and lender will inquire about your investment amount, and you do not want to answer "none" to them.
- It would be best if you had a high-net-worth investor or proxy: Find someone to mentor you who has the same level of wealth, cash, and experience as you. In doing so, you will be able to notify listing real estate agents and lenders that you're representing this high-net-worth investor and are commercial real estate property on their behalf. Indeed, that will open some doors for opportunities. This investor may or may not be the essential principle in the transaction, and you may need to locate another before closing. The investors will most likely have made a lot of loans when this person was replaced with a competent investor.
- You have a fully executed purchase contract on the property: Don't imagine for a second that private investors and lenders would spend their time on your idea until you have a completely completed purchase contract on the commercial real estate. Hence, you must have executed the property's purchase contract to show the investors that you intend to and can invest in commercial real estate. This is performed by putting down the previously mentioned 10% down payment.
- Seller Pays the Down payment. Next, inquire with the seller about the possibility of the seller paying your down payment. You'll almost certainly wind up paying way above their asking price to structure a transaction like this, but that shouldn't matter because you won't have to pay anything out of pocket. Getting the property appraised for your new purchase price, on the other hand, may be tricky.
- You have the critical property financials: Without a pro forma predicting revenue, costs, mortgage payments, and net profit over a minimum of two years or the length of time you want to own the property, your transaction won't stand a chance. These property financials should be based on facts rather than assumptions in the listing broker's proposal. Actual current and historical rent rolls and profit and loss records are required to prove that the key financials are factual. The purpose of this is to show the investors that you have the financial capabilities to invest in commercial real estate, although you are leading or giving no cash at the moment.
- Your pro forma shows strong financial returns: This is also a key one. Investors must be enthused about the return on their investment after the property has been repositioned. A minimum yearly cash-on-cash return (CCR) of 8% is required. Of course, ten percent to twelve percent is preferable. The annual internal rate of return is more relevant (IRR). This is the sum of operating income and appreciation. Appreciation usually typically outperforms operations in commercial buildings.
- Your executive summary is excellent: Your Executive Summary must be excellent. It should at least have four (4) pages and pitch your business to investors and lenders. Begin by astounding them with the property's estimated yearly CCR and IRR. Then describe the property in detail, including its location and proximity to main malls and motorways. Add in the price you're paying for it, the cost of your value adds, and a forecast for how much it'll be worth in a few years. Don't forget to explain potential dangers and how you plan to address them. Demonstrating that the property can break even with 75% or lower occupancy can help it weather the storm during a downturn. Finish with an exit strategy.
- Seller Financing: Inquire about the seller's willingness to bear the debt on the property if you purchase it. You may be able to make your monthly payments to the property owner instead of going through arduous lender approvals. On the other hand, the seller's financing may balloon after a few years, forcing you to refinance to pay them off, or they may carry the debt for the life of the property — it all depends on how you arrange the agreement. The following are the reasons why a seller should refinance the commercial real estate:
- They want to avoid tax obligations from a sale;
- They enjoy having monthly income;
- This could help them get rid of the commercial property faster;
- The returns could be more attractive in the long run.
- Lease with option to buy/own. Is the commercial property currently unoccupied? If yes, then you might propose a lease-to-own arrangement with the landlord. To make the payments, you'll lease the property from the landlord and run your business or sublease it to other tenants. This lease can run as long as you and the owner want it to, and the percentage of rent payments that go toward the purchase price will depend on the terms of your agreement. Your monthly payments can go toward the purchase of the building, saving you the trouble of having to put down a significant down payment. This can all be done without having to show money at the initial stage of the transaction.
In conclusion, if you want to invest in commercial real estate with little to no money, stick to this guide strategy. To be successful, you'll need to practice giving a terrific presentation to investors and lenders and leverage a seasoned commercial broker who specialized in investments.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE 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 email@example.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE