Founder of Apartment Loan Store a Commercial Mortgage Firm. Author of “The Encyclopedia of Commercial Real Estate Advice,” Publisher- Wiley
To start out with a disclaimer, buying a commercial property without money or experience is very difficult to do. Sure, this could be a breeze if you have an honest face and the ability to sell snow shovels in Hawaii. Otherwise, pitching your deal and having no track record or skin in the game is likely just to reward you with sour faces from investors and lenders.
As a commercial mortgage banker, my office gets calls every day from up-and-coming real estate investors who have nothing to contribute to their deal except enthusiasm. Most of these calls are just annoying. But over the past 24 years, I have assisted over 50 of these entrepreneurs who did not have any money or experience get their deals closed. Why? Because they found the right property, in the right place, at the right price with great value-add opportunities. This ensured that they could raise the cash and attract experience-rich private investors who could qualify for my loan.
In my book, The Encyclopedia of Commercial Real Estate Advice, I describe eight countermeasures to actually pull this off. It’s not easy, but if you are willing to do the work and can raise at least 10% of the down payment in your own name, this absolutely can be done.
Eight Countermeasures When You Don’t Have Enough Money Or Experience
1. The subject property is outstanding: You have found a commercial property to buy that has at least two of these four attributes (and if it has all four, I will drop everything to get your deal started): a) it is in a good neighborhood; b) it is priced below market for its condition; c) it already has enough net operating income (NOI) to cash flow the mortgage payments; d) the property has a strong repositioning upside. This can include rents that are already under market, a lower than market occupancy or the need for inexpensive operational and cosmetic changes that will enable rents to be raised.
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2. You can raise 10% of the down payment in your name: As already mentioned, this is the big one. I don’t care how you do it — borrow from your parents, sell your boat and RV or use a home equity credit line — but you absolutely have to do this. Why? Because this gives you clout. The one thing you can count on is that every investor and lender will ask you how much you are putting into the deal. Do you really want to tell them “nothing”?
3. You have a high net worth investor or proxy: Find someone to mentor you who has the high net worth, cash and experience that you lack. By achieving this, you can tell listing real estate brokers and lenders truthfully that you represent this high net worth investor and are searching for properties for them. Boy, will that open up some doors. This investor might actually be the key principal you use for the deal or you might end up finding another one prior to closing. I have made many loans where this individual was replaced by another qualified investor.
4. You have a fully executed purchase contract on the property: Don’t think for a moment that private investors and lenders will waste their time on your project without this.
5. You have the essential property financials: Your deal won’t stand a chance without a pro forma projecting income, expenses, mortgage payments and net profit over a minimum of two years or the duration you plan to hold the property. This needs to be based on fact and not just assumptions in the listing broker’s offering. You absolutely have to have actual current and historical rent rolls and profit and loss statements.
6. Your pro forma shows strong financial returns: This is also a big one. After repositioning the property, investors need to get excited about the return on their investment. A minimum of 8% annual cash-on-cash return (CCR) is essential. Of course, 10%-12% is much better. More important is the annual internal rate of return (IRR). This is income from operations and appreciation combined. Commercial properties almost always earn more from appreciation than operations.
7. You have the best team members: These experts make you and your deal look good to investors and lenders. We are talking about a highly respected and experienced buyer’s real estate broker, an experienced high net worth investor, a commercial real estate attorney and a property management company.
8. You have an outstanding executive summary: This should be four pages or less and sell your deal for you to investors and lenders. Start out by knocking their socks off with the properties projected annual CCR and IRR. Then give an enticing description of the property, including its location and access to major shopping and freeways. Add to this what you are paying for it, the cost of your value adds and an estimate of what it will be worth in so many years. Don’t forget to mention risks and how you will mitigate them. Showing that the property can break even at 75% or lower occupancy can bulletproof it during a recession. Conclude with your exit strategy.
So if you want to buy a commercial property without money or experience, follow this tried and tested recipe. To ensure your success, you will need to practice a great delivery for investors and lenders. For many, this will entail “faking it until you make it.” Be sure to rehearse your presention in front of your friends, spouse, kids or even your pets. Throwing in some commercial real estate jargon such as cap rate, cash-on-cash return and capital improvements will really make you look like a pro.