Thinking about investing in some commercial real estate this year?
Let me cut to the chase, out of all the options available to you, buying (or partially investing in) commercial properties could be your best bet as an investment. It’s a relatively stable asset, has a familiar feel for investors since it’s residential, and the lending terms can get fairly aggressive.
Now, even within this category there are many options to think about. For the sake of simplicity, let’s get specific and stick to the good old-fashioned (and often lucrative) apartment complex.
Where do you start?
When researching the purchase of your first apartment complex, there are seven main areas that you must look into, learn about, or easily master by investing with a trusted professional.
I won’t be diving deep on any of these areas in particular, the purpose of this article is to quickly give you an idea of what you need to know to make a smart investment.
OK, let’s take a look at the seven areas you need to have some expertise in before buying your first apartment complex …
Determine Your Investment Strategy
There are basically an unlimited amount of different ways you can invest in an apartment complex, depending on asset type, property class, location, investment strategy, and more. Finding the right investment strategy for you is very important. In my experience, the best commercial real estate investment strategies are:
- The Commercial BRRRR (hat tip to Bigger Pockets!) also known as Value-Add
- Ground-Up Development
- Long-Term Buy and Hold
Depending on your goals, you may choose to stick with one method, or diversify with multiple strategies.
The most common strategy for investing in apartment complexes is the BRRRR or value-add method since there are many older apartment complexes out there that could see a significant increase in value through renovations and repositioning.
How To Pick The Best Location
You’ve heard it said that success in real estate is all about “location, location, location.”
When it comes to investing in an apartment complex, this is even more true. And finding the right building for YOU can be a daunting task, if you’re on your own.
How do I suggest you approach this, when you’re trying to find that perfect building? Here’s a five-step approach that can give you a great head-start:
- Find a great broker (see below)
- Decide where you want to buy/invest
- Determine which asset class / building type you’re going after
- Narrow your search
- Tour potential locations thoroughly
Now, there’s obviously a lot of detail within each of those items above, but we’ll cover a few of those items a bit further below.
If you start your apartment complex investment strategy with this location approach in mind, you’ll find it saving you a ton of time and headaches down the road.
Find A Great Commercial Real Estate Broker
Finding an ethical and excellent broker is incredibly important in the commercial category. In fact, apartment complex deals are almost exclusively done through brokers.
The good news is that commercial brokers bring a number of benefits with them. By virtue of working in the field, an experienced commercial broker will know the market through and through – they can help you meet your goals while staying true to your budget.
Brokers are the front-line in the search for exemplary apartment complex sites. Here are just three of those benefits:
- The broker will do the heavy lifting for you
- An experienced broker is invaluable during negotiations
- They won’t cost you a dime up front
Now, the bad news is that most brokers in this world represent the sellers, exclusively. That means that if you’re bringing a buyer’s broker to the table, you’ll likely have to pay their commissions. If you’ve retained the right broker, their fee will be worth every dime as they help you find the right location and assist you throughout the process.
Enlisting the help of a good commercial broker gives you the peace of mind that an industry professional is protecting your interests.
As anyone looking for commercial space will quickly learn, most sellers will be represented by their own broker, which makes it even more important to even the playing field.
Not only will a commercial real estate broker be a valuable asset during negotiations, but also throughout the entire search.
The right broker will be able to take care of everything from researching and curating an initial list of properties to finalizing the (sometimes complex) deal.
Don’t skip this step!
How To Find A Commercial Real Estate Lender
This is an interesting time to go out looking for a commercial real estate lender. Many banks and other commercial lender types are a bit gun shy right now, due to the effect 2020/2021 has had on certain parts of the commercial sector.
That said, in my opinion, this hesitancy can be overcome and it only applies to certain types of deals. So, yes, you can find a great lender for your project/investment, it’s just going to take a little work.
Here are four ideas to get you started:
- Prep a Great Loan Package
Many would-be investors go overboard here. I always advise people to keep it short and powerful. Stay between 3-5 pages, including only an Executive Loan Summary and a Pro Forma Operating Statement at first. If done well, this will be enough to get serious interest from your prospective lender.
- Think Small
This might seem counterintuitive, but starting with small, local banks might be your best bet. Maybe even your own bank would be a good place to start. You can talk directly with the top loan officers and/or the President, making a great pitch to the right people, and your chances of finding a sympathetic ear skyrocket.
- Get Ready to Work the Phone
There’s an old saying in business, “You’re only 2,000 cold calls away from becoming a millionaire.” I don’t think you’ll need to make that many calls to lenders, but prepare yourself for the possibility of needing to reach out to 100 banks. This is the game, my friends. Embrace the suck.
- Know Your Stuff
This might be obvious, but too many take this for granted, and come up empty handed. Spend whatever amount of time is necessary researching your building, the neighborhood and town it’s in, talk to people in the neighborhood if you can … in short, know your asset inside out. The more intelligently and effortlessly you can speak about your project, the better chance you’ll have at closing a loan with a great lender.
If you go all in on these four tips, you should be able to get a deal done with a lender. If not, just open up a can of never quit and keep at it. Much of this game is simple brute force persistence.
When you do that, you’ll be that much closer to closing on your first apartment complex.
Do Your Due Diligence (Free Checklist!)
Due diligence is one of the most important parts of making sure you’re investing in the right property.
Questions about what you should inspect in the property and reviewing (and understanding) financial documents is crucial to putting together a good deal.
Here’s more good news … I’ve put together a comprehensive checklist called, appropriately, Due Diligence Checklist for you, and it’s entirely free!
The Art Of Raising Capital
Money is a finite resource. Investing in commercial real estate is expensive, so chances are good you’ll run out of your own capital rather quickly.
Learning when and how to properly raise capital is crucial if you’re looking to find the right apartment complex and then grow from there.
As a place to start thinking about whether or not you should raise capital, here’s a short list of the pros and cons.
The Pros Of Raising Capital:
- Scalability – Third-party capital can fuel the growth of your real estate portfolio faster than you could ever scale on your own. More money = more deals. Scalability can also increase your profitability, too.
- Experience – If you’re raising capital from partners with investment experience, they can help ensure the success of the project and bring their expertise to the table.
- Another Set of Eyes – It never hurts to have others take a look at your deal. They may find positives and negatives that you had overseen.
The Cons Of Raising Capital:
- It’s Expensive – Investors will expect a significant portion of the equity in the deal since they’re putting up the majority of the capital. It’s not uncommon for investors to own 70%+ of the equity of these offerings.
- You Don’t Call All the Shots – Once you’ve taken capital from an investor, they will expect you to utilize that capital responsibly to get them a return. You may not actually work for them, but you really do.
- Additional Complexity – Once you’re no longer the only investor in your deals, they become more complex. You’ll need to decide on a deal structure, put together an operating agreement, decide how to report financials, etc.
Obviously, this is a complex and high-stakes topic to try to understand, much less master. I strongly suggest you work with (or at least consult) an experienced professional before diving into the world of raising capital.
Syndication: The “Easy Button” For Buying Your First Apartment Complex
A commercial real estate syndication is a way for individual investors to pool their funds together in order to buy a larger and more stable asset than any of them could have done on their own.
Since they are an investment offering, real estate syndications are governed by the Securities and Exchange Commission (SEC), so each offering must file documentation with and report to the SEC.
The general intent of any commercial real estate syndication is to reduce risk, spread out the cost to each investor, and build wealth and passive income.
Some of the pros of engaging in real estate syndication include:
- Access to larger assets and projects
- More stability due to higher unit counts and / or location
- Less money out of your pocket if you’re the syndicator / deal sponsor
- Completely passive real estate investing and cash flow if you invest with a sponsor
- They can support onsite, professional management
- And, all of the tax benefits, forced appreciation, and write offs just like any real estate investment
Commercial real estate syndication is — in my opinion — an excellent way for a new investor to find and close on their first apartment complex. In fact, syndication is one of the vehicles we focus on most.