Commercial Real Estate – Myths Explained
For many people, investing in commercial real estate is a black box, with many myths in this industry. In this article, I’d like to talk about some of these common myths and discuss to what degree they may be true or not.
Myth #1: Good deals don’t come easy.
This one can be true, depending on your location and the stage of the real estate market that we’re in. If you’re looking for commercial real estate in the Inland Empire, which is where I focus my brokerage business, I will admit that good deals are pretty tough to come by nowadays. With the advent of the Internet and listing services like Costar and CREXi, the real estate market has become a lot more efficient. Many deals are listed on the open market right away, and anyone with an Internet connection will know what’s on the market at any given time.
There still are a few ways to get good deals:
- Be a diligent student and know your product. By knowing what kind of commercial listing your target is, you’ll be ready to invest at the right time. When you see a good deal, you can be ready to jump on it right away.
- Get to know a few commercial brokers who are active in your area. They often know about “off-market” deals. These off-market deals are owned by Sellers who don’t want to list their properties on the open market, but are open to selling to the right buyer.
- Look in another geographic area. Here in Southern California, good deals may be hard to come by, but if you are willing to look to other states such as Arizona or Nevada, which are just a short flight away, you can often find investments that will provide a higher return on your money than those in SoCal. If you buy a single tenant triple net (NNN) retail property, all of the responsibility to maintain the property falls on the tenant, not the landlord, which means all the landlord has to do is collect a check each month. That’s what makes these investments particularly attractive to out of state investors.
Myth #2: My cousin/brother/uncle sells houses. He can help me sell my commercial property.
Selling residential properties and selling commercial properties are very different. Selling an empty home is based on comparable sales in the area on a price per square foot basis. Selling commercial real estate in the Inland Empire, particularly investment properties, requires an understanding of the local market, as well as a property’s income/expenses, NNN reimbursements, market cap rates, and often other factors. Office buildings, retail properties, industrial warehouses, and multifamily apartments all have different characteristics. For this reason, in the commercial brokerage industry, brokers often specialize in just one product type. I would recommend that you choose a commercial broker who specializes in the type of property you want to sell.
Myth #3: You need a lot of money to own commercial real estate.
In general, commercial properties do cost more than residential properties. However, it doesn’t mean that the money has to be your money.
Banks will lend up to 70% of a commercial property’s value. And for the remaining 30%, you can always try to source that money from investors. Friends, family, and other investors looking for a deal. If you find a deal, and it truly is a deal, then the money will come. Go to real estate networking events to find people who would be willing to lend on the deal or share in the deal with you. Brokers often know developers or other investors who are particularly interested in buying commercial real estate in the Inland Empire and can connect you to those people.
Myth #4: Hiring a broker to sell my property is expensive.
A good broker should make up for his or her fee by selling the property for a higher price than a Seller can obtain by selling it themselves. They do this by exposing the property to the ideal buyers, and marketing the property in the right way to explain its benefits to prospective buyers. So while the commission paid to the broker at the end of a transaction might seem like a lot of money, you would stand to lose a lot more money by trying to sell it yourself, or by just choosing the broker who will sell your property for the least amount of money.
Remember – brokers don’t get paid unless your property sells. That’s a pretty good deal for a Seller, and of course that creates a lot of risk on the broker’s part. I can tell you that I’ve spent hundreds of hours on deals that never paid me a cent since they didn’t sell. So we do work hard to earn our money.
Myth #5: Something is wrong with the property if it’s for sale.
There are many reasons why owners sell property, and by no means should a buyer assume that something is wrong with the property. Here is just a partial list of top reasons owners sell:
- To take a profit – sometimes it’s just the right time to cash out, after making good money on a property.
- A major tenant’s lease is coming due – when an owner is uncertain if a stream of income will continue, sometimes he would rather sell the property than deal with the uncertainty, or deal with negotiating with the tenant.
- A major tenant just renewed its lease – this is often when the property’s value is at its highest and is a good time to sell at the peak.
- To pay for a loan that is coming due – if a loan is coming due, then the balance of the loan must be repaid; either via a refinance or by selling the property.
- To diversify risk – it’s always smart to spread your investments across different asset classes such as stocks, bonds, and real estate. If an investor’s portfolio is too heavy in real estate, it may be a good idea to sell and diversify.
- The risk of owning the property outweighs the reward – sometimes ownership of a property creates certain liabilities (for example, if several people own a property but only one of them is personally liable).
- The work required to maintain the property outweighs the reward – tenants are often headaches, often in the case of owning residential properties. Why not sell and buy a single tenant triple net property, where the landlord has no responsibilities?
- Partnership issues – often, two or more partners who own a property want to part ways and invest their money separately.
Just as in a residential transaction, a seller of commercial real estate in the Inland Empire (and throughout the State of California) must disclose any known defects with the property, and failure to disclose them could result in a lawsuit. By no means should a buyer think that a property is for sale because there is some sort of issue with it.
I hope that this article has helped to dispel some myths about the commercial real estate industry. If you have found it useful, or if you have any questions, or if you disagree with anything I wrote, I want to hear from you! Contact me or send me an email at firstname.lastname@example.org.
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