The 5 Biggest Myths about Investing in Commercial Real Estate
Like any complicated business, commercial real estate investing has its share of myths and questions. I’ll admit that for those of us who are already in the game, some of this works to our benefit to help keep other competitors from coming onto the playing field with us. Understanding these 5 myths that outsiders have about commercial real estate can help you better understand the dynamics when working with lenders, potential investors, or JV partners.
Here’s the top 5 myths (plus one more) that keep other people from investing in commercial real estate:
* You must start off in residential real estate to get into commercial real estate. There’s no rule, rhyme, or reason stating that you must first invest in residential real estate in order to make the leap into commercial real estate investing. These fields are two different animals, two different languages, and two different consumers. It’s like comparing apples to oranges.
* Only the rich need apply. As you can probably imagine, this myth is just that: a myth. It isn’t true that you have to be rich to get involved with commercial real estate investing. You can be as creative in your financing here as you can be when investing in homes.
If you don’t believe us, here’s an example: Donald, one of our Commercial Dream Partners, recently purchased a 24-unit apartment building. The purchase price was $750,000. The owner carried a second mortgage of $100,000 for Donald. That left him $50,000 for a down payment. Donald negotiated $30,000 for repair credits at closing. That left him with an out-of-pocket cost of $20,000, which he funded from a refinance from another property. Donald proves you only need to be rich in motivation and creativity.
* This game is only for big-time players. In commercial real estate it doesn’t matter where you start, and it doesn’t matter if you only want to devote part of your time to do it. Having a full-time job or being a single-parent doesn’t matter either.
One of Peter’s partners started his career by buying small commercial properties. His first was a cheap seven-unit apartment building. His second was a small and quaint self-storage building used by the plumbers in town. He did this part time while holding a full-time day job and raising a small family. It all started from there and grew to owning and operating large community properties around the country.
* You need a real estate license. A lot of investors don’t have a real estate license, and they often wonder if not having a license poses a problem. Our answer is no. Not having a license will not hinder you, nor has it hindered many of our successful friends and clients who invest full time or part time. The fact is that as long as you’re a principal in the transaction, you don’t need to be licensed. (A principal is someone who buys property to make a profit.)
Agents and brokers, on the other hand, are those who help an investor buy or sell, and they’re the ones who get a commission as compensation. The duties they perform require a license. As long you don’t receive compensation or represent yourself or someone else in the transaction, you don’t need one.
* Commercial real estate investing is riskier. To this we say, “Compared to what?” If you compare it to stocks, do you have control over the companies you own stock in — in areas such as income, expense, debt, management, and insurance? We bet not. However, you do have these five controls in commercial real estate investing. If you compare it to residential real estate investing, what happens if you rent out your single-family home and the tenant moves out? What’s your monthly income then? The answer: Zilch. If, on the other hand, you own a 24-unit apartment building and one tenant moves out, what’s your monthly income? Answer: 23 paying tenants worth of rent! What’s more risky? We rest our case.
* Commercial real estate is too complex for simple folks. Again, this isn’t true. Remember when you started using some new software? You had no idea how to use it. It seemed too complicated, and it had entirely too many features. But there was a help section or YouTube tutorial to get you started. After that, through repetition and practice, what seemed much like a puzzle is now fully understood and appropriately used. Getting to know commercial real estate investing is the same concept. You have quite a few things to master, but it isn’t rocket science.
Commercial real estate, like the rest of life, does have risks. If it didn’t, it probably wouldn’t be as fun. And it surely wouldn’t pay off with the incredibly strong rates of return that it does.