Property investors often ignore the option to invest in commercial property because they don’t think they can afford the deposit or it appears to be just too complicated. Even some Residential investors with a substantial portfolio under their belt actively avoid getting to know how commercial property works.
I can totally understand both points of view. The industry has played a good game at surrounding commercial property dealings in a shroud of mystique. It took me quite a while to even partially break through. It looks tempting from the outside and occasionally some epic stories leak out, but it is difficult to see what is going on and a certain amount of alchemy must be required, right? This is simply not true, yes we need to learn some new skills, but it wasn’t much harder than first having to learn how to invest in residential properties.
So lets deal with the question, or excuse: “I don’t think I have enough money to buy any commercial real estate”. Here are some strategies and ideas to help you overcome the finance question.
Typically a deposit for commercial property will be between 30%-40%
1. Do you already have a residential portfolio?
If you have an existing portfolio I would really challenge you to think about whether you can’t afford a deposit for a commercial property? Could you refinance some of your portfolio and access some money or perhaps you could do what we did which was to actually sell some residential property and use the proceeds to buy your first commercial investment. Now I am not advocating that you just go out there and change everything, but I am pushing you to ask yourself is it a lack of available funds, or a lack of confidence that is holding you back from investing in some good commercial property deals? If so, simply improve your knowledge by reaching out and educating yourself.
…you could do what we did which was to actually sell some residential property…
2. No Jerry, I really don’t have any money!
If you have been lucky enough to play the Board game Cashflow 101 from Robert Kiyosaki then you will have picked up lots of lessons from the experience. The game is all about getting out of the rat race by buying income producing assets. You can choose small deals or big deals to invest in, but the bigger deals cost more money. I have played the game many times and still learn new things each time I play. One of the clear lessons for me is when there is lots of money around the table and I don’t have much myself, it is a good idea to turnover over the big deals anyway so I can sell them to those that need them. That way I can build up my investment pot. It is just the same in real life, finding and selling bigger deals to investors can bring you much needed cash.
Seeking out those deals will put you in the swim, which exposes you to new people, opportunities and lessons. Being a commercial property sourcer can earn you quite a lot of money. We have sold on deals in the past and it definitely helps with cash flow. So you can actually start right now and not wait until you have saved a nice crisp deposit wrapped up in a bow.
3. Joint Venture with Money
Ok, so you have some experience in Residential but no deposit readily available but you still want to purchase buildings right now! Well you could joint venture. If you are willing to get out there, educate yourself, find and negotiate the deals, then why not consider doing the first couple of projects with a joint venture partner. You bring your residential experience, put in the time and necessary efforts to source the right deal and your partner provides the money.
4. Find a building that already has some income.
The good thing about most of the CMO (Commercial multiple occupancy) buildings we have bought was that there was often an income in place. The properties were just poorly managed and only partly let which in turn led to a low valuation. Remember most valuers base their commercial figures on current income not future potential.
However small, an existing income can really help when trying to raise bank funding. So if starting money is tight, then make one of your key investment criteria “buildings must be partially let and income generating”. This may not help with your deposit per se, but it could help de-risk the project and make it more attractive for yourself, the bank and your joint venture partner. (The only caveat to this is to watch that the length of the current leases does not affect your future plans.) We partly used this approach with the bank and leveraged some buy 2 lets, rather than selling them. In this case the loans were with the same bank.
A final thought, on the benefit of not having lots of money.
If you had lots of money but no experience in this sector you could be tempted to dive straight in, but without some experience things can quickly go wrong. So the challenge of not having enough money might actually be a blessing in disguise. You are going to have to work hard and stretch yourself, which means you will learn more and push yourself to find the best deals in order to raise the necessary finance. You won’t be tempted to settle for the first deal that comes along as it will simply not be good enough to meet your financiers expectations whether that be a joint venture partner or bank.
In case I didn’t get it across well, whether you think you have enough money or not, the message is: just get started.
There are some fantastic returns to be made in Commercial property but as I was taught when I was a child learning to fly fish: “You can’t catch anything if your fly is in the air and not in the water”. You can only catch a good deal if you are actually out there in the swim. Educate yourself, form a workable strategy and get out there.