Commercial Real Estate investing basics – Part 3
In part 3 of our commercial real estate series, we will continue from where we left off last issue, by sharing strategies on how to find deals in the specific markets you have selected. Just as the principles for picking the right markets are similar across all types of real estate, so are the concepts for finding deals. This topic can be boiled down to the following: your success in finding real estate deals depends on how well you cultivate relationships with an effective network of professionals. The majority of this article will focus on the people that can help you find the best deals and how to find those people in any market
If you are new to a market, you will need to make substantial effort to develop rapport with all types of professionals, including commercial RE brokers, property managers, appraisers, RE attorneys and property inspectors. But Before you pick up the phone to start making calls, develop a clear picture on what you are trying to buy. You should have a general idea about the type of propoerty (discussed in part 1), how much money you have to invest, property class (A,B,C,D), cap rate and the strategy you are looking to deploy (ie reposition, value-add, momentum play, etc). Sites like www.loopnet.com and www.showcase.com can give you an idea about prices and cap rates within a given market for specific property types and classes.
Once you have a general idea about your buy criteria, use the same sites referenced above to identify some of the active listing brokers in your chosen market. In addition, www.ccim.com is another great site for finding qualified brokers in your market. Listed properties on Loopnet and Showcase may or may not fit your criteria, but just know that your primary objective is to begin establishing rapport with the brokers, while educating them on what you are looking for. Although you are a potential new client, you will not likely see their best deals out of the gate. That is because they save their best deals for their established clients and those they like. This is where consistent communications and some persistence will help you succeed. Find a good reason to contact each broker every 10-14 days. Share an article related to their interests or local RE article that might be helpful. Remember, the goal is to stay visible in their minds so that they think about you when a deal comes along that fits your criteria. If they send you a lousy deal (they will), politely thank them for sharing the “opportunity” and then explain to them why it doesn’t match your previously described criteria. This is an education process that takes some repetition and patience. Keep it up and they will slowly gain a clear vision of what you want. If you are patient, you should eventually start to see more opportunities that are worthy of taking a closer look.
Property managers are another critical part of your team, and will help you to better understand a market, its unique qualities and the numbers that you will need to quickly and accurately underwrite deals. How do you find the best property managers? Simple, ask RE brokers to share their favorites who are a fit with your criteria and strategy. Brokers are always happy to provide referrals, because they know those referrals benefit them in the long run. I begin my conversation with property managers by telling them about a property I am considering and then asking lots of questions about income, expenses and potential strategies. After a few of these conversations, you will get a sense of the numbers that make a property a good (or bad) deal. I like to ask about what they think is a reasonable expense ratio for a well run property (expenses/income) and what the per door expenses should be for the type of property you are underwriting. If you have these two numbers, you can quickly analyze a property if you know its current and potential income. This will allow you to sort thru lots of properties fast, quickly identifying those properties to take a closer look. Of course, don’t forget to ask the property managers if they know any owners that are looking to sell AND other successful brokers in the market.
Other investors can also be a great source of leads, local knowledge and potential JV partners. You can meet these people at local REIA’s (real estate investor associations), Landlord associations and coaching/education seminars. Use Google and www.meetup.com to find these organizations, when and where they meet. Interview people carefully and get a good sense of their experience, track record and most importantly their integrity. Check references closely if you are considering a JV on a deal that somebody else has found. Finally, it goes without saying that putting the details of any JV deal in writing is imperative to avoiding future conflicts and misunderstandings.
Additional RE professionals in a particular market should be pursued as soon as possible. Before you get too serious about any property, make sure you have been given a few referrals to appraisers (great resource for local information), a RE attorney (to review any local contracts) and property inspectors (another good source of local knowledge). RE brokers will be a particularly good resource for referrals to these people. The good ones will likely be referred multiple times. Take the time to at least make an introduction so that you are ready to engage them when needed. And most importantly, you never know when they might know about a motivated seller, so be sure to always ask.
Once you have established a solid rapport with trusted team members, plan a trip to your chosen market. There is nothing that will accelerate your success in a givan area than showing your team members you are serious enough to make a visit. Establishing rapport is always more effective in person. I can promise you that brokers and managers will take you more seriously once they have met you face-to-face. That is the whole idea….get them to feel confident that you are serious and able to perform. Once they have that confidence, your deal flow will vastly improve.
There are other methods to finding deals, such as sending letters to owners expressing an interest to buy their property, using the MLS (for smaller deals), auctions and landlord court. All these methods can be used to find sellers, however they tend to be time consuming, labor intensive and less efficient than using brokers and managers. Ultimately, no matter what strategy you use, the key to success is relationships and consistent follow-up. Next issue we will discuss how to structure and finance deals.