How to Get Started in Commercial Real Estate
by Ray Alcorn
On my online newsgroup [Commercial Real Estate Forum] and at seminars, I am
often asked, “How do I get from where I am (usually single-family residential
properties) to dealing in larger scale properties?”
The question is often followed by a recital of how the investor has tried and
failed to purchase a larger property or is unsure of the steps necessary to
acquire larger income properties. Some have yet to do their first deal and
wonder if they can start in commercial real estate without first acquiring
smaller properties.
Many investors do start their career by buying a rental
house, then another, and maybe a duplex or small apartment building. Sooner or
later they “hit the wall.” The “wall” is when you're bank tells you they can't
give you any more single-family mortgages or that your portfolio is outside
their lending parameters.
This is a common scenario and a very real problem. The
investor has gotten too big to deal with the residential lending folks and is a
fish out of water when it comes to knowing how to approach the commercial side
of the bank.
Another common scenario is the investor who happens upon an income
property deal, perhaps assumes an existing mortgage or negotiates seller
financing. The property proves to be a winner; the investor makes a nice profit,
and then goes looking for another deal. Then the flip side of beginner’s luck
kicks in, also known as the “sophomore jinx.”
What seemed so easy with the first
property proves difficult to reproduce. Only then do they ask, “How do I know
how much it is worth?” “How do I know the seller is telling the truth about the
cash flow?” “How can it be financed?” “How do I raise the down payment?” The
uncertainty can be overwhelming.
Empire or Job?
Then there is the investor who
has it all figured out. They are buying machines, and over time they acquire a
minor empire of every different type of properties—some good, some bad—but with
little in common other than the owner.
But the empire has a dark side. Just
keeping up with it all is a full time job, and make no mistake, it is a job.
Maintenance, delinquencies, skips, evictions… the list goes on and on, never
ending and without regard for holidays, sickness, or vacations.
This is the
investor who wakes up in the middle of the night fixing problems in his dreams.
When morning comes and the alarm goes off, eyes still blurred with sleep and
sees the alarm clock flashing “SELL!”
I think real estate is one of the best
ways--maybe the best way--for everyday people to build wealth. I've spent a
lifetime in this business and lived all three of those scenarios. I know what it
is to be outside looking in, and I know what it is like to want out.
Real estate
can produce whatever lifestyle you desire, but it can also swallow you whole if
you are not careful about what you acquire and how you acquire it. This is not
theory for me. I've learned some hard (and expensive) lessons along the way.
Strategy = Thinking things through
As I look back on my experiences, I know
today that many of the hard knocks could have been avoided had I known to apply
one simple principle: “Think it all the way through.”
As often happens in life,
experience is what you get right after you needed it. I've learned the law of
unintended consequences--that we can never fully know what will happen, but we
can reduce the downside by planning for the unexpected.
Over the years I have
had the great fortune to see many plans come to reality. I've made deals with
outlandish profits and had others turn south almost from the start. Most
importantly, I've learned how to spot the difference between the two. I've
learned that the more attention I put into the deal up front, the more money I
end up with in my back pocket.
I've been guilty of slipping back into my old
ways. I've gotten involved in deals when I did not do the requisite thinking and
lived to see them die on the vine or blow up in my face. Some of us have to "hit
the wall" more than once before the lesson becomes permanent.
Whether you are
just starting out, trying to get bigger, or even trying to get out, the job is a
lot easier when you have a plan to guide you through the maze of choices.
Ideally that guide would be personal, leveraging your strengths and desires and
avoiding your weaknesses. In short, an investment strategy.
Strategy is defined
as, “A plan of action intended to accomplish a specific goal.” If we desire a
specific outcome, then we must be willing to do the footwork--to think it all
the way through before we begin. And we start by identifying the goal.
A
four-point plan to intelligent investing
If you want to build significant wealth
investing in commercial real estate, it’s going to require that you take the
time to think things through. Understand that real estate is generally is a get
rich slow kind of business, and one that requires planning, patience, and
persistence.
Without a strategy to guide you, the results will likely not be at
all what you desired. What does such a strategy look like? It’s simpler than you
might think.
First, get your personal financial house in order. Orient your
financial affairs to serve your purpose of building wealth. Remember my favorite
truism: Opportunity without the capacity to capture it is an illusion.
Next,
form your criteria for property type, size, and location. Each property type
requires a different set of skills and offers varying levels of return. It is
much better to fit the property to the investor’s strengths, rather than trying
to make the investor fit the property.
In the same way, there is no national
real estate market. Only by observing your local market can you identify
opportunities that are within your capacity to act upon.
Once you’ve identified
a potential deal, learn how to accurately value a property based on its
condition, your return requirements, and your borrowing power. Understand why
“What is it worth?” is the wrong question, and how to answer the right question:
“What is it worth to me?”
And finally, learn how to structure deals and make
offers too good to refuse. Act decisively, then be prepared not only to reap the
profits, but keep them. Tax planning and asset protection is a key component of
building wealth.
These four steps are the topics of the four modules in my new
book, DealMaker’s Guide to Commercial Real Estate. The book is written for the
investor who has "hit the wall" and is looking for a way around it. It is
written for the investor who wants to move to or start with larger properties
but is overwhelmed by the complexity.
It is written for the investor being
lashed daily by the demands of the monster he or she has created and knows there
has to be a better way. There is, and it starts with developing the strategic
mind set of an intelligent investor.
About the author...
Ray Alcorn is the Chief
Operating Officer of Park Real Estate, Inc. in Blacksburg, Virginia. Park was
founded in 1953 by his father as a development company to build mobile home
parks.
Today, the firm owns and operates a diverse portfolio of commercial
investment properties. With holdings in the retail, office, and hospitality
sectors, the company specializes in acquiring and developing high-quality real
estate assets in the southeast United States.
Ray generously hosts our
Commercial Real Estate discussion forum, where he answer is questions and and
pariticpates in discussions with other commercial real estate investors.
In his
home study courses, The Dealmakers Guide to Commercial Real Estate and The
Dealmakers Guide to Mobile Home Parks, Ray shares a lifetime of experience
investing in commercial real estate. The books provide real-world information
written by a true dealmaker, including how to identify opportunities, determine
value, how to structure deals for maximum returns. These books are an invaluable
resource for creating and building wealth in commercial properties of all types.
· The Dealmakers Guide to Commercial Real Estate
· The Dealmakers Guide to
Mobile Home Parks