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 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 CEO of Park Commercial Real Estate Inc., a real estate acquisition and development firm headquartered in Blacksburg, Virginia. In a career spanning three decades, through all types of economic conditions, he has been involved with the acquisition, sale, development, financing, and leasing of commercial property transactions valued over $250,000,000.
Ray is a renowned expert in commercial real estate with experience in apartments, office buildings, shopping centers, mobile home parks and hotels.
Ray generously hosts our Commercial Real Estate discussion forum, where he answers questions and and participates in discussions with other commercial real estate investors. And he shares his wealth of knowledge and experience in dozens of articles about commercial real estate.
Ray is the author of The Dealmakers Guide to Commercial Real Estate, THE definitive work on commercial real estate investing.
His book provides real-world information written by a true dealmaker, including how to identify opportunities, determine value, and how to structure deals for maximum returns. It is an invaluable resource for creating and building wealth in commercial properties of all types.