I’ve always had an affinity and admiration for commercial real estate (CRE). During my college days, I would purchase pictures and posters of skyscrapers and iconic office buildings to place on my walls. I obtained my real estate sales license during my Junior year of college and I was on my way to real estate success… so I thought.
Fast forward 10 years and several life and job changes later and we arrive at my enrollment into the MBA Real Estate Finance & Development program at The University of Texas at San Antonio. When I enrolled in the REFD program, I was still searching for information about CRE. I had spent years working in residential real estate and couldn’t figure out why I still didn’t know anything about CRE.
Why is commercial real estate such a mystery?
Recently, while renewing my real estate license, I took a continuing education class called “The Insider’s Guide to Commercial Real Estate.” First of all, finding a CRE continuing education course was a challenge. Secondly, probably 95% of the people in the class were there to figure out how CRE works. From what I recall, there was only 1 individual in the class who had any experience in commercial real estate deals. Many people (even successful real estate professionals) want to know how to get involved in commercial real estate, but few know how to break in.
- Commercial Real Estate has not kept up with the times. There is no standardization in the industry and it is riddled with so much archaic terminology that it is confusing to many unless you spend countless hours studying and understanding all the different scenarios.
- “Commercial Real Estate” is a very broad term that doesn’t really describe anything in particular. Are you interested in multifamily apartments, offices, industrial spaces, marinas, retail malls, regional malls, land, hotels, or even cemeteries or other specialty use properties? What is going to give you the best return? You can’t be an expert in everything, so you better focus on what’s the best for you and your situation.
- Financing options are not regulated and can become very complex if you’re not careful. Most commercial mortgage lenders will not lend any more than 80% of the value of the property and many commercial properties are actually purchased with 50-60% debt. This means that a large chunk of the transaction is coming from equity either out of your own pocket or other partners in the transaction.
- Returns on investment (ROI) can become very complex too once a bunch of partners become involved. Things such as waterfall structures come into play outlining exactly how each partner to the deal will receive their money in certain events. If you don’t pay very close attention to how these structures are presented you could be making an investment in a very risky proposal that is presented in a favorable light.
Having said all of this, I truly believe CRE investing can provide better returns and more excitement than residential real estate investing. Residential is easier to understand, and for that reason I believe many investors/speculators stick to it, but for me, the commercial game is more to my liking and excitement level.
If you want to know more about a specific topic, please feel free to ask as I would love to expand on any topic that you might have interest in. Please leave me a comment below.