Considering Commercial Real Estate
I currently own 4 residential properties including the one I live in. I see real estate as my way of earning semi passive income. 
For my next purchase I’m considering buying a commercial property for up to $1 mill. but I don’t know what it is that I don’t know.

What are some common mistakes for beginners / people like me? What’s the typical/average vacancy rate? How can I quickly improve a property to increase value? How much do you set aside for maintenance or does that all fall on the tenant?
Is a typical down payment 20% or is 10% doable?

Any suggestions to what I should keep an eye out for is appreciated. 

I’ll be talking to brokers and listing agents pretty soon but want to know what to expect.
[{"id": "fey449v", "text": "What kind of commercial property? Multi family, industrial, flex, office, retail? I am guessing multi family based on your ownership of SFRs.", "replies": [{"id": "feyqy3c", "text": "I\u2019ve been eyeing some warehouse/light industrial. \n\nFlex seems appealing too since I think I would get a taste of commercial and keep some residential. It sounds like an interesting mix with different streams of income. Haven\u2019t seen any available yet. \n\nMulti family seems a bit overpriced for my area at the moment. I think the hype has lowered the margins (South Florida).\nWith the single family I\u2019ve benefited from a booming market and forced appreciation.", "replies": [{"id": "feyz20x", "text": "Flex doesn\u2019t involve residential. It\u2019s basically a hybrid of office and warehouse.", "replies": [{"id": "fez2qkk", "text": "Higher turnover and can be tough to finance smaller properties too", "replies": [], "depth": 4}, {"id": "fezpkuu", "text": "Gotcha", "replies": [], "depth": 4}], "depth": 3}, {"id": "fez8nll", "text": "Interesting! You should do some research on the vacancy rate for light industrial in your area and the specific neighborhood. Finding a good broker is probably your best bet as many listings you will never find online. Unless you have CoStar access.\n\nWhat are your return expectations? That would be a good place to start too as it will help guide product type.\n\nFor commercial you are most likely going to need to put 25% down, or more. Banks will solve for a debt service coverage ratio, which is basically net income available to service debt. As others mentioned, commercial financing is very difference from SFR. Likely going to get 5 year fixed balloon with a 20-25 year term. Meaning you have to refi the loan in 5 years. Each bank is different so ask you banker if they do commercial loans and what their terms would be on a project like this - knowing that final terms will change.", "replies": [{"id": "ff2gugk", "text": "Is it typical to refinance the loan at 5 years or do most make the balloon payment?", "replies": [{"id": "ff2y5fu", "text": "Most investors refinance because using large cash holdings to pay down debt really kills your returns. Most real estate investors are cash poor and asset rich as they leverage to keep buying more assets.\n\nJust make sure you have a decent liquid reserve pool. Retenant expenses can be quite expensive.\n\nBanks will be focused on the cash flow from the property. Not the income, the cash flow. So as you are looking at properties have a good understanding of what the NOI is based on the lease. You lease terms should be longer than the requested finance term. So for a 5 year deal, hopefully you have a long term tenant in a lease with at lease 5 years remaining. Or a strong lease with lease extension options.", "replies": [{"id": "ff3tzgc", "text": "Thank you for the response! This is something I had wondered about before and this is insightful.\n\nIs it fairly easy to refinance the loan, or are there a lot of hoops to jump through? Basically I'm wondering if you could PLAN on refinancing and then more likely than not be derailed and forced to make the balloon payment? Or are there only special circumstances where that would happen?", "replies": [{"id": "ff43dl0", "text": "Commercial banking is very different from residential/consumer. Be prepared to compile tons of documents for the bank, and there are no consumer protections for commercial loans. So no disclosure laws, and very few other regulations - in comparison to consumer loans.\n\nBasically the entire deal gets reunderwitten every  5 years. An entire new loan. So, anything can happen and the bank can call the note due.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fey8ew2", "text": "There\u2019s many factors at play that could change the answers here, especially things like what type of asset and it\u2019s location. As for financing I can only speak to where I am in Canada. The down payment is typically larger than residential and landlords/owners are usually putting 20-25% down and only able to attain that 75-80% financing from a lender. However there have been some instances where they\u2019re able to get more, that\u2019s all dependent on the asset and situation. Unfortunately all your questions are specific to the market within where you live. You\u2019re doing the right thing by speaking to brokers. Just be open and honest and find someone you trust who will explain things to you and help you learn. If someone where to come to me with questions like this it would be a fun project to work on together and find them a great asset they were excited about, and I\u2019m sure others in your area are in that position as well.", "replies": [{"id": "feyrgwx", "text": "Thank you. I think it will be a fun project.\ud83d\ude09\nI like the whole process and am happy to lean back again once the tenants are in place. (Semi passive lean back).", "replies": [], "depth": 2}], "depth": 1}, {"id": "fey917s", "text": "I like mixed-used commercial. Half Res./Half Commercial (think apartments on top, retail on bottom).\n\nFind an under performing building with a good location. Get in there, fix it up, get the vacancies filled, and bump the rent roll. Do that with commercial building and you can make alot of money.\n\nSomethings to consider though: Commercial spaces tend to sit vacant *much* longer compared to residential. But, once you do get a commercial tenant, they typically take care of themselves and have longer lease terms (3, 5, 10 year etc), so that's nice.\n\nCommercial shit (equipment, roofs, capex stuff) is alot more $$$ than residential...so just keep that in mind when budgeting.\n\n\nBanks will want 20+% down.", "replies": [{"id": "feyrli2", "text": "Thank you. Good advice.", "replies": [], "depth": 2}, {"id": "fezx8ay", "text": "This.  Commercial property valuation is mostly based on the rent you are able to bring in, so if you can find a poorly run property and get it going again, you can increase the valuation quite substantially.  But, as gold\\_flake mentions, it also has a lot higher costs (including brokerage fees to get solid tenants in place, often capex to new tenants, etc), and usually longer vacancies.  On the plus side, with NNN leases, tenants pay for just about everything once they are settled in.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fez6m5h", "text": "Commercial lender here. Generally 20% minimum down. The property itself will have to support its own debt, not like residential where it\u2019s total debt to income. The terms are different. Commercial loans have a term where your rate is locked in and then it balloons, and the amortization length is the total pay down to zero. You\u2019ll see like a 5 year term and 25 year amortization for example. If you have questions or need help financing feel free to ask", "replies": [], "depth": 1}, {"id": "ff1zs4p", "text": "Average vacancy rate varies and is something you should be able to look up or get by calling brokers.\n\nYou improve value by either increasing the future cash flows or by making the future cash flows more safe and predictable.  Ideally you are able to do both.\n\nHow much to set aside for maintenance.  It\u2019ll vary by the condition, size, and type of property, but you could probably use $0.25 psf annually.\n\nHow much of the operating expenses and maintenance the tenant covers is determined in their lease.  If it\u2019s NNN then the tenant likely covers all or substantially all of the operating expenses associated with their space and their portion of common area maintenance.\n\nYou can\u2019t really put in less than 15% equity with a bank.  If you do, it is then an HVCRE loan and will be priced very very high because it increases the bank\u2019s cost of capital.  You should expect to be closer to 40% down than 15%.", "replies": [], "depth": 1}, {"id": "ff2c7hn", "text": "I'm a commercial guy in Los Angeles. Feel free to message me. Happy to hop on a call or Zoom or something and help out.", "replies": [{"id": "ff2cjq4", "text": "I am looking in sd, well starting to same story own some sfr (2) sold biz now looking into investment  commercial property lmk if you have info here in san diego", "replies": [{"id": "ff2i0rx", "text": "My associate partner is in SD and I'll be there next week!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ff76p9b", "text": "I\u2019d go single tenant NNN if you looking in $1mm range. Find a Dollar General in a growing market.", "replies": [], "depth": 1}]