Trying to get one foot wet with CRE (complete newbie)
Hi all,

Disclaimer: I have no idea what I'm doing.

This is super long and I appreciate any advice you can offer to point me in the right direction. I feel like I'm feeling my way through the dark and any candles you can provide will help!

You don't have to answer everything, any little bits of advice y'all can provide, I'll take it and note it for sure.

Here's the situation:

I'm new to RE in general. Starting from 0. Never done any residential/commercial deals. No background in it. Just picture a normal (well, maybe that's an oversight) person who's worked in unrelated industries and very good at saving. No network. No connections. All I have is capital saved up and about a month's worth of RE knowledge.

I know the basics about running the numbers for residentials (CAP rate, CoC, 1% rule, 50% rule, appreciation, etc.) and how the process "works" in the big picture. Lease a property, get money. Cash flow positive = good (after PITI).

I'm still in my research phase. Initially, I wanted to start with residential (duplex) like most people. Then I came across CRE and really liked the idea of NNN lease. This beats dealing with all the headaches of residential RE, even with a good PM.

I really like the idea of passive income with minimal management, and that's my goal. NNN seems to accomplish that. I don't mind doing the legwork to acquire the property and regular check-ins, but I don't want to be spending the majority of time managing properties. Maybe 20h/week at most. Also really like the business rather than emotional relationships of CRE.

But to be clear, I don't want to be "completely hands off" like turnkey or REIT. I want to actually have something physical in my area that I can see to believe, not something that I have little control over or halfway across the country.

You may say to just buy REITs, but aren't ROIs much better when you actually own the property? If REITs netted more than actually DIY and had less headache, why would anyone even invest in CRE on their own? Owning it yourself must have some reward, no?

From what I've read CRE and residential RE (RRE?) are completely different animals. This is why I don't want to "waste" time and energy learning and buying a duplex or SFH doing it the residential way first, then moving to CRE. Spending time researching, buying, and dealing with tenants just to later move to the complete opposite doesn't seem appealing at all. Or house-hacking.

People say to learn residential, but from what I understand, they're completely different. So the knowledge doesn't "carry over." This is apparent when I was reading between multiple forums and CRE brokers have no idea about residential and the same vice versa. And people have started with CRE and never bothered to learn residential. So I know it's possible. But if it's a must, I wouldn't be completely opposed.

I want to start with CRE because that seems more aligned with my goals (passive income and as little management as possible- NNN). I'm interested in retail/office with absolute NNN, currently occupied, good tenant history, and long leases in a developed area. But I guess that's the dream for many.

So at this point, I still have a lot to learn. What should I do? So far I've just been doing the ritual (reading books, posts, vids, blogs, etc.) Any books you recommend? Or should I just buy random brokers that specialize in retail in my area a meal and take notes?

And yes, I'm aware that CRE screwups are much more impactful than residential, which is why many use res as a training ground. But I don't feel like using resources to learn something that you ultimately don't want to deal with is a good investment of time. After the first few purchases, I imagine both avenues turn out the same in terms of "difficulty" of the process.

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Questions at this point being completely inexperienced:

How do you run numbers/find deals for CRE? What do you look for?

What are the main things you need to research for your DD?

Should you buy CREs in cash if possible to be free and clear? Or is it still preferred to use loans and leverage?

What's the hardest part about buying a CRE property and getting positive cash flow?

I found an office space with a longtime tenant and a lease until next year in my area. I can buy the property in cash. Assuming the tenant stays/renews and the area continues to develop, is that all there is to it? It seems too simple.

I also found a vet clinic up for sale with a tenant that's been there for 30 years. The lease needs to be renewed soon. Assuming the tenant stays, how would you go about checking the potential on this property?

How does purchasing a single unit in a building work? Who owns it after it's paid off?

Anyone had experience with both residential and commercial? What do you have to say about the two animals?

Does anyone know the main concerns you should be wary of when it comes to CRE? I'm not talking about the small things that rarely happen to only 0.01% of properties (that you often can't control), but more common events that can turn your investment negative and can be prevented with DD or controlled.

Are there any other strategies that you prefer with better ROI and less/same risk?

Thanks for any help you can provide~!
[{"id": "fbi25m8", "text": "You ask a ton of questions that will take a long time for you to get answers. \n\nI will answer one. A risk with commercial that you wont really see with residential is potential extended vacancy. Generally with apartments you will always be able to fill them, even if it takes lowering rent a bit to do so. \n\nWith commercial you could be loomong at 6 months or a year to fill a vacancy depending on the market or situation. Even in a good market depending on the property it could take time. You need to have the wherewithal to withstand these times. \n\nSo generally this is one reason commercial is considered more risky than multifamily or residential rentals.", "replies": [{"id": "fbiocqe", "text": "I agree with this and want to add one thing and disagree with one. To piggy back: this vacancy assessment is probably a little conservative on average. The main thing to add is the direct cost of the vacancy. You'll have tenant improvements and leasing commissions that either don't exist or more expensive than residential. Residential would be a month or two vacant, 0.5 or a month for commission maybe. Commercial will be a year vacant, 4% of the gross lease value, and $10-way more than $10 per square foot in TIs. All that said, my disagreement is that it's not more risky. Those costs can be big but they're far less often than in residential. If you have to boot someone you just change the locks and judges and laws don't get on your way. It's unlikely someone will steal your appliances out of spite. It's not more or less risky in general, the numbers are just bigger all around. Coming in and going out.", "replies": [{"id": "fbis6r2", "text": "Good points. My main point is that if are unable to sustain the property through that year if vacancy, that's bad. I have seen a vacancy in a single tenant property sink the owner because they didnt have enough reserves until they found another tenant.", "replies": [{"id": "fbjqlfr", "text": "Agreed. I see that happen with multitenant owners when they have reserves for a vacancy but then end up with two and they have to give it back. That risk is under capitalization and/or over leverage, it just CRE. Not arguing, you're right, I just want OP to see this so he doesn't lose his property.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fbi636y", "text": "Not reading the whole thing but NNNs aren\u2019t gonna get the best returns for you. The main buyers of those are REITs that have extremely low cost of capital (Loan money at 3.75% buy property that yields 6%) and people 1031ing off other investments. Also v high risk if you only have one or two since losing one tenant loses your entire income\n\nI really like REITs", "replies": [{"id": "fbiojc2", "text": "NNN deals (single tenant net leased) are purchased by REITs typically because their goal is to minimize their downside instead of push yields. Their cost of capital is lower in general, but they're usually far less leveraged then a private entity.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fbi78hi", "text": "For whats it's worth, I switched into CRE *brokerage* from a related industry 7 years ago.  I aggressively peddled myself to global shops until someone gave me a chance.  The learning curve was steep.  But I figured it out and it worked out.\n\nHowever, the questions you are asking seem to be from the point of an investor.  If thats the case, work to get the opportunity to play with other peoples money before you dare play with yours in something you have no understanding of.", "replies": [], "depth": 1}, {"id": "fbipsmd", "text": "I read the whole post. It's a lot. A couple things: the two properties you mentioned both have short term remaining leases. Don't buy those. If the landlord thought they'd stay they'd renew them then sell for way more money. Second: when you refer to NNN do you mean single tenant net lease? If so, know that the tenant and their term mean everything. Think about it like buying a whole bunch of stock in that company. Past that, there are many things to consider. Is base rent flat? Is it really NNN? Can you get the sales numbers for that location? There are plenty of multitenant NNN investments out there. Their value is that the risk of the every growing expense costs is passed to the tenant. How much capital do you have? With the information I have your best bet is to buy a multitenant property with most or all tenants NNN and hire a property manager. Also, since you're new, your personal financial situation will be key to a lender. What does that look like? Don't post the answers here, I'm just saying to be mindful. Go to CREXi.com. Look at a bunch of properties and as you do pay attention to the listing agent. When you start to notice a pattern call the guy or girl and tell them a very (very!) summarized version of your post and meet to discuss. It's not abnormal for a high producing agent to not represent a buyer except for their own exchange buyers so if he refers you to someone don't be turned off. Start from there. Be clear with your goals and when they give advice, especially about how realistic your expectations are consider it more realistic than what you read on the internet.", "replies": [], "depth": 1}, {"id": "fbvic3u", "text": "As most have said, there are a lot of questions here. I think taking a course (you can find plenty online, UDEMY is pretty cheap and certain courses will cover a lot of this) is a good starting point for how to \"run the numbers\". The way to get your returns are increasing cash flow, and to keep it simple, thats either increasing your revenue or decreasing your expenses. Decreasing expenses usually comes with more experience, so you'll want to lean on increasing expenses. Leasing out a portion of the parking lot for parking, extending a lease while increasing the rental rate, etc. There is a lot that goes into it, and as most people have said, there are risks such as long term vacancy.", "replies": [], "depth": 1}]