New Investor
Hypothetically, if one wanted to start investing in CRE using the strategy outlined [here](https://www.reddit.com/r/financialindependence/wiki/commercialrealestatepost), how much money would it take to get started and what practical advice would you offer?
[{"id": "d0yoph8", "text": "I actually asked my broker friend some questions based on the article you referenced.  Here is what his thoughts were.  Full disclosure I am not an investor in commercial real estate at all.\n1) You basically need to have 20% down (and often more) if you are going to finance through a bank.  If you check out loopnet it looks (in my area at least) tough to find much that isn't just land for less than $.5M.  So immediately  you are looking at $100k for just the down payment.\n2) You need reserves (again, assuming you go through a bank).  It depends on how much other income you have, but basically the bank is going to figure out how up the creek you are if a tenant moves out.  Can you afford the mortgage with your own income and reserves?\n3) Banks will go ahead and look at the type of lease, the lessees, and the length terms when evaluating whether or not to make the loan.  The guy in the article references starbucks, a much safer lessee than the mom and pop store.  But, you won't get as high a return from a 'safer' investment.  The way I  interpreted what my buddy said was, if its a person that is newer to commercial investment, we want the investor to buy a safer property, but of course then that minimizes your cash flow because you had to pay a premium for it.\n4) Your personal credit history is also going to be looked at.\n5) You could explore seller financing, I don't know nearly enough about this topic to be able to offer any advice on this.  \n6) My own personal take is that you can get just as good of returns (or even better) if you just go with residential multi-family real estate.  In the example the guy in the article gave he says he is making over $4k per month on a 515k property.  So if he did put down just 20% (btw, many brokers require 25%), then he invested $103k and has a mortgage payment of $3175/mo at 4.2% .  If you make $4k then you are looking at about $800/mo cash flow.  That's not that great compared to what you can generate from standard residential (though like the OP says, he doesn't have to worry about the 2 a.m. clogged toilet).  However, OP did talk about how he was able to use his commercial property as collateral in new loans.  I don't know enough about refinancing to understand exactly how this works or general strategy here.\nTL::DR - You probably need $100k+ if you go with conventional financing, but you can likely get more bang for your buck looking at residential at reduced risk.", "replies": [], "depth": 1}, {"id": "d0yrh46", "text": "\n\n\n\nOk so typing this on my phone so please bare with grammar mistakes.\n\nCouple things about this strategy and the article related linked in your post.\n\n1. it's a strategy that works for some of my clients investment strategies but 1) not for everyone and 2) I think this persons analysis of how it works is way too general and thusly misleading. \n\nOff the start with his numbers (70K net income on a triple net basis = tenant responsible for roof structure property taxes, with a 4% interest @ 80% Loan to Value or LTV, or 800K loan Amortized over 20 years) really don't make sense. Here's why:\n\nA) commercial loans or financing for properties like this typically require a stronger LTV with a minimum of 35% down or 65% LTV\nB) his current numbers don't debt service for a lenders underwriting. An underwriter looks my for a Debt coverage ratio or DCR of roughly 1.25 at least for this type of investment for the loan to fund. \n\nSimply put, based on the investment description those numbers aren't there.\n\nWe can get in to a lot more minutia about corporate rating, strength of location, car counts, anchoring retail corridor.\n\nThe author than discusses appreciation which is not entirely accurate with these properties since these deals are based on cash flow like bonds and the closer to the termination of the lease, the riskier the investment. Hence these properties don't appreciate like other property types. What some people do is find properties with a coupe years left on the leaders retenant or renegotiate the lease and then resell. Value really comes from years remaining on lease and those minutia points above.\n\nAlso the cash on cash return. Using the authors own numbers, the cash on cash return is just above 5.9%, which to me is low considering the risk you take on from these investments. (I do not factor in principal reduction on debt service as part of a cash on cash analysis because that's factors in to equity on resale or refinance and that value is different than from the time property is purchased). \n\nDepreciation is also brought up and my answer is always speak to your accountant. Depreciation is not money you keep but are taxes deferred to a later date and your accountant can explain in better detail what that means. \n\nBased on the authors property criteria, I can safely say the Starbucks property he is referring to flat out does not exist if we are to use the criteria laid out. Not in this market, and if it does, BUY IT! You'll probably have a better chance finding a winning lottery ticket though. \n\nTruth is that this author says he's been in the biz for 15 years but the numbers don't make sense and I've never heard of a commercial loan originator financing a Triple Net product with less than 35% down and a 1.25 DCR. Lending practices were definitely different and this may have applied prior to the Great Recession but personally have never seen a deal of this product with that type of financing. \n\nThat said these investments and the strategy discussed isn't a bad one. What it comes down to is what do you want from your investment. \n\nAppreciation and cash flow? Buy apartment buildings \n\nPossibly better returns with some appreciation, retail or commercial office, medical, etc. \n\nIf you're looking purely cash flow and owning real estate without management... Triple net is a great option. So here is what you want to look for:\n- location: high car counts in strong retail corridor\n- You want strong credit corporate guaranteed tenant. Not something owned by a franchisee\n- Make sure the lease terms are strong. Say for a 10 year lease, it's only a couple years in rather than a couple years from termination. \n\nAlso ask yourself though why this strategy fits what you are trying to do. Why do you want to buy real estate and when you own it, what are you willing to do to maintain your investment. \n\nHope this helps \n\n", "replies": [], "depth": 1}, {"id": "d13rk2u", "text": "The risk/return profile for these assets in the current market is not nearly the same as what is referenced in that write-up.  The market is *much* tighter these days. ", "replies": [], "depth": 1}]