If you’re just starting out as a beginner commercial real estate investor you might be trying to figure out how to land the best deals from commercial real estate brokers. How can you win against the experienced investors that the brokers have access to? How do you get the broker to give you the deal, even though you’re a beginner investor?
Value-Add Deals
I want to share with you the story of one of my Proteges. He had no experience in commercial real estate and acquired a sixteen-unit complex in a Seattle suburb, which many would consider one of the hottest markets in the United States. The sixteen-unit property is a great value-add deal because the value and equity can be increased.
He’s going to do this by immediately raising the rents by $75. He also discovered a vacant closet where he will install a washer/dryer hookup for the complex, which will demand an additional $75 for each unit. In total, that is a $150 increase in rent. Multiply that by 16 units and then again by 12 and you get almost $28,000 annually in additional income. This increases the property value by $500,000. That makes this a great deal for my student.
As a beginner investor, my student had zero track record and his offer wasn’t the highest. However, his offer was the one they accepted and he beat out the more experienced investors even though he is a beginner investor. How did he do it?
3 Tips for Beginners to Beat Experienced Investors:
- Learn the Language
- Have the Cash for Your Down Payment
- Play to Win
1. Learn the Language
There are two languages in the real estate profession. There is the single family residential language, and then there’s the commercial property language. Using residential real estate terminology in the commercial real estate world is a definite no-no. If you want to be taken seriously as a commercial real estate investor you must learn the broker language. You need to learn the apartment lingo; learn the terms of the cap rate, cash and cash return, price per unit, and NOI. It will give you instant credibility and with the broker. If you want to be taken seriously you must learn these terms.
7 Commercial Real Estate Terms You Should Know
This is exactly what my student did. He learned the language and studied the terms which helped give him the confidence he needed when speaking with brokers. He was able to overcome what I call “Beginneritis”, which is when you are a beginner investor that wants to be taken seriously, but you lack confidence. By studying these terms and using them when speaking with brokers, you will be taken seriously and build credibility. This is the first step to beating the more experienced investors.
2. Have the Cash for Your Down Payment
This doesn’t mean that all the cash needs to be on hand. This idea can be a mental block for beginner investors because they worry that they must have all their ducks in a row before they can call the agent or make an offer. This isn’t true at all and I have a blog post on Ways to Raise Down Payment Money for Commercial Real Estate. My Protege didn’t have all the funds available, however he had it accessible in a variety of places.
When you are speaking with a commercial broker about a potential deal, they will ask you questions to determine if you are wasting their time. Your response to where the down payment money is coming from is crucial, as it will dictate how many deals they are going to send to you. We coached our student to inform the broker upfront that he had enough money available through various means for the down payment. That is all he needed to tell the broker and the broker never mentioned it again.
If you are a novice investor, having the cash available evens out the playing field. This could be savings, cash, retirement accounts, or other investors. If you consider all these options you can come up with hundreds of thousands of dollars for your potential deal that you didn’t think you had. To be taken seriously and to beat out more experienced investors you must have money for the down payment.
3. Play to Win, Don’t Play to Lose
One of my favorite books has a fantastic quote . The book is called, “The Art of War” by author Sun Tzu. He states, “Knowing the enemy enables you to take the offensive. Knowing yourself enables you to stand on the defensive”.
Meaning that if your’re going to play to win, then you need to know your stuff. You must do thorough market research and have a strategy. As mentors and coaches our company does precisely that for our clients. We train our students so that they are able to know how to play to win.
3 Things We Did to Beat the Competition and Win the Deal:
1. In order to be seriously considered, our offer was slightly higher than asking price, just like everyone else who bid.
2. We used their in-house lender. The in-house lender is the one who sits next to the listing broker. We wanted the lender to communicate how well qualified our student was to help us win the deal.
3. We kept the inspection period in the contract to 21 days. This gave us 21 days to perform all our financing and all our due diligence. We were determined to demonstrate that we were committed to this deal. If after 21 days, we chose to back out, our earner’s money would be non-refundable. Our competition offered 30 or 40 day inspection periods, but we offered 21 days because we were so confident in the deal.
Know Your Deal
We were confident in this deal and able to offer slightly higher than asking price because we knew there was a rent income upside of $150 which equals nearly $500,000 in forced equity. Also, we found out during our research that there were two identical properties behind this complex, and I don’t think anyone knew because no one ever brought it up. I saw the potential of not just 16 units but of up to 48 in the future. Currently, my student is contacting the owners of those other properties.
The property is in a prime location. It’s located in a suburb of Seattle with a thirty minute commute to downtown and there is a community college and two elementary schools within walking distance. Seattle is one of the hottest multifamily markets in the nation and has seen a 15% population growth since 2010. We did our due diligence and understood this deal had fantastic potential and that is why we were able to be so aggressive and play to win.
