If you are a real estate agent and you have ever wondered whether commercial real estate could be part of your business, you will want to keep reading.
Maybe you want to do more commercial real estate yourself. Maybe you simply want to understand it better so you can connect your clients with strong commercial brokers in your market and earn referral fees. Maybe you want to learn because you want to become a buyer of commercial real estate yourself.
I am sharing my key takeaways from my conversation with commercial real estate expert, Troy Muljat.
Troy is a CCIM member, a CPM designee, a commercial certified appraiser, and someone who works across office, retail, industrial, and multifamily. He owns a management company, manages assets, and continues to buy his own properties.
Troy loves commercial real estate because it is much less emotional than residential. It is about the numbers. It is about whether the value is there or not. Residential buyers and sellers are often deeply emotional. In commercial real estate, buyers and sellers are usually looking for return on investment, income, and value.
He also pointed out that the average deal size is larger, and there are many active listings for sale and billions of square feet for lease. Depending on where you work, you may use platforms like CoStar, LoopNet, Crexi, or a local commercial MLS. In some areas, your own MLS may already include commercial real estate opportunities.
Your Existing Database May Already Be Your Best Opportunity
Your database is full of people who may need more than residential help. Some may want to lease a space for a business. Some may want to buy an investment property. Some may want to connect with someone who understands commercial real estate in their market. Some may want to become investors themselves.
There Are Multiple Ways to Make Money in Commercial Real Estate
Here are four main areas:
- Seller broker
- Buyer broker
- Tenant rep
- Landlord rep
Tenants get you talking to landlords. Landlords can turn into representation opportunities. Landlords can turn into sellers. Sellers may do a 1031 exchange and become buyers again.
He said it is a wonderful circle, and there are lots of opportunities to make money on every aspect of it.
He also mentioned traditional sales, leasing, consulting, broker price opinions, buying and managing your own investments, presentations, letters of intent, newsletters, marketing reports, and determining what is a good investment.
Troy charges for his BPO (Broker Price Opinion) and you could too! It is a great way to get paid for your time.
The Four Major Asset Classes
Troy said that in order to identify the slice of your local commercial real estate market that offers the most opportunity, you have to develop your knowledge base.
He talks about the big picture of commercial real estate, including both sales and leasing. Then he steps back and talks through the four major asset classes:
- Multifamily
- Industrial
- Office
- Retail
He explained that multifamily is typically five units and up. That matters because once you are working at that level, you are dealing with commercial debt, and understanding those aspects is very important.
Industrial includes warehouses and buildings like the large concrete tilt-up building he mentioned working on for a client.
Office, he said, is the one segment that has struggled post-COVID, with a lot of vacancies. But he also made the point that vacancy provides opportunity. There is an opportunity to rent those spaces, lease them out, and get a commission.
Retail is one of his specialties, along with multifamily, though he works in all four asset classes.
Depending on the size of your market, you can go broad or narrow. In a larger market, you might focus on just one category of commercial real estate. You could do only sales, or only landlord representation in retail. There are a lot of opportunities depending on your market.
Why Investors Buy Commercial Real Estate
There are four main reasons investors buy commercial real estate.
- Cash flow
- Principal reduction
- Taxes
- Appreciation
Troy said number one is cash flow. Investors want cash flow and a return on their investment.
If there is debt on the property, principal reduction matters too. Investors want to be able to pay down the mortgage.
Then there are taxes. Troy talked about depreciation and ways to accelerate depreciation when buying an investment.
The fourth reason is appreciation. How are you growing rent? How are you reducing expenses? How are you growing value, and what is that value going to be down the line?
Troy said when he sits down with a client, he starts by asking what is most important to them. Is it taxes? Is it appreciation? Do they care about cash flow? Are they willing to sit on something and renovate it and then look for an uptick three years down the line? He is trying to understand whether they are a long-term investor or a short-term investor.
How Value Is Created
When looking at value in commercial real estate, take potential gross income, subtract vacancy, add any additional income, subtract expenses, and that equals NOI.
Troy said that, “Whether it’s a stabilized vacancy or actual vacancy, we’re going to analyze both of those. If the building’s half vacant, we’re not going to subtract out 50% of the vacancy. We’re going to use a stabilized vacancy. And so we need to talk about that and understand how a bank looks at valuing the property, how an appraiser will look at it. How is value created is really important.
It’s just not a price per square foot. It’s not a price per unit, always. We’re gonna look at the income. We’re gonna analyze the income… Income’s everything.
He called NOI the Holy Grail. It is how they value the property. That NOI divided into a cap rate, or a rate of return if paid in cash, is how value is reached.
Due Diligence Is Crucial
Troy’s team’s due diligence checklist includes profit and loss statements for the past three years, monthly statements, the rent roll, lease review, city review, tenant interviews, inspector or contractor review, HVAC responsibility, capital expenditures, and a market study.
He said they study the rent roll and ask whether tenants are at market, above market, or below market. They ask whether the property needs to be repositioned and whether income can be improved.
They analyze leases and contact the city to find out if there are violations or permit issues. They interview tenants to find out whether they want to stay, whether they are preparing to leave, and whether they have an option to buy the building.
He said this is where he finds a lot of value in commercial real estate. It is also where he may find a problem with the property and back out. Due diligence is crucial.
Looking at Deals Every Day
Troy said something that really stayed with me. He said he is analyzing a deal or two or three a day, constantly. That is the flow he wants other people to get into as well.
The idea is simple. Look at deals. Learn how to analyze them. Then you will know when there is a great deal, and you will be able to act, either for a client or for yourself.
He said that when someone really understands what a good investment is, one good deal can set them on an amazing trajectory.
All it takes is one good deal.
If you want to serve your database better, create additional revenue streams, and think differently about your own future, commercial real estate deserves your attention.
You may already have the right people in your world.
You may already have opportunities sitting in your database.
You may already be closer to commercial real estate than you think..
Ready to take the leap into commercial real estate? Check out Troy’s course here.
This article is intended for educational and informational purposes only and should not be considered legal, tax, financial, investment, or real estate advice. Readers should consult their own licensed professionals before making business, investment, or commercial real estate decisions.
