Have you been toying with the idea of investing in an apartment, strip mall, or other commercial property? Are you looking for a steady income stream or a big payoff when you sell?
Defining your goals and realizing the challenges of commercial investing are crucial to success in this segment of the real estate market. When it comes to commercial real estate, Claudia Troisi, a Commercial Senior Associate in our Carlsbad office, has been around the block–literally. Seventy percent of her work involves multifamily, industrial, and finding infill properties for developers.
Not only has she specialized in buying and selling commercial real estate since 2005, but her interest in repurposing commercial buildings also led to her serving on the City of Oceanside Planning Commission for 12 years.
We asked Claudia to give some advice for anyone interested in following her career path, what the commercial market is like these days, and why she got into the commercial arena. Here’s what she had to say.
The first thing every new commercial investor should know is that you really must look at this as a business, not an investment. The difference is that an investment is typically something you put money into, and then you forget about it. A business is something you deal with every day. Most commercial properties for new investors are going to require attention–if not daily, then certainly weekly. If you’re not committed to that kind of effort, you might want to invest in something else.'Most commercial properties for new investors are going to require attention–if not daily, then certainly weekly.' Click To Tweet
It’s common to assume that once you buy a commercial property you’re done. That’s usually not the case unless you are a second- or third-tier investor who’s been doing this for years and has a property manager in their building.
Generally, commercial real estate investors start off with a small commercial building or an apartment building–something that requires a lot more attention by the owner. The owner has to be very knowledgeable about more than just finding the property. They have to learn how to deal with tenant improvements, leasing, and repairs and are generally more involved than you would think.
It’s best to start small because it always takes more time and money than you think it will, for reasons you can’t imagine until you are actually doing it. For most that means investing in a duplex, a fourplex, or a simple retail commercial building with one or two tenants. You’ll want to familiarize yourself with the neighborhood and learn to manage a property that is not your home.
Typically, it’s best to start with a property that is no more than 30 minutes from your house. The reason for that is: Out of sight, out of mind. As mentioned before, you cannot passively invest in a property and then forget about it. When work needs to be done or inspections need to be made, it can be a pain if you have to drive out of your way to visit the building.
When you’re not frequently checking up on your property, that’s when problems can arise. Claudia suggests a minimum of three to four visits to your property per year.
Even though property may be cheaper in Arizona or Imperial Beach, Claudia strongly encourages new investors to heed to her 30-minute rule. If it’s too far away, it will be too inconvenient to visit, making it difficult to take good care of your property. Once you’re a more experienced investor, then you can think about expanding outside of your 30-minute radius.
It’s also important to be practical about the amount of income you will be making vs. your expenses for the year. To be a good property owner, you need to spend time and money at your property to ensure your investment’s quality and value don’t decline.
It’s tricky for new investors to understand how they’re going to get their money. Claudia explains that your profit either comes in the form of:
You will only get your income in one of the above ways. If you are buying for a steady income stream, Claudia advises you to invest in the eastern parts of Southern California.
If you don’t care so much about your monthly profit but want to make sure you keep the principal, she says it’s better to invest closer to the coast. That’s where the returns are very low, but the appreciation is much more stable. So when the market goes down, it goes down the least, and when the market comes back, it comes back first.
Retail is probably the only asset class where there’s more inventory because it has been damaged by online retailers. Because of this, there are way more retail-zoned properties than retailers to fill them. It’s hard to convert retail to another use, mostly because of zoning regulations, but also because retail is in an area that has a declining population and/or a declining need for the products still sold by brick and mortar. There’s also only so many restaurants and bars you can put in.
If you are a first-time investor, Claudia encourages you to invest in four units or fewer so you can still qualify for a residential loan, which is less expensive than a commercial loan. If you buy five units, you’ve crossed the line from residential to a commercial loan, which means you no longer can put 20 percent down. You have to put down 25, 30, and in some cases 35 percent, and you’re going to have a higher interest rate. So you’re better off going from four units to six or eight or 10, but not five because you’re going to pay a premium.
If, at some point, you want to sell, don’t upsize by just one more unit. Claudia says to wait until you can afford to move up to eight or 10 or 12, getting as many units as you can. It’s best to sell less frequently and buy better each time, like you would with a house.
Claudia was a loan officer, an appraiser, and has been in real estate all her life. She got her license around 2000 and worked for development companies for many years, working with commercial buildings and neighborhood shopping centers, and apartment complexes. Learning the basics of commercial helped build her reputation for being able to figure out what a building can be repurposed for, opening up a lot of opportunities.
Claudia loves commercial real estate because, since you’re dealing with business people, it’s a much less emotional side of the real estate industry. Even first-time investors are a little more business-oriented because, even if they are new to the process, they are still in it because they are business-minded people.
Challenges that agents who are new to commercial real estate face are:
But there’s a lot of reward if this is the kind of work you want to do. And luckily, for Berkshire Hathaway HomeServices California Properties agents, you can do both residential and commercial sales.
Some benefits are that commercial agents tend to not be limited by geography, whereas in the residential world you might be. If you’re willing to travel, you can pick up business anywhere you have a real estate license.
Everybody wants to be in Southern California. Foreign investment is really interested in anything along the coast—not just Southern California.
All along the coast, whether Southern or Northern California, property will always be in demand, even if you have to find a new use for it. If it will easily convert to another business, you’ve got a gold mine. If it’s California real estate, it’s going to do well, but if you need a strong economy for that building to stay full, you might want to reconsider the investment.
Currently, Claudia is mentoring two young women who want to get into commercial real estate. When agents decide to make the switch from residential to commercial, they are partnered with a Senior Commercial Associate until they have seen several deals all the way through and can confidently and competently work on their own.
With commercial agents throughout Berkshire Hathaway HomeServices California Properties’ close to 60 locations, our Commercial Division provides a comprehensive real estate solution for clients throughout Southern California and the Central Coast.
To find a commercial agent near you, call 877-778-8811.