Our guest with Agent First Summit this week was Daniel Eng, a commercial real estate superstar with over 20 years of experience as well as the founder of Engvest Commercial Realty, LLC.
Our Agent First Summits happen every Tuesday morning! It’s a perk for all our real estate team members and any of their guests who want to grow their real estate business. To get an invitation, RSVP here: Save Your Seat!
In this session, Daniel shares with us the secrets he has learned to help clients invest in commercial real estate.
How Do You Get Started with Commercial Real Estate?
To jump into commercial real estate, your best bet is to take some educational classes. Not only will you learn more about the commercial process, but you’ll also find tons of connections with other agents who can help you learn and network.
Once you’ve received some education, you’ll want to find an experienced partner. Commercial real estate can be a complex business and also an expensive one to get started. There is a significantly higher startup cost to doing commercial real estate than residential real estate. So getting into this business alone is not very feasible.
Commonly Asked Questions about Commercial Real Estate
What is Triple Net?
Triple net rent is the additional rent you’ll have to pay to take care of property taxes, property insurance, and common area maintenance. Keep the triple net in mind when you’re looking at the lease for any kind of commercial property.
Understanding this cost will help you decide whether or not a property is worth investing in with the capital available to your client.
What Is the Cap Rate?
You should also find out about the cap rate to help you evaluate how much a property will be worth. In simple terms, the cap rate is how much you can expect to earn in net profit from a property that you’re renting out. It’s usually calculated by dividing the operating expenses of a property by its net market value.
However, while an important number to know, the cap rate isn’t the only thing you’ll use to determine how profitable an investment is. Money and value change over time, so it’s crucial to approach investments with a more nuanced approach.
How Do You Handle Competition from Other Businesses?
If your client wants to invest in a property in a strip mall to build a restaurant, for example, you have to keep an eye on what other restaurants are in that space. In some situations, you may find that other restaurants have an “exclusive clause,” which basically prevents other businesses in the same competitive space from setting up in their area.
However, in some cases, you may not find such a clause because there’s enough competition for a certain product or because the owner of the property believes they can earn no matter how much competition is nearby. You just have to check with the owners of the property and the shops before making a purchase.
Who Should Make a Personal Guarantee?
If your client is investing in a commercial property, they may need to make a personal guarantee that they will be responsible for maintaining the lease and payments for the term of a contract. If they fail, the personal guarantee grants the collecting party access to personal assets or other funds outside of the corporation to cover the lease.
This guarantee is not always required, but if it is it will usually be required of the tenant, franchisee, or possibly a combination of people working together. Check with the seller about what kind of personal guarantee they want from their tenants.
What Kind of Terms Can You Expect?
When renting commercial properties, you can often expect to find 3, 5, 7, or 10-year leases. The term will depend on whether the landlord is looking to sell the property soon and whether they want to sell it with leases already included.
When signing a lease for a specific term, tenants may have the option to renew at either the set rate or at the market rate, depending on what they prefer. This allows them some freedom to make changes based on their financial situation after a few years of running their commercial business.
How Do You Negotiate a Security Deposit?
Some landlords may not require a security deposit. Ultimately, it depends on their financial situation and a few other factors such as:
- Whether or not they offer TI
- If the tenant is offering a personal guarantee
- If the tenant is well-established as a businessperson.
Some landlords may not require a security deposit if they believe that the extra capital from the business will benefit them regardless.
How Do You Prequalify Clients?
Before choosing whether to work with a client, you need to prequalify them. The best way to do so is to ask good questions and get to know them. Find out if they:
- Have other investment properties
- Recently sold a property and want to use the 1031 exchange to buy another
- Have a lender who thinks they are business savvy
- Are first-time buyers with enough saved
If your client wants to purchase through a business, dig into the business to ensure that it’s legitimate. Ask for financial statements from the individual seeking to rent so that you know whether or not they can pay regardless of the business’s position.
Make sure that you dig deep into your clients’ lives so that you know whether you can trust them to do the right thing by the landlord and manage their rental well.
What Do You Get in Commission?
Your commission will usually be a percentage of the base rent that is paid on the commercial property. The percentage will vary depending on who you work with and what kind of relationship you have with commercial partners.
Mistakes To Avoid in Commercial Real Estate
There are certainly many mistakes that you could make when starting out in commercial real estate. Many agents have committed mistakes before! If you want to stay ahead of the pack, there are a few things you should watch out for.
For one, don’t try to close an investment for your client all on your own if you don’t have a lot of experience. Find a commercial broker you can refer to or partner up with to make sure you actually close the deal and get the best for your client.
For another thing, always prequalify your client and make sure they have a business plan and enough capital to fulfill that plan. If they don’t seem qualified, don’t work with them.
Commercial Real Estate Scenario
So, let’s say you have a client who wants to open a restaurant. Before you even go to a commercial agent to start discussing a real estate investment, you need your client to answer some important questions:
- How much capital do you want to invest? You’ll need to purchase space, menus, seating, etc. Have a business plan in place first.
- What additional things might you need to invest in (e.g. a grease trap) to keep the property running?
- What is the Tenant Improvement Allowance (TI)? This will cover how much per square foot a landlord will offer to pay to help a tenant get set up.
- Should you get counseling? If you’re working with a first-time tenant, you may want to introduce them to someone who can coach them through the process of leasing. This will help prevent any expensive mistakes for both of you.
Once your client has answered these questions to the best of their ability and is ready to move forward, find a commercial broker to help you make and close a deal so that they can get that restaurant started!
Conclusion
In commercial real estate, you have to be careful who you work with. But if you make sure to prequalify your tenants, discuss important legal matters with the landlord, and find help as needed from a commercial broker, investing in commercial real estate is a great business opportunity.
Never be afraid to ask questions to make sure the people you’re working with know what they’re doing. You won’t regret taking the extra time to get to know them so that your commercial real estate endeavors are as productive, secure, and lucrative as possible.
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