AMA - First Commercial Deal

Today’s show is another AMA episode.  Today’s question comes from Saadya in NYC.

“I’m looking to conduct my first commercial deal. What is the most important thing to look for in that first project?”

Well Saadya, this is a great question.

When it comes to having a successful project, there are three main factors to consider.

1) The submarket

2) The people involved

3) The deal specifics

You’re based in Brooklyn. The NY area is highly transient. It’s such an expensive market that people tend not to stay for long unless they really have to. It takes a strong consistent income stream to justify the cost of living. I know of so many people that live in NYC for just a short period of time.

Real Estate is hyper local. I would recommend you choose a location that is experiencing population growth and job growth behind it. I would stay away from areas that are losing population. I like Philadelphia which is not too far from where you’re located. I would stay away from the expensive bedroom communities North of NY and in Connecticut. The taxes are too high, despite the fact that many people from NYC have moved to those communities this year during the pandemic. I don’t believe the growth in those communities will be sustained. I would choose a community that had strong growth prior to the pandemic, and then that growth continued or accelerated during the pandemic.

2) I’m fond of saying that a good deal badly managed is no deal. So the key is to make sure that you recruit the best quality people into your team. There are a shocking number of poor quality people in this industry, and a few outright crooks.

3) The deal itself. This is where most rookie investors start. They make it all about the deal. Let’s be clear, on your first few deals you will make some mistakes. It’s super important that those first few deals have next to no downside risk and lots of upside. You will need that to act as a cushion against the inevitable mistakes that will happen.

So you’re looking for a deal that is off market. Even in today’s environment we have a lot of money chasing deals. It’s still an auction environment. You don’t want to be bidding against other more experienced investors who might be willing to pay more. You almost always end up paying too much in that environment.

You want to find those special cases where there is a problem to be solved. It might be an estate sale where the property is physically distressed or financially distressed in a good area with strong fundamentals. It might involve rescuing a property that is in pre-foreclosure. You would have the opportunity to be solving a problem for a family that is in a difficult spot.  The moratorium on evictions and foreclosures is masking the depth of distress that is just beneath the surface. These business and real estate failures will create a re-pricing of assets in the near future. I can’t tell you exactly when that will happen. It could be in the next 90 days if government continues to gridlock on any decision making. It might be longer, perhaps 6-9 months away. But the tidal wave of distress is coming. It might involve a property that must be sold because of a divorce, or a discord between family members. That represents an opportunity to step in a save a family member from financial ruin. A friend of mine calls that doing good, and doing well at the same time.