FIGURE 4-1: The Commercial Wholesaling Process.
Wholesaling Apartment Buildings
You can do the same thing with any type of commercial property, but we’re going to suggest you start off wholesaling apartment buildings. You’ll have two distinct advantages over investors who wholesale single family houses.
First, commercial real estate has less competition compared to single family home investing.
Second, you can make substantially more money because commercial transactions and prices are so much larger than single family homes.
Getting started without very much money
What if you are starting out with very little money, but you have a burning desire to get started in commercial real estate? To keep it interesting, let’s also say that you have no experience. Can you still wholesale a commercial property? The answer, of course, is yes.
The key to wholesaling is understanding which types of properties will provide you with the biggest pool of buyers. Your best buyers are going to be newer investors who are hungry to get into property. Because of this, it’s important to focus on the following types of leads, property sizes and type.
Off market properties: dealing directly with the owner. (Note that this is a strong preference, not a hard and fast rule. While you can wholesale a deal with a broker involved, it’s much harder to do.)A $16,000 CASE STUDYLet me introduce you to our Commercial Mentoring client Bryon. He didn’t have any experience with commercial real estate whatsoever. He’s a former corporate guy who quit his six-figure job cold turkey to jump right into investing in houses. After making money with lease-option deals for about six months, he decided to try out commercial.Byron offset his lack of commercial experience with motivation. We got him started with commercial wholesaling where he made $16,000 on his very first deal.
Class C apartment buildings: where the highest returns are found which means you’ll have more potential buyers.
5 to 50 units: smaller deals where you’re not competing with the stronger, well capitalized investment firms.
So why would anyone want to wholesale commercial real estate? Well, the simple answer is it solves a huge problem. As a beginning commercial real estate investor, it’s not uncommon to face a big obstacle — you don't have the down payment.
A Wholesaling Example
Here’s an example of how to make money wholesaling a commercial property. You’ve found a twelve-unit apartment building, worth $1,000,000 that needs $50,000 in repairs. You’re able to get it under contract for $850,000. This is due to a number of reasons, one of which is that the seller is motivated to sell quickly but also because the property needs repairs.
Making sure you have equity
You’re in it for $850,00, and after accounting for the $50,000 in repairs that are needed, you have $100,000 in equity in the property. This is critical to wholesaling a deal.
| Your Price | $850,000 |
| Repairs | $50,000 |
| Your Equity | $100,000 |
| Value | $1,000,000 |
Understanding why buyers will pay your wholesaling fee
So, you find a buyer who purchases it from you for $900,000. And then you pocket the difference of $50,000. Notice that this is a win for everyone. The seller gets their property sold at a price they were comfortable with. Your buyer gets a commercial property that’s worth $1,000,000 for $900,000, and they put another $50,000 into fixing it up so they are thrilled with the deal and have $50,000 in equity from day one.
Getting Started: The Five Steps
If you’re trying to accomplish something new, it’s easy to fall into the trap of thinking it’s too complicated or too hard to do. The secret is to break each new challenge down into smaller step by step chunks. A great example of this was when co-author Peter Conti decided to heal his injured leg by hiking the Appalachian Trail. It seemed impossible, yet by breaking it down into steps he surprised everyone. Pick up a copy of his book, Only When I Step On It to read his inspiring story.
Generate leads of potential properties. This is going to be the raw data that feeds your commercial real estate investing business.
Analyze those properties so you know how much they’re worth. This analysis allows you to know what your target price is for each property so you can get them at a wholesale price or terms.
Get the deals that meet your qualifications under contract. Don’t forget that getting deals under contract is an essential step.
Find a qualified buyer. This is actually easier than you might think.
Close the deal and get paid. This is our favorite step.
Step one — generating leads
We recommend that you focus on apartments. Out of all the commercial asset types, apartments are best to wholesale because they're easy to analyze. Everybody wants them; they make good investments; and they're the most plentiful. Financing also is more readily available for apartments than it is for self-storage, office buildings, retail, or industrial properties.
When you’re getting started wholesaling, you’re going to want to look for five- to twenty-unit properties because these owners are easier to deal with. You’ll also discover that smaller deals are easier to wholesale because there are more buyers for smaller properties.