When people learn to trade the financial markets like shares, options and the like, they all learn in 3 stages…
- You look at all the trading rules or you watch the markets and try to define a set of trading rules that you are going to follow – this is your system.
- You “Paper trade” your system and work out all the kinks as well as make sure you can actually follow the rules.
- This gives you an opportunity to trade without having real money on the table and practise your system
you go live and put some skin in the game by trading with real money.
One of the best things you can so with property investing, and it’s particularly relevant with commercial investing because it’s so numbers driven, is to “Paper Trade” properties.
What would that look like?
Well, you start by working out how much equity you have and what you could possibly afford for your first commercial property.
Then start searching for properties online. (It will work particularly well for properties that are close to you. You’ll see why shortly)
Fully investigate the property. Call the agent and ask them all the relevant questions as though you were interested in buying it. Basically, you want to do your due diligence on the property and even go and inspect it.
If it looks like there're upsides, call then council and discuss what the zoning is and what you could do with that property.
Take a look at what else you could do with the property to increase the value or the rental income.
Find out about the tenant – the managing agent is the best place to start with this. Do they pay their rent on time? How long does the current lease have to go?
I’d even go and talk to the tenant and find out if they are still happy to stay on, or what would make them happy to stay on. Sometimes they might be happy to sign a new lease if you give them something they need for their business.
It could be a new Aircon, or better front signage… but it could be the thing that keeps them happy and guarantees you a nice long lease.
Do all the numbers on the property to work out what your yield should be… What is the cap rate of the area? Is this property on par?
You want to proceed as though you are going to buy… but you’re not going to… yet…
this is just a dry run – practise mode…
And, what’s more, I suggest you so this many times. It works best if you can even inspect the property but even if you can’t, make the phone calls, do the numbers and do whatever due diligence you can.
You’ll get to the point very quickly where you’ll be able to do the due diligence and the numbers on any property you see and in a matter of a few minutes you’ll know what can and can’t be done there and what the numbers should look like…
If they look good…. that is… the actual numbers closely match what they need to be for the deal to work; then you can switch into phase 2 – proper due diligence, where you investigate the property further.
Here too, because of all the practise you’ll be able to get through this investigation quickly because you’ll know what to ask and who to ask to get the best answer.
When you are ready to get skin in the game, you are going to be fully prepared to engage in all there things you practised and do it efficiently, knowing that because of that practice, you’ve got everything covered off and squared away.
No one serious about making money would ever think of putting money into the markets without learning or developing some kind of system or strategy and them paper trading that system first, and it’s no different here.
You wouldn't think of handing your kid the car keys and telling them to go play without first making sure they have done a lot of practice and successfully tested for their licence?
These dry run feasibility, due diligence and number crunching sessions will give you confidence, skill and courage when you are ready to use your real money.
Also by the time you have done this a few times, you will have made a few contacts which may be able to bring new properties to you based on the criteria you are looking for.
Over the years, I have made so many contacts that now every time I open my inbox there are new properties for me to consider – these can be a goldmine and this practise time will get you started.