We all think about it and some of us actually take action and take real estate into our hands as an investment. The longer the NY Stock Exchanges fail to achieve desirable returns, the more people start investing in real estate.
For most of us, the obvious choice of real estate is single-family homes. Although you can invest in real estate without owning a home, most people follow the experience they have had in buying their own home. This is familiar ground and the learning curve for such a real estate business is quite lean.
Of course, there is a disadvantage to this approach. Competition is fierce and there are markets where investors are artificially driving up the cost of real estate while completely deterring first-time home buyers. If this is the case, the bursting of the real estate bubble is only a matter of time.
How do you avoid these situations and still invest successfully in real estate? How do you manage to stay one step ahead of the competition and be prepared for bad times when investing in real estate? The only answer I have is a commercial real estate.
Why commercial real estate, do you perhaps ask yourself? A commercial real estate is a solid investment in good and bad times of the local real estate market. The commercial properties I am referring to are apartment buildings.
Yes, you become the landlord and no, you don’t have to do the work yourself. You are the owner and not the administrator of the apartment building. The costs of owning and managing the building are part of your expenses and are covered by the rental income.
Multi-family houses are considered commercial property if there are 5 or more units. For the figures to work, you should consider either owning several small apartment buildings or opting for larger buildings. This keeps the cost/income ratio at a positive cash flow. The ownership of rental properties is about a positive cash flow.
When investing in single-family homes, it is easy to generate a positive cash flow. Even if your rental income does not cover your expenses 100%, the increase in the value of the house will contribute to the positive cash flow. The rules are different for commercial properties.
While single-family houses are valued according to the value of recent sales of similar houses in your neighborhood, a commercial real estate is not interested in increasing the value of other buildings. The value of the property is based solely on rental income. To increase the value of a commercial property, you need to find a way to increase the rental income. The formula how this is calculated would be too much for this short article. I have listed a few very helpful books where you can find all the details.
What is another advantage of investing in a commercial real estate? Commercial real estate financing is very different from financing a single-family home. When financing a single family home, you are at the mercy of lenders who want to ensure that you are able to pay for the house with your personal income. Commercial real estate finance is based on the ability of the real estate to generate a positive cash flow and to cover the financing costs.
After you have read all this information about the commercial real estate, you want to go out there and immerse yourself in the agreements. Not so fast. First, you need to learn as much as possible about real estate. In the commercial real estate industry, you are dealing with professionals. If you show up too much as a newcomer, you will be wasting the time of these guys and your career in the commercial real estate will end before it actually begins. Second, no commercial real estate lender will lend you money unless you have at least a little experience with real estate investments.