Investing in Commercial Real Estate
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Commercial real estate is a complex property investment that requires due diligence and alertness. The returns from investment in commercial real estate are much higher than investing in residential real estate and this is what makes it money spinning. You can define commercial real estate that has not more than four houses in a complex used as a residence. It is a widely used term for real estate used for other commercial purposes like hospitals or industrial units.
You must first understand all aspects of investing in commercial real estate before you take the plunge. First, make a shortlist of all available properties, and then screen out all except those that seem most attractive. Next, seek financing in the form of loans to purchase this commercial property.
During this time, assess the resale value, cost of improvements and other regulatory issues related to the property. If there are, too many problems leave the property before you lose all your money.
There are several advantages of investing in commercial real estate. Initially, you may have to invest in some renovations of the property, after which you will have a regular source of income from each dwelling in the property. Second, you are spreading your risk over several residences, so that you get some rental income even if one residence is empty. At the end of the month after paying all taxes and bills, you can still make a profit of a thousand dollars from each residence, as you are the master.
Overtime, you can invest in more commercial real estate properties and hire a manager for managing them. You can give him rent-free accommodation in lieu of his services and pay him an hourly wage if he is handling more work. This will give you free time with your family and a chance to pursue your hobbies, while you get income month after month. You can use this time to seek out more properties strategize your investments.
You can also upgrade facilities in your commercial real estate and pass on the incremental cost to your tenants. Despite these renovations, you can still make a good profit every month. Moreover, this increases the cost of your property and is a worthwhile cost. You can run a commercial real estate business either full-time or part-time depending on your convenience and need for funds. Thus, commercial real estate is a business with low investment and wonderful returns.
Is Real Estate Investing For You?
The real estate business is a potentially lucrative way of growing your money with hardly any risk in terms of the product you will be investing your money in. But you need to consider two important factors before you begin.
Capital
Well, for one thing, to be an investor requires capital. It’s difficult to raise capital when you can barely make YOUR student loan payments or the prospect of your children going off to college weighs heavily on you.
It requires some talent (or lots of research) to find creative ways to raise capital. It will also take some self-control to hold onto it.
Provide that you do not decide to purchase vacant land (which would generally take some time to realize a profit you can be happy with), when you buy your first property you will have to consider how fast it would be to get your capital back so you can keep business going.
The purchase amount should not take up your entire capital because, if you want to realize a nice profit, you will need to spend on such things as…
- remodeling or renovation
- repairs or maintenance
- electrical bills
- heating bills
Risk
What’s more, even if real estate presents a golden opportunity to be part of a market that has grown steadily through the years (as opposed to the stock market, for instance), there is also the risk that one bad decision can stop your fledgling business on its tracks.
That is why it is important that you study the market before jumping in, paying special attention to instances of failed ventures (there are hundreds online). But it will take some patience to sift through all the material online that is aimed at nothing more than trying to sell you something. It will also take up lots of your time before you even begin.
When you make a decision, say to remodel a home, you need to minimize the risk that what you change will do little to increase property value. You will have to study the houses in the same area, and what kinds of people (families, singles) live in them, before you make any major decision to remodel (e.g., changing the number of bedrooms).
If you decide to rent, you will have to deal with tenants; if you decide to sell, you will have to deal with buyers; and both involve risk.
But you can minimize the risk of a bad decision by starting slowly. Many successful real estate investors started out as agents or brokers before they put their own money into the business. Perhaps, you would want to do the same thing.
Your Downpayment
Your Downpayment and LTV
More than how much mortgage you can afford, some lenders will actually first look at how much of a downpayment you can make. The majority of lenders require anywhere from a 5% to 20% downpayment on the price of a house you want to buy.
Your Down Payment Can Be a Valuable ‘Leverage’
Your down payment amount can greatly impact your mortgage and, provided you can raise enough cash, it does not have to be a hindrance. It can even prove to be a valuable tool.
For instance, if you offer a lender a bigger downpayment than is required, you gain leverage to negotiate for a speedy approval of your mortgage without having your income verified. Also, a bigger down payment may mean that a less than optimum credit standing will be ignored.
Moreover, if you put more cash down, you will not only lower your monthly mortgage dues you will also be able to buy more expensive property.
LTW – How It Is Calculated
The downpayment will not necessarily be equivalent to the cash you provide, since settlement expenses may eat into it. But in general, your down payment should be the value of the property minus the amount the lender will provide.
Lenders calculate the downpayment via the LTV (loan to value) ratio, calculated as follows in the example below.
Property value = $250,000
Loan amount = $180,000
LTV = ($250,000 – $180,000) / $250,000 = 28%
An LTV of 28% is acceptable, since most lenders only require 20%. If you do not hit 20% you can make your LTV acceptable by putting down more cash or opting for less expensive property.
If you do not want to settle for cheaper property, you can increase the cash you put down by considering other sources, such as borrowing from your 401(k) and paying it through a salary deduction or postponing a yearly vacation.
The LTV is useful in avoiding confusion in cases of financial settlement where the amount that constitutes the cash you put down can mean a different amount to you and the lender.
Therefore, many loan approval guidelines consider LTV rather than down payment and require insurance for LTVs above 80%, which is similar to requiring mortgage insurance for downpayments less than 20%.
The Top Three Best Real Estate Investments
The Top Three Commercial Real Estate Investments a la Jason Gilbert President of Commercial Training Institute.
The magic of all of these real estate investments is that they are recession-proof, meaning they’ll get be great investments if the US economy slows or stalls.
1. Buy Mobile Home Parks
Advantages:
Mobile Homes require minimum maintenance and management
Huge Cash Flow
Opportunity for creating additional profit centers.
Most of mobile home parks range from 10 to 20 acres – some are even as large as 50 acres.
Land becomes valuable that eventually replaced by retail, residential, or commercial real estate. Mobile home parks are creating huge amount of cash flow because you are renting the dirt that the mobile homes sit on - which makes it a very attractive investment.
By leasing the land to residents, there is very little maintenance required. You will need to ensure that the electrical, gas, water and sewer are in good condition, but from the point of connection into their homes, the owners are responsible for all maintenance expenses. The expenses incurred by the mobile home park owner are minimal, (compared to apartments or single family homes)
Other Benefits:
Most residents stay for a very long time.
Creating many profit centers, like selling new units to tenants on a lease option (or sold on a note). So you are not only leasing the land, but you are selling the mobile home on terms as well.
2. Invest in Self-Storage Units
There are Three “Generation” Types of Self Storage Units.
1st Generation: As Defined, usually developed in the 1960s and 1970s.
2nd Generation: Typical row buildings, some multi-story facilities and conversion to older buildings.
3rd Generation: Excellent Lighting, air conditioned units and aesthetics.
Invest in 2nd Generation. They offer the biggest bang for the buck. Look for units with high occupancy.
Self Storage Park Advantages
Low Maintenance
No Tenant Headaches
Large Demand in Boom or Bust Cycles. People will utilize storage when they downsize in a real estate bust. People will utilize self-storage when they are upgrading to bigger homes.
Cash Flow
3. Invest in Self-Assisted Living complexes.
Baby Boomers Drive this market.
Advantages.
Cash Flow
Large Demand
Little Maintenance
Looking at Jason’s recommendations, you’ll see one thing in common. Very low maintenance and management and very high cash flow.
This is my type of investment. High Cash Flow and Low Maintenance.
Jason Gilbert is teaching people all over the country how to buy commercial real estate with none of your own money or credit.
Check it out here:
Why Invest In Real Estate?
By Mark Archer, Founder Bullrealestate.com
Why You Should Invest in Real Estate
There are 3 main reasons why real estate is arguably the best investment.
1. Leverage. This is where you can partner with your banker (or the seller through ’seller finance’) to build a massive portfolio of real estate assets.
2. Cash Flow. Good real estate investments produce cash flow which means you can enjoy a passive income on a monthly or quarterly basis.
3. Tax Benefits. The IRS legally allows you to write off tax deductions over the life of your investment. This is one of the hidden and most overlooked reasons that real estate investments are far superior to stocks or businesses.
Bonus: Real estate is tangible and it is not likely to depreciate over time time. [Editor note: Many parts of the U.S. are experiencing a decline in real estate prices. However, When analyzing year over year returns, real estate is arguably still a relatively more stable investment when comparted to paper or business]
Many investments are tangible (cars, electronic equipment, etc.) but they usually depreciate so fast, that if you go into buying and selling them, you have to do it at a very rapid turnaround rate before time weathers your investment. That is not the case with real estate. Even if you just sit on your investment, it will most likely not depreciate; and you can take your time reselling because time will only make it more valuable.
Real Estate Investing – Better than the Stock Market?
The only investment that can approximate the profits of the real estate market in terms of size and speed of return is the stock market.
Like any other investments real estate is subject to the ups and downs of its market. However, the stock market, on the other hand, has such highs and lows that can make your heart stop at the thought of your hard-earned money being subjected to that roller coaster ride.
It is still fresh in many investors’ memories how the stock market has suffered sudden, precipitous drops over time.
Captured Market vs. Volatile Market
Experts often quip that the reason real estate is such a good investment is because “God isn’t making any more of it.” With burgeoning populations come a burgeoning demand – but the supply can only be multiplied to a certain extent (e.g., high rises).
Therefore, with real estate, you basically have a product that will be demanded by more and more people over time. (Hence, the reason for a steady growth in prices.) The same cannot be said for stocks.
Low Risk vs. High Risks
By now it should be pretty clear why real estate is such a great investment. It can be more predictable when compared to other asset classes.
Minimal Experience vs. Expertise
Even amateur investors with minimal experience can make money in the real estate business. Of course, some research, and maybe some expert advice, is needed. But a slow learning curve will not kill you since, once you successfully determine a good purchase, you can take more time to learn the ropes as the value of your property increases.
One of the best reasons why real estate is such a good investment are the tax breaks it offers. In fact, the federal government encourages it by setting up multiple tax-break methods for people investing in real estate. One of these methods is the 1031 exchange.
Tax Breaks from the 1031 Exchange
Defined by Internal Revenue Code Section 1031, the exchange of sales proceeds from one investment to another means no gain or loss takes place and, therefore, capital gains taxes need not be paid.
The 1031 exchange basically means if you have real estate property and you sell it, and then take the money from the sale and reinvest it, you will not be taxed on your profit. This makes real estate a terrific investment, unprecedented in the freedom from taxes it offers.
Furthermore, moving proceeds between investments, as you grow your money sans taxes, is not that hard since real estate offers many investment options, such as vacant land, warehouses, rentals and apartments, industrial or commercial buildings, and shopping malls.
Tax Breaks from Depreciation
The real estate investment arena is one place where the word “depreciation” does not have the negative connotation it usually does. Investors consider depreciation as the best real estate tax break because it takes little effort.
If you invest in real estate, the Internal Revenue Service will require you to depreciate your properties, only as a paper loss, to make allowances for regular wear and tear. But although the depreciation appears on paper, the value of your land does not depreciate. This tax break applies as follows:
Money invested in vacant land plus part where structure/s are built = 100%
Commercial property = straight-line depreciation over 39 years
Money invested in condominiums = 100%
Residential property = straight-line depreciation over 27.5 years
Tax Breaks From Being a Professional
The government will give you additional tax breaks if you make your living in the real estate market as a professional. In fact, the government may give you an almost unlimited amount of deductions on the properties you invest in! You just have to meet the following requirements.
Time requirement. Spend over half your work hours in real estate activities and you qualify as a professional, subject to certain provisions of income.
Material participation requirement. Make the major decisions of your real estate business and you qualify, but you can delegate responsibilities, provided approval on crucial matters (e.g., pricing, tenants, etc.) rests on you and you meet the time requirement.
There are also other tax deductions you can benefit from as a professional, such as personal property depreciation where you can depreciate the appliances, cars, and trucks you use on your investment property for a tax break.