We all think about it and some of us take action and get our hands on real estate investment properties. The more the New York Stock Exchange fails to produce desirable returns, the more people start investing in real estate.
For most of us, the obvious property choice is a single-family home. Although you can invest in real estate without owning a home, most people follow the experience they have had buying their own home. It’s familiar ground and the learning curve for doing such a real estate transaction is quite slim.
Of course, there is a downside to this approach. Competition is fierce and there are markets where investors artificially increase the cost of properties while discouraging first-time buyers. If so, the bursting of the housing bubble is only a matter of time.
How to avoid these situations while succeeding in investing in real estate? How do you stay ahead of the competition and also prepare for bad times in real estate investments? The only answer I have is commercial real estate.
What commercial real estate could you ask? Commercial real estate is a solid investment in the ups and downs of the local housing market. The commercial real estate I am talking about is made up of multi-unit buildings.
Yes, you will become the owner and No, you will not have to do the work yourself. You are the owner and not the manager of the building. The cost of owning and managing the building is part of your expenses and will be covered by your rental income.
Apartment buildings are considered commercial buildings if there are 5 or more units. For the numbers to work, you should consider owning several small apartment buildings, or you should opt for larger buildings. This will keep the expense to income ratio in a positive cash flow. Owning rental property is all about positive cash flow.
By investing in single-family homes, it’s easy to get positive cash flow. Even if your rental income doesn’t cover your expenses 100%, home appreciation will contribute to positive cash flow. With commercial real estate, the rules are different.
While single-family homes are appraised based on the value of recent sales of similar homes in their neighborhood, commercial real estate doesn’t care about the appreciation in value of other buildings. The value of the property is based solely on rental income. To increase the value of commercial real estate, you need to find a way to increase rental income. The calculation formula would be too much for this short article. I have listed some very useful books where you can find all the details.
What is the other advantage of investing in commercial real estate? Commercial real estate financing is completely different from financing a single family home. While you’re financing a single-family home, you’re at the mercy of lenders who want to make sure you’re able to pay for the home with your personal income. Commercial real estate financing is based on the ability of properties to generate positive cash flow and cover the cost of financing.
After reading all this commercial real estate information, you’ll want to get out there and dive into the deals. Not so fast. First, you need to learn as much as you can about real estate. In commercial real estate, you are dealing with professionals. If you look too new, you’ll be wasting these guys’ time and your commercial real estate career will be over before it really begins. Second, no commercial real estate lender will lend you money unless you can demonstrate at least some real estate investing experience.
What is the solution for this? Go out and make yourself an offer or two on single family homes. It doesn’t matter if you make big profits to start with. Either way, most novice investors lose money on their first trade. If you manage to show positive cash flow with your single-family home offerings, you’re ahead of the pack.
My advice, buy a small single family home in a decent neighborhood and rent it out right away. This will keep your personal expenses to a minimum and you will have rental income to cover your monthly expenses. As a bonus, you gain experience as an investor and as an owner.