We are all thinking about it and some of us are really taking action and getting our hands on real estate investment properties. The longer the New York Stock Exchanges do not produce desirable returns, the more people will start investing in real estate.
For most of us, the obvious choice of properties is single family homes. Although you can invest in real estate without owning a home, most people follow the experience they had when buying their own home. This is familiar terrain and the learning curve for doing such a real estate business is pretty slim.
Of course, there is a downside to this approach. Competition is fierce and there are markets where investors are artificially raising the cost of property while completely discouraging first-time home buyers. If this is the case, the bursting of the housing bubble is only a matter of time.
How can you avoid these situations and continue to invest successfully in real estate? How can you stay ahead of the competition and prepare for bad times in real estate investing too? The only answer I have is commercial real estate.
What commercial real estate might you ask about? Commercial real estate is a solid investment in the good and bad times of the local real estate market. The commercial properties I am referring to are multi-unit apartment buildings.
Yes, you will become an owner and No, you do not have to do the work yourself. You are the owner and not the manager of the apartment building. The cost of owning and managing the building is part of your expenses and will be covered by rental income.
Apartment buildings are considered commercial real estate if there are 5 or more units. For the numbers to work, you should consider owning several small apartment buildings or you should go for larger buildings. This will keep the income / expense ratio in a positive cash flow. Owning rental properties is all about positive cash flow.
By investing in single-family homes, it is easy to achieve positive cash flow. Even if your rental income doesn’t cover your expenses 100%, the appreciation of the house will contribute to positive cash flow. With commercial real estate, the rules are different.
While single-family homes are priced at the value of recent sales of similar homes in your neighborhood, commercial real estate does not care about the appreciation of other buildings. Property value is based solely on rental income. To increase the value of a commercial real estate, you must find a way to increase rental income. The formula for how this is calculated would be too much for this short article. I have listed some very useful books where you can find all the details.
What is another advantage of investing in commercial real estate? Commercial real estate financing is completely different than financing a single family home. As you finance a single family home, you are at the mercy of lenders who want to make sure you are able to pay for the home with your personal income. Commercial real estate financing is based on the properties’ ability to produce positive cash flow and cover the cost of financing.
After reading all of this information on commercial real estate, you want to get out there and dive into the deals. Not so fast. First, you need to learn all you can about real estate. In commercial real estate these are professionals. If you find yourself too rookie, you’ll be wasting these guys’ time and your commercial real estate career ended before it really began. Second, no commercial real estate lender will loan you money if you can’t demonstrate at least some real estate investment experience.
What is the solution to this? Get out there and make a single-family home sale or two yourself. For starters, it doesn’t matter if you make big profits. Most novice investors are losing money on their first trade anyway. If you can manage to show positive cash flow with single-family home deals, you’re ahead of the pack.
My advice is to buy a small single family home in a decent neighborhood and rent it right away. This will keep your out-of-pocket expenses to a minimum and you will have rental income to cover your monthly expenses. Bonus, you gain experience as an investor and as an owner.
Here’s another observation I made during my real estate investing career. Most people like to analyze, learn, discuss and analyze a little more. They never actually made a real estate deal. They love to talk about real estate investing, but they never did it themselves.
My approach to real estate investing was simple.
– I bought some books on real estate investment.
– I read each and every one of them.
– I made a simple plan on how I want to get started.
– I started looking for properties.
– I bought my first investment property 30 days after I started reading my first book.
– I made a positive cash flow with all my properties so far.
What is my point You have to go out and practice what you have learned. The only valid credential in the real estate business is practical experience. With a couple of offers under your belt, you can go out there and start shopping for commercial real estate and even impress seasoned investors with your knowledge. Because you did this experience yourself and you know what you are talking about.
Reference book for commercial real estate investments:
Gary W. Eldred, PhD: “Make Money With Low Income Properties”
Jack Cummings: “Real Estate Investing and Financing Handbook”
You will find these books and many more on my real estate investment website at http://www.suncoastrenttoown.com/author_directory.htm
Sincerely,
Peter Dobler
