We are all thinking about it and some of us are actually taking action and getting our hands on real estate investment properties. The longer the New York Stock Exchange fails to produce desirable returns, the more people start real estate investing.
For most of us, the obvious property choice 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 ground and the learning curve for doing a real estate business of this type is quite thin.
Of course, there is a downside to this approach. Competition is fierce, and there are markets where investors artificially raise the cost of properties while completely discouraging first-time homebuyers. If this is the case, the bursting of the housing bubble is only a matter of time.
How do you avoid these situations and still successfully invest in real estate? How to get ahead of the competition and also be prepared for bad times in real estate investments? The only answer I have is commercial real estate.
Why commercial real estate you might ask? Commercial real estate is a solid investment in good times and bad in the local real estate market. The commercial real estate I’m referring to is multi-unit apartment buildings.
Yes, you will become a homeowner and No, you don’t 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 expense/income ratio in a positive cash flow. Owning rental properties is all about positive cash flow.
With investing in single-family homes it’s easy to achieve a 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 at the value of recent sales of similar homes in your neighborhood, commercial real estate doesn’t care about the appreciation in value of other buildings. Property value is based solely on rental income. To increase the value of a commercial property, 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 listed some very useful books where you can find all the details.
What is another advantage of investing in commercial real estate? Financing commercial real estate is completely different than financing a single-family home. While you are financing a single-family home, you are at the mercy of lenders who want to make sure that you are able to pay for the house with your personal income. Commercial real estate financing is based on the properties ability to generate positive cash flow and cover the cost of financing.
After reading all of this information on commercial real estate, you’ll want to get out there and dive into the deals. Not so fast. First, you need to learn as much about real estate as possible. In commercial real estate you are dealing with professionals. If you come across too much of a newbie, you’ll waste 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 if he can’t demonstrate at least some real estate investing experience.
What is the solution to this? Go out and make a single-family home offer or two yourself. It doesn’t matter if you make big profits to begin with. Regardless, most novice investors are losing money on their first trade. If you can 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 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 a landlord.
Here’s another observation I made during my real estate investing career. Most people like to analyze, learn, discuss and analyze some more. They never actually got to do a real estate deal. They love to talk about real estate investments, but they never did it themselves.
My approach to real estate investing was simple.
– I bought some books on real estate investing.
– I read every one of them.
– I made a simple plan for 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.
– 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 deals under your belt, you can go out and start looking at commercial real estate and even impress seasoned investors with your knowledge. Because you did this experience by yourself and you know what you’re talking about.
Reference book for commercial real estate investments:
Gary W. Eldred, PhD: “Make money with low-income properties”
Jack Cummings: “Real Estate Investment and Financing Manual”
You will find these books and many more on my real estate investing website at http://www.suncoastrenttoown.com/author_directory.htm
Sincerely,
Pedro Dobler
