We all are
thinking about it and some of us are actually
taking action and getting their hands on real
estate investment properties. The longer the
NY Stock Exchanges doesn’t produce desirable
returns the more people are starting with real
estate investments.
For most of
us the obvious choice of properties are single
family homes. Although you can invest in real
estate without owning a home, most people follow
the experience they made while purchasing their
own home. This is familiar ground and the learning
curve for doing a real estate deal of this type
is pretty slim.
Of course
there’s a drawback with this approach. The competition
is fierce and there are markets where investors
are artificially driving up the cost of the
properties while completely discouraging first
time home buyers. If this is the case, the burst
of the real estate bubble is just a matter of
time.
How do you
avoid these situations and still successfully
invest in real estate? How do you get ahead
of the competition and be prepared for bad times
in real estate investments as well? 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 and bad times
of the local real estate market. The commercial
real estate I’m referring to are multi unit
apartment buildings.
Yes you will
become a landlord and No you don’t have to do
the work by 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
the rent income.
Apartment
buildings are considered commercial real estate
if there are 5 or more units. To make the numbers
work you should consider to either own multiple
small apartment buildings or you should opt
for bigger buildings. This will keep the expense
to income ratio at a positive cash flow. Owning
rental properties is all about positive cash
flow.
With investing
in single family homes it is easy to achieve
positive cash flow. Even if your rent income
doesn’t cover your expenses 100%, the appreciation
of the house will contribute to the positive
cash flow. With commercial real estate the rules
are different.
While single
family homes are appraised by the value of recent
sales of similar homes in your neighborhood,
commercial real estate doesn’t care about the
value appreciation of other buildings. The value
of the property is solely based on the rent
income. To increase the value of a commercial
real estate you need to find a way to increase
the rent income. The formula on how this is
calculated would be too much for this short
article. I listed a few very helpful books where
you can find all the details.
What’s another
advantage to invest in commercial real estate?
Commercial real estate financing is completely
different than financing a single family home.
While financing a single family home you are
at the mercy of lenders who want to make sure
that you are in the position to pay for the
house with your personal income. Commercial
real estate financing is based in the properties
ability to produce positive cash flow and to
cover the financing cost.
After reading
all these information about commercial real
estate you want to go 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’re dealing with professionals.
If you come across too much as a newbie you
will waste these guys’ time and your commercial
real estate career ended before it actually
started. Second, no commercial real estate lender
will lend you any money if you can’t show at
least a little bit of real estate investment
experience.
What’s the
solution to this? Go out there and do one or
two single family home deals yourself. It doesn’t
matter if you make huge profits to start off
with. Most newbie investors are loosing money
on their first deal anyway. If you can manage
to show positive cash flow with your single
family home deals you are ahead of the pack.
My advice,
buy a small single family home in a decent neighborhood
and rent it immediately. This will keep your
out of the pocket expenses at a minimum and
you will have rent income to cover for your
monthly expenses. Bonus, you gain experience
as an investor and as a landlord.
Here’s another
observation I made during my real estate investment
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 never did
it themselves.
My approach
to real estate investment was simple.
-
I bought some books about
real estate investment.
-
I read every single one of
them.
-
I put together 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 positive cash flow
with all of my properties so far.
What is my
point? You have to go out there and practice
what you’ve learned. The only valid credential
in the real estate business is practical experience.
Having a couple of deals under your belt, you
can go out there and start looking at commercial
real estate and even impress seasoned investors
with your knowledge. Because you made this experience
by yourself and you know what you’re talking
about.
Book reference
for commercial real estate investments:
Gary W. Eldred,
PhD: “Make Money with Small Income Properties”
Jack Cummings:
“Real Estate Financing and Investment Manual”
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