A Guide To Commercial Real Estate Investing
Is commercial real-estate investing a more suitable investment than investing in residential properties? Generally, we all realize that real-estate in general is a good investment vehicle and both residential and commercial properties may be good investments. Either avenue may have a massive effect upon your net worth, but most individuals think only of residential property once they think of investing in real estate. Although this is obviously the most viable route for most people, commercial property can offer additional benefits the residential model can not offer.
Three Reasons Commercial Investments are better than Residential Deals:
Commercial Real-estate Provides you with More Access to More Capital
It has been my experience that it is somewhat simpler to raise larger amounts of capital (under $3M) for a commercial deal than it is to raise one hundred and fifty thousand dollars for a residential deal. As a residential investor your access to capital is limited primarily to traditional financing, hard-money loan companies, and private money from individual investors. If you are not able to raise capital from one of these three avenues, then you are forced to acquire property in more of a creative manner with owner financing, subject to strategies, lease options, etc. This in itself is just not a bad thing, but unfortunately you will have to walk away from some really good deals that can't be acquired with creative financing techniques.
In commercial real estate it really is more common for investors to pool their capital together and syndicate deals, additionally, you will discover that smaller private equity firms and finance businesses are more inclined to do joint venture projects and provide the needed capital to accomplish the deal should the deal makes sense. So as a commercial investor you've got the possibility to raise capital for a deal from the exact same sources as residential projects such as: Traditional Financing and Hard-money, but also you can access capital through smaller private equity firms, hedge funds, private REITs, investment groups, and also the list goes on.
There also appears to be a experience of intrigue and prestige with regards to investing in commercial deals. Perhaps, as a result of the state of the current commercial market, it appears investors are trending more toward investing in commercial projects.
Commercial Real-estate is Less Competitive
Whenever you consider it from a marketing perspective, most investors target residential property owners, thus making the residential market more competitive. In many arenas, from industry news sources, the World-wide-web, all the "We Buy Houses" signs virtually on every street corner, there are a lot of marketing tactics targeting residential property owners. If you take the exact same marketing strategies discussed and apply them to commercial real-estate, you will probably find you are the ONLY person contacting these commercial property owners in regards to selling their property. Most commercial real estate investing properties under $5 million tend to be too large for some residential investors, yet too small for some institutional investors.
Commercial Real-estate allows for "Forced" Appreciation
Residential properties can be valued according to other comparable properties that have sold in the area and are similar in features. Should the "comps" for a 3 bedroom/2 bathroom house in a particular neighborhood is roughly one hundred thousand dollars, then your property is probably going to be worth one hundred thousand dollars. It doesn't matter too much if your target property has additional features, or maybe if your home is getting $900 a month in rent in contrast to the house across the street that is only renting for $700 a month. Things considered, your property will still be valued pretty close to the "comps" of the area.
Conversely, in commercial real estate, the valuation of a property is based on the revenue that the property generates. Fundamentally, commercial properties are still subject to the "comps" of the area as it pertains to "How" that revenue is valued with regard to capitalization rates. Still, the overall premise is the fact that, the better revenue a property generates, the better that property may be worth.
As a result, to be able to "force" the appreciation of your commercial property, you'll need to seek out additional ways to increase the revenue that the property generates. A small rise in revenue can raise the value of a property significantly determined by the "Cap Rates" within the area for that type of commercial real-estate. Unfortunately, with residential real estate this isn't an option as you really can't force appreciation. Your property will be valued within the general array of the market comps.
