A Surprising Fact About Commercial Real Estate Investing
Is commercial real-estate investing a more suitable investment than investing in residential properties? Fundamentally, all of us realize that real estate in general is a great investment vehicle and both residential and commercial properties can be good investments. Either avenue may have a massive impact on your net worth, but plenty of people think only of residential property once they think of investing in real estate. While this is undoubtedly 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's been my experience which it is somewhat easier to raise larger amounts of capital (under $3M) for a commercial deal than it is to raise $150,000 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. In case you are not able to raise capital from one of these three avenues, then you are required to acquire property in more of a creative manner with owner financing, subject to strategies, lease options, etc. This in itself isn't a bad thing, but unfortunately you shall have to walk away from some good deals that cannot be acquired with creative financing techniques.
In commercial real-estate it's more common for investors to pool their capital together and syndicate deals, additionally you will see 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 if the deal seems sensible. So as a commercial investor you have the potential to raise capital for a deal from the same sources as residential projects for example: Traditional Financing and Hard-money, but will also you might 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 buying commercial real estate deals. Perhaps, as a result of the state of the present 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 Net, all of 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 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 relation to selling their property. Most commercial properties under $5 million tend to be too large for most residential investors, yet too small for some institutional investors.
Commercial Real-estate allows for "Forced" Appreciation
Residential properties are usually valued based on other comparable properties that have sold in the area and are similar in features. If 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 does not matter too much if your target property has additional features, or if perhaps your home is getting $900 a month in rent rather than the house down the street that is only renting for $700 a month. Everything considered, your property will still be valued pretty close to the "comps" of the area.
On the other hand, in commercial real estate, the valuation of a property is in line with the revenue that the property generates. Now, commercial properties will still be 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 is worth.
Consequently, as a way to "force" the appreciation of your commercial property, you will need to discover 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" in the area for that sort of commercial real-estate. Unfortunately, with residential real-estate this isn't an option as you really can not force appreciation. Your property will be valued in the general variety of the market comps.
