Commercial Real Estate Investing Tips
Is commercial real estate investing a more suitable investment than investing in residential properties? Generally, most of us realize that real estate in general is a great investment vehicle and both residential and commercial properties may be good investments. Either avenue may have a tremendous effect upon your net worth, but a lot of people think only of residential property when they think of investing in real estate. While 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 easier to raise larger quantities of capital (under $3M) for a commercial deal than it really 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 lenders, and private money from individual investors. If you are unable 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 just isn't a bad thing, but unfortunately you will have to walk away from some good deals that can not be acquired with creative financing techniques.
In commercial real estate it is more common for investors to pool their capital together and syndicate deals, additionally, you will find that smaller private equity firms and finance companies are more inclined to do joint venture projects and provide the needed capital to complete the deal if the deal seems sensible. So as a commercial investor you have the potential to raise capital for a deal from the exact same sources as residential projects for example: Traditional Financing and Hard-money, but in addition 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 sense of intrigue and prestige in relation to investing in commercial deals. Perhaps, because 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 think about it from a marketing perspective, most investors target residential property owners, thus making the residential market more competitive. In several arenas, from industry news sources, the Internet, all of the "We Buy Houses" signs virtually on every street corner, there are many 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 regards to selling their property. Most commercial properties under $5 million tend to be too large for some residential investors, yet too small for most institutional investors.
Commercial Real estate allows for "Forced" Appreciation
Residential properties tend to be valued according to other comparable properties which have sold within the area and are similar in features. In the event 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 your house is getting $900 a month in rent rather than the house across 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.
However, in commercial real estate, the valuation of a property is depending on the revenue that the property generates. Generally, commercial properties will still be subject to the "comps" of the place as it pertains to "How" that revenue is valued with regards to capitalization rates. Yet, the overall premise is the fact that, the greater revenue a property generates, the better that property will be worth.
As such, as a way to "force" the appreciation of your commercial property, you'll need to search out additional ways to increase the revenue that the property generates. A small increase in revenue can increase the value of a property significantly depending on the "Cap Rates" within the area for that type of commercial real-estate. Unfortunately, with residential real estate this is not a choice when you really can't force appreciation. Your property will be valued in the general variety of the market comps.
