Buying Commercial Properties Review
Is commercial real estate investing a better investment than investing in residential properties? Essentially, most of us know that real estate in general is a great investment vehicle and both residential and commercial properties may be good investments. Either avenue can have a huge effect upon your net worth, but most people think only of residential property once they think about investing in real estate. Even though this is undoubtedly the most viable route for some 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 Gives you More Access to More Capital
It has been my experience which it is somewhat easier to raise larger quantities 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 lenders, and private money from individual investors. If you're unable to raise capital from one of these three avenues, in which case 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 shall have to walk away from some really 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, you shall also find 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 in the event the deal makes sense. So as a commercial investor you've got the possibility to raise capital for a deal from the same sources as residential projects such as: Traditional Financing and Hard money, and also you could 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 their state of the present buying commercial real estate 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 several arenas, from industry news sources, the Net, all of the "We Buy Houses" signs virtually on every street corner, there are plenty 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 have a tendency to be too large for many residential investors, yet too small for many institutional investors.
Commercial Real estate allows for "Forced" Appreciation
Residential properties are usually valued determined by other comparable properties that have sold within the area and also 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 house is getting $900 a month in rent rather than the house down the road that is only renting for $700 a month. Things considered, your property will still be valued pretty close to the "comps" of the place.
However, in commercial real estate, the valuation of a property is in accordance with the revenue that the property generates. Essentially, commercial properties will still be subject to the "comps" of the area as it pertains to "How" that revenue is valued when it comes to capitalization rates. Still, the overall premise is that, the more revenue a property generates, the more that property is worth.
As such, as a way to "force" the appreciation of your commercial property, you will need to seek out additional ways to improve 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 is not a choice while you really can not force appreciation. Your property will be valued in the general array of the market comps.
