Commercial Real Estate Investing 101: Learn everything you need to know to get started.
Commercial Real Estate Investing is an ever changing and multifaceted investment medium. The same investment strategies, such as short sales, REO or buying notes, gain and lose position in the same manner that stocks or bonds gain or lose their position. For this reason as an investor, in order to thrive in this business, you have to be flexible and capitalize on the best investment strategy at the moment. You must move with the economic trends and follow the laws of supply & demand.
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Commercial Real Estate Investing 101:
While short sales and REO are still powerful and very viable niches, even though we have seen confusion and reorganization with the different lenders lately, and patience is the name of the game, commercial real estate investing has been gaining attention and it is going to be even a more popular way of investing in the upcoming years.
For several investors commercial real estate investing has seemed as a way of investing out of reach or as a later goal, but actually it is becoming more achievable and lucrative for even the small investor than residential real estate, especially for apartment buildings, which are preferred by lenders over other types of commercial real estate.
There are some misconceptions that should be addressed:
- Financing is difficult – nowadays, it seems easier to get financing on a commercial project than a residential investment. Lenders look at the property performance and give less importance to the buyer’s credit: buyer’s credit can be in the lower 500s. Also structuring creative financing is not only possible but encouraged, even by lenders.
- Large downpayment is required – if the lender is a JV partner, financing is usually 100% of the purchase price. Also sellers are motivated in carrying second mortgages and lenders still allow second mortgage financing and other selling incentives as part of the deal structuring.
- Management is difficult – for larger apartment buildings, most managers live onsite and are dedicated to the management of only that specific property. Therefore there is a better control of the situation.
Also other important considerations are:
- Vacancies are low and getting lower – with the housing crisis and displaced homeowners (because of foreclosure or loss of job) there is a high demand for temporary housing (rent versus buying) and it is going to increase in the next year.
- Long term wealth – immediate cash flow and great appreciation potential in the next 5 to 10 years.
- Tax breaks and incentives.
- Critical mass principle – more units and more income streams lessen the risk.
As stated in a special online Report from the National Real Estate Investor Association, “55% of all respondents to a survey conducted by National Real Estate Investor and Marcus and Millichap Real Estate Investment Services believe that now is the time to buy apartments, followed by retail (32%). … Apartment owners are also bullish on rents, with 41% expecting that rents will increase in the next 12 months.”
In light of the facts and latest trends, as an investor always looking for the best way to capitalize in real estate, try to look into commercial real estate and at least add it as an option to your real estate investment strategy.