Commercial Real Estate
Too often investors are one-dimensional in their approach to real estate investing. While these investors are light years ahead of individuals who take no action, these investors are still potentially limiting their success. One-dimensional investors also potentially limit their personal satisfaction by not exploring additional areas of real estate investing. You should never let the fear of the unknown, or a lack of confidence in your own ability, prevent you from exploring new areas of financial investment.
Commercial real estate is one area of real estate investing that is often overlooked. Many individuals bypass even investigating commercial real estate, simply because the topic intimidates them. This is unfortunate because commercial real estate can be a tremendous source of cash flowa primary reason many investors get involved with real estate in the first place. Many who have braved the world of commercial real estate have found they are able to generate more cash flow and wealth through commercial real estate then through any other real estate strategy, and that commercial real estate t is actually fairly straightforward and easy to learn.
Never limit yourself because of a lack of knowledge, or fear that an area of investing is too big for you. By learning the basics of commercial real estate, you can determine if this is an area that interests you, and one that might work for you.
Reasons People Invest in Commercial Real Estate
Perhaps the number one reason that people invest in commercial real estate is the wealth building opportunities it provides. One deal completed in commercial real estateas a general ruleis more likely to produce cash flow than one deal completed in residential real estate. In addition, there is a level of cash flow protection that commercial real estate offers that residential real estate does not. If you buy a residential single-family home, then you are dependent on renting out that unit to produce cash flow. In commercial real estateparticularly when multiple units are involvedyou can have one or two units unoccupied, and still generate levels of cash flow. You also have the added benefit of having longer leases with certain types of commercial property.
Aside from financial considerations, many individuals choose commercial real estate because of lifestyle considerations. The central nature of commercial real estate means that if you own a commercial real estate property, you can deal with all prospective and current tenant issues at a single location.
Types of Commercial Real Estate Investing
In a broad sense, commercial real estate is any property that is used in conducting business. Four of the most common types of commercial real estate are:
Retail - The commercial retail market comes in all shapes and sizes, ranging from regional shopping centers to community malls to strip centers. The strip center is where most investors will first step into the retail market.
Industrial - Includes bulk warehouses, office warehouses, large manufacturing spaces, research and development parks, industrial parks, and storage spaces. Industrial-specific investments can be a wonderful source of income if purchased correctly. One of the members of your power team should be someone familiar with the industry you are investigating, and should be able to do inspections on the property.
Office - Office property can vary from high-, mid-, and low-rise buildings to garden offices. A garden office is usually considered to be a one- to five-floor complex with multiple buildings and open space in between. Investing in garden offices or apartments may be a great way to begin your investing with cash flow, and also offers the ability to hold large areas of land for future development.
Residential (multi-family) - Apartment buildings are perhaps the most popular choice of investment for the beginning investor. Technically, any property possessing more than four units is considered a commercial property. Apartments will always generate a need in society, as there will always be a segment of the population that cannot, or does not want to, purchase single-family homes.
In recent years, foreclosures, declining homeownership, higher lender standards, and a changing demographic base have all created more demand for apartment buildings. In their forecast for 2012, Kiplinger anticipates that home prices will continue to fall, around 2%, while home construction overall will increase by about 15%. The vast majority of this increase will be in apartment buildings “to serve the hot rental market” (www.kiplinger.com/businessresource/economic_outlook/).
While apartment buildings offer tremendous cash flow opportunities, other commercial deals might be a better fit for your investing goals and objectives. If you are interested in commercial real estate, don’t simply lock into one area unless you have investigated multiple types of commercial real estate to see what might be the best fit.
Property Valuation
Where comps are used often to determine the value of a single-family home, the property’s ability to produce cash flow is a primary deciding factor in determining a commercial property’s worth. Comps work with residential properties because it is fairly easy to compare one home in an area with others based on recent sale price, comparable size, condition, type, and year of construction of other homes in the area. Finding comparable commercial properties is often more difficult, and thus, different criteria are used in determining a property’s true value.
Remember, you are not buying a home to live in; you are effectively purchasing a business, and a detailed analysis of the cash flow the property can generate is an absolute must. The ability of the property to generate rental income is perhaps the most important criteria to consider. Other things that you should consider are the size, condition, and location of the building, financial stability of the market you are looking to invest in, and levels of competition that you are competing against.
Finding the Deal
Just as circumstances happen in residential properties to create motivated sellers, circumstances also occur to those who own businesses. Owners of commercial property can encounter personal and professional challenges that put them in a situation that forces them to sell, creating excellent opportunities for the savvy investor. The cash flow in the buildings they own may be positive, but extenuating circumstances may force the sell. Your knowledge of dealing with motivated sellers should be applied in these situations.
Finding deals in single-family homes is fairly straightforward to the nature of that type of investment. For beginning commercial real estate investors - as with any property you investigate - you should first ask yourself “Can the property I am looking to acquire generate positive cash flow immediately?” If it can, then you can continue with your due diligence. If it cannot, then you are probably best to continue your search.
When conducting your due diligence, be sure to work with the appropriate members of your power team to determine whether the deal makes financial sense. Commercial real estate can be extremely profitable, but there is also less room for error. Be sure that you acquire the knowledge necessary before you begin any venture. Rich Dad education offers classes in commercial real estate, taught by instructors who have vast experience in this field.
Commercial real estate can be an exciting area of investing. The advantages and cash flow generating opportunities are abundant. Many of those that succeed in commercial real estate would never consider residential properties as the work-to-reward ratio doesn’t compare. Whether or not it ends up being an area that fits your objectives, it would behoove you to investigate commercial real estate in more depth.