We all are thinking about it
and some of us are actually taking action
and getting their hands on real estate
investment properties. The longer the NY
Stock Exchanges doesn’t produce desirable
returns the more people are starting with
real estate investments.
For most of us the obvious
choice of properties are single family
homes. Although you can invest in real
estate without owning a home, most people
follow the experience they made while
purchasing their own home. This is familiar
ground and the learning curve for doing a
real estate deal of this type is pretty
slim.
Of course there’s a
drawback with this approach. The competition
is fierce and there are markets where
investors are artificially driving up the
cost of the properties while completely
discouraging first time home buyers. If this
is the case, the burst of the real estate
bubble is just a matter of time.
How do you avoid these
situations and still successfully invest in
real estate? How do you get ahead of the
competition and be prepared for bad times in
real estate investments as well? The only
answer I have is commercial real estate.
Why commercial real estate
you might ask? Commercial real estate is a
solid investment in good and bad times of
the local real estate market. The commercial
real estate I’m referring to are multi unit
apartment buildings.
Yes you will become a
landlord and No you don’t have to do the
work by yourself. You are the owner and not
the manager of the apartment building. The
cost of owning and managing the building is
part of your expenses and will be covered by
the rent income.
Apartment buildings are
considered commercial real estate if there
are 5 or more units. To make the numbers
work you should consider to either own
multiple small apartment buildings or you
should opt for bigger buildings. This will
keep the expense to income ratio at a
positive cash flow. Owning rental properties
is all about positive cash flow.
With investing in single
family homes it is easy to achieve positive
cash flow. Even if your rent income doesn’t
cover your expenses 100%, the appreciation
of the house will contribute to the positive
cash flow. With commercial real estate the
rules are different.
While single family homes
are appraised by the value of recent sales
of similar homes in your neighborhood,
commercial real estate doesn’t care about
the value appreciation of other buildings.
The value of the property is solely based on
the rent income. To increase the value of a
commercial real estate you need to find a
way to increase the rent income. The formula
on how this is calculated would be too much
for this short article. I listed a few very
helpful books where you can find all the
details.
What’s another advantage
to invest in commercial real estate?
Commercial real estate financing is
completely different than financing a single
family home. While financing a single family
home you are at the mercy of lenders who
want to make sure that you are in the
position to pay for the house with your
personal income. Commercial real estate
financing is based in the properties ability
to produce positive cash flow and to cover
the financing cost.
After reading all these
information about commercial real estate you
want to go out there and dive into the
deals. Not so fast. First, you need to learn
as much about real estate as possible. In
commercial real estate you’re dealing with
professionals. If you come across too much
as a newbie you will waste these guys’ time
and your commercial real estate career ended
before it actually started. Second, no
commercial real estate lender will lend you
any money if you can’t show at least a
little bit of real estate investment
experience.
What’s the solution to
this? Go out there and do one or two single
family home deals yourself. It doesn’t
matter if you make huge profits to start off
with. Most newbie investors are loosing
money on their first deal anyway. If you can
manage to show positive cash flow with your
single family home deals you are ahead of
the pack.
My advice, buy a small
single family home in a decent neighborhood
and rent it immediately. This will keep your
out of the pocket expenses at a minimum and
you will have rent income to cover for your
monthly expenses. Bonus, you gain experience
as an investor and as a landlord.
Here’s another observation
I made during my real estate investment
career. Most people like to analyze, learn,
discuss and analyze some more. They never
actually got to do a real estate deal. They
love to talk about real estate investments,
but never did it themselves.
My approach to real estate
investment was simple.
-
I bought some books
about real estate investment.
-
I read every single one
of them.
-
I put together a simple
plan on how I want to get started.
-
I started looking for
properties.
-
I bought my first
investment property 30 days after I started
reading my first book.
-
I made positive cash
flow with all of my properties so far.
What is my point? You have
to go out there and practice what you’ve
learned. The only valid credential in the
real estate business is practical
experience. Having a couple of deals under
your belt, you can go out there and start
looking at commercial real estate and even
impress seasoned investors with your
knowledge. Because you made this experience
by yourself and you know what you’re talking
about.
Book reference for
commercial real estate investments:
Gary W. Eldred, PhD: “Make
Money with Small Income Properties”
Jack Cummings: “Real
Estate Financing and Investment Manual”
You will find these books
and many more on my real estate investment
website at
http://www.suncoastrenttoown.com/author_directory.htm
Sincerely,
Peter Dobler
