Why Invest in Commercial Real Estate

by Dilip Motabhoy on Monday 2 August 2010, 8:24 PM | Category: Finance| View: 1284 views
 
 
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Real Estate Investment

There has been an ongoing theory by many that investing in real estate was "the best" investment that one could make. The proponents site the numerous reasons to focus on real estate over other investments including: Safety, Income, Appreciation, Supply and Demand, and most importantly Return on Investment. Most people who choose to invest in real estate focus primarily on residential properties which are 1 to 4 units. There are advantages in investing in single family homes but I want to offer some advantages to investing in commercial multifamily properties also. Let us compare the two options.

Who Should Invest in Residential Real Estate

The obvious reason people choose to invest in single family houses versus apartment buildings are obvious. First single family homes are more readily available and most people are familiar with them.  For the average person owning the home they live in is their greatest investment. This is the American dream. Therefore there is a large market of buyers and renters. The second reason people choose to invest in one to four unit homes is the cost of entry. Before 2008 there were many programs to allow a real estate investor to purchase residential housing with down payments of 20%, 10%, 5% or even nothing. If an investor did not own a home he could purchase one for 5%, 3% or nothing down with very attractive interest rates, move in, upgrade the home and sell it or rent it out. Those days are gone. They may never come back. But ultimately the person who has little experience and relatively limited funds should start with residential investing. For the two reasons mentioned above, familiarity and limited funds required, this should be the starting point for most. This should not be were you stop if you want to create a lifetime passive income and leave a lasting financial legacy for your family.

Why Invest In Commercial Real Estate

If you have a long term outlook on investing and you want income and appreciation now is a great time to invest in commercial real estate. There has always been great financial opportunities investing in apartment buildings and mixed use properties. But as the market values have taken a temporary dive without rents going down, this makes this an excellent time to invest in commercial property. Stable income with appreciation. This is a very good long term investment. With good property management in place investing in multifamily properties could be the passive income that many investors look for.

Barriers to Buy Commercial Property

The primary reason people shy away from investing in multifamily versus residential properties is the money necessary for down payment, reserves and upkeep. This is a valid concern. If you do not have adequate finances I would not suggest apartment buildings. That said the barrier to entry is less than what you may think with creative financing. Using creative techniques and strategies a buyer can own large units for relatively a small down payment. There are possible options for little or no down payment. Yet you must be careful to purchase property that has positive cash flow enough to pay the mortgage, manage the upkeep and give you a an adequate return.

Residential versus Commercial

Assume an Investor had $60,000 to invest and wanted to know if they should invest in residential or commercial property. Assume conventional financing requiring 30% down with no other costs (not real but good for this example).

To purchase a residential property the buyer could get a single family home in a nice neighborhood for $200,000. The investor could expect to net between 400 and 500 per month as a net return to a single tenant.

To purchase a 6 unit apartment building for the same price and down payment the investor can expect to net $200 per unit or $1200 per month.

Which option would you choose? In reality there are many more options for creative financing when buying commercial property. Therefore one could purchase a larger building for the same investment.

Before you invest determine your financial objectives and compare the opportunities in commercial as well as residential properties.

Commercial Real Estate Investing is an opportunity whose time has come.

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