Commercial Real Estate Investing Guide: Don’t Limit Yourself to Residences

church-631078_1280First of all, there’s absolutely nothing wrong with investing in residences; however, don’t let any past residential experience limit you to just that segment. Although you may be comfortable in the residential sector, there are many other types of commercial real estate to consider. Additional options include office buildings, industrial properties, parking lots, and land to name a few.

It is always a great idea to weigh the pros and cons of purchasing, owning, and managing these various property types, and then choose your niche based on what suits you best. Will an apartment building, office complex, tract of land, or parking lot help you reach your goal? At this stage, it is crucial to think outside your comfort zone. Make your decision based on financial numbers.

You’re going to need to be prepared to spend a great amount of time when you start investing in commercial real estate. If it’s taking longer to get your first deal done, don’t get discouraged. It just means the right situation hasn’t come your way yet. The best deals come to investors that simply stick with it no matter what. It takes time to screen for deals and make offers. Much like anything else there is a learning curve that will get far easier over time. Good things come to those who wait.

It’s very important to build relationships with other investors when you’re getting started as a commercial real estate investor. Many commercial properties cost millions of dollars, and you may simply not be able to afford it on your own. Your best choice may be to partner with other like-minded individuals. Join your local real estate investor clubs and go to all meetings and events that you can. Network with as many people as possible and keep mind and eyes open. You never know who your next business partners will be.

Always, always, always have your financing lined up in advance. Commercial loans are structured differently than residential mortgages. Downpayment percentages are typically higher so you need to be prepared well in advance to submit an offer. There are many positive aspects to a commercial loan as opposed to a residential mortgage. Oftentimes commercial loans do not require personal liability. If the deal ends up going south, it won’t negatively impact your personal credit. In addition, commercial lenders don’t care if you borrow the downpayment from someone else. The money doesn’t need to come directly from you, or doesn’t need to sit in your personal bank account for ninety days.

Lastly, be prepared to lose your due diligence money. Once your offer is accepted, you will have a certain amount of time to perform an appraisal, property inspection, and any other inspection or test that is required by law. Although this is the same process that takes place with any residential property, these tasks cost a lot more money when it comes to commercial real estate. You may end up spending $5,000 plus only to discover that the property is not worth purchasing. Don’t be discouraged. The money you spend in due diligence could save you hundreds of thousands of dollars of problems.

If you stick to this guideline, this is certainly not a guarantee of success. There’s no magic formula to investing in commercial real estate. It takes a lot of hard work, plenty of persistence, and little bit of luck. Having said that, the more knowledge you have will greatly increase your chances of making it work.

Written by GilverBook Team

 

Commercial Real Estate Investing Guide: Learn the Language

open-house-1163358_1280Real estate is the most intriguing and time tested investment concept known to humankind. In fact, most people have been exposed to it since childhood when they first started playing the mega-popular board game Monopoly. Investing in real estate oftentimes leads people on the path of wealth accumulation; however, they need to realize that it’s a slow ride, and not an autobahn. Building a solid real estate portfolio takes time and patience. There is certainly a plethora of opportunities out there from which to choose, and it certainly does make financial sense to specialize in one particular area and then branch out from there. Once you become a solid real estate investor in one area, then diversify; otherwise you may end up spreading your time, and finances too short.

Many people begin their real estate investing career by purchasing single-family homes either for quick flips or a long-term rental strategy. Although this an excellent way to get your feet wet, moving on to larger, and more profitable commercial deals simply makes the most sense. You’ll find that a larger commercial deal requires almost the same amount of effort and due diligence as one single-family investment, which makes it even more attractive. For example, if an investor is planning to purchase ten rental units, it makes far more sense to buy a ten-unit commercial apartment building than ten separate single-family purchases. Not only will the purchase price per unit be significantly lower, the operational costs per unit will be reduced as well. That being said, there are a number of things to learn, consider, and decide upon when it comes to purchasing commercial real estate. This guide is a good resource to get you started thinking like a commercial real estate investor.

The very first item to cross off of your checklist is to learn the language of commercial real estate. As they say, if you want to walk the walk, you need to talk the talk. There is a tremendous amount of words and acronyms in commercial real estate that you may not be familiar with, and it is extremely important to learn them. The industry people that you will be working with, such as bankers, real estate brokers, and strategists, will assume that you know the commercial real estate vocabulary. You need to be taken seriously, and a lack of understanding their language will not accomplish that. Here are a few examples.

  • Ad Valorem: A tax based on the assessed value of a piece of property
  • Cash on Cash: Annual property income over how much you actually invested. The amount invested could be just the amount your down payment was.
  • Capitalization Rate (Cap Rate): Property income divided by the total value of the property.
  • Loan-To-Value (LTV): A ratio of how much money you’re asking from a lender to the total value of what you want to purchase.
  • Vacancy Rate: Percentage of properties that are vacant in a time period in a given area.

Written by GilverBook Team

Differences Between Single Family and Multifamily Home Investments

san-francisco-210230_1280Investing in residential real estate is always a good way to diversify your investment portfolio. The proper real estate investment option for you certainly depends on the time you can dedicate to managing and maintaining the properties along with your long-term financial goals. A good place to start is with either single family or multifamily properties. They have their own pros and cons, and are appealing to investors based on personal finances and investing preferences.

Single Family Investment Properties

There are many advantages to investing in single family properties over multifamily properties. The first being that many single family homes can be purchased below the fair market value. This is an important investment strategy because profits are made and lost at the time the property is purchased. When an investor purchases a property at a percentage below market value, they gain that percentage in equity from day one.

For example, a single family property is worth $100,000. An investor purchases it for $90,000 or ninety percent of the current market value. The investor gains a $10,000 or ten percent equity stake in the property as soon as it is purchased.

That being said, many multifamily properties are sold above their present market value due to the fact that they are less available in many areas. It all comes down to the law of supply and demand. In addition, the prospect that future improvements will result in higher rents tends to keep multifamily sales prices above current market value.

Property management expenses vary depending on the logistics of managing the properties, along with tenant population. It is certainly true that higher end single family properties with qualified tenants have less turnover on average than their multifamily counterparts. Renters of these homes tend to view their living conditions as more permanent, and have a far greater sense of pride in maintaining the property themselves. This results in less maintenance costs and repairs for the investor. Tenants of single-family properties typically do not outgrow the space nearly as quickly because there is usually a backyard, additional bedrooms, and, in most cases, a basement.

Multifamily Investment Properties

There are many benefits to investing in multifamily homes over single family properties. Multifamily presents a more reliable source of income. A vacant single family property generates absolutely zero income, while a multifamily commercial real estate property will rarely sit one hundred percent unoccupied. The units tend to be less expensive than a single family and therefore fill up faster. Many first-time real estate investors purchase multifamily properties so they can save money by living in one of the units. Living on the property also helps reduce the time and costs associated with management and maintenance.

Another huge benefit of multifamily properties is the fact that investors can own multiple units with less mortgage loans. For example, if an investor purchases ten single family homes, they are required to obtain ten separate mortgages. They are required to make ten separate monthly payments, along with ten quarterly property tax payments, and ten property insurance payments. Applying for ten loans can be frustrating, and, once obtained, all of the payments and paperwork is very time-consuming. On the other hand, if an investor purchases a ten-unit apartment building instead, they have the benefit of the same ten rental incomes with only one mortgage, one property tax, and one property insurance to deal with.

As you can see there certainly are differences between single family and multifamily residential property investments. If purchasing residential real estate is a good fit to your personality and investment strategy, then a combination of single-family, and multi-family units will help build a balanced portfolio.

Written by GilverBook Team

REITs Vs. Lease Option Investments

citiy-731216_1280When searching for a profitable real estate investment, it is always a smart idea to research various options. This article will provide you a comparison between Real Estate Investment Trusts (REITs) and a lesser known strategy referred to as Lease Option or Rent to Own property investing. Both methods have the ability to earn investors good returns; however, they are completely different from each other. That being said, you need to know exactly what you are getting yourself into. In order to increase the probability of success, it is crucial for the investment to fit your personality.

Let us start out by explaining exactly what a lease option contract is. The titleholder of the property agrees to lease the asset to a tenant that has an option to purchase the property for a price that is agreed upon at the start of the contract. Typically, the tenant has the option to purchase at any time during the contract term. Another aspect of this type of structured deal is that a portion of the monthly rental payment is applied towards the buyer’s down payment only if they end up purchasing the property. With a lease option contract the tenant is responsible for all maintenance issues, making life easier for the investor or owner.

Lease option investing is similar to flipping properties. It is crucial for the investor to purchase the property at less than market value in order to guarantee a profit when the tenant exercises the purchase option. If the tenant fails to purchase the property, there should be plenty of cushion to either sell the property to someone else, or lease the property with an option to purchase to another party.

For people that prefer a more hands off approach, investing in REITs is the perfect real estate investment strategy. As the investor, you are purchasing stocks in large real estate management companies that specialize in purchasing, developing, managing, and maintaining multiple properties. These assets include apartment building, office buildings, hotels, warehouses, storage, shopping centers, and other large facilities. Typically, REIT stocks are traded on major stock exchanges such as the New York Stock Exchange (NYSE).

Investors do not need to concern themselves with issues such as locating properties to purchase, making monthly mortgage payments, maintaining and managing tenants, liability issues, among a plethora of other items that property owners deal with on a daily basis. Instead, they are leaving all of those tasks up to the management teams of the companies they are investing in. Liquidating the asset is as easy as picking up the phone, or pressing a few buttons on your computer, smartphone, or tablet. In addition, most REITs pay dividends that add up over time.

We believe that any good real estate investment portfolio should include multiple REITs. Having said that, if lease option property investing sounds like something that you would enjoy, then try adding a deal or two to your overall strategy.

Written by GilverBook Team

Investing In Residential Real Estate Properties vs. REITs (Part 1/2)

real-estate-475875_1920Many people earn great returns on their investments by putting their money into residential real estate purchases. These types of properties include singe family homes, multi-family homes, individual condominiums, and townhouses. Although some investors purchase and then quickly sell the residential properties for profit, otherwise known as flipping, for the purpose of this article we will concentrate on holding the assets for long-term rental purposes.

We will also compare purchasing individual residential properties to investing in Real Estate Investment Trusts or REITs. Both options provide investors with an excellent opportunity to earn great returns on their money. However, they are quite the opposite of each other regarding the overall investment strategy.

Residential Real Estate Properties

Purchasing individual residential properties may very well be the best option for investors that are hands-on and enjoy having far greater control over the situation. That being said, investors certainly need to be aware of the various aspects involved before considering this type of commitment. It can take a considerable amount of effort and time in order to locate the correct single-family property.

If purchasing more than one property, investors need to multiply that effort and time by a significant amount. Some might not agree, but a good rule of thumb to go by is that two properties require three times the amount of work. Another hugely important factor is financing. Most people are not able to pay for the purchases in cash, and rely on obtaining mortgages. Regarding mortgages, some aspects to keep in mind are the down payments, monthly principal and interest payments.

Other factors to consider are the property taxes and insurance, maintenance fees, and management. If an investor decides to manage the property, s/he needs to be prepared to answer phone calls in the middle of the night from unhappy tenants. On the other hand, hiring property managers will add on yet another expense. The expenses need to be paid even if the properties are empty or the tenants are not paying their rent. Residential properties are often hard to sell, so it may take time to liquidate the assets. Investors are able to borrow against the asset, and build equity over time.

To be continued…

Should You Purchase Commercial Real Estate or REITs?

pieces-of-the-puzzle-592781_1280Investing in commercial real estate can be an extremely profitable venture. This sector includes properties such as retail stores, office buildings, industrial property, medical centers, hotels, farmland, multi-family housing or apartment buildings, warehouses, garages, and retail malls. If you are considering making an investment in commercial real estate, there are many well-positioned options for you to choose from. Serious consideration needs to be given to the type of involvement you would like to have, along with the financial commitment that you are able to make. We have outlined two excellent investment strategies in the commercial real estate arena, providing you with the key points for each option.

To many people, making an investment in commercial real estate involves purchasing and managing a building or buildings. This traditional method may work well for some investors; however, it is crucial to be aware of exactly what is involved in this type of commitment. Owning commercial property encompasses a hands-on approach.

The investor must spend time and resources to locate suitable properties and negotiate on purchase prices. Once purchase agreements are in place, the investor is responsible for entering into a mortgage with a lender. That is unless the investor happens to have cash assets. Typically, a twenty percent down payment is required, which can add up to large sums of money. For example, if the purchase price is $5 million, the twenty percent down payment is $1 million.

In addition, investors must be responsible for the monthly mortgage payments, property taxes, insurance, maintenance, and management fees. The bottom line is the bills are due even if there are no tenants to pay the rental income.

On the other hand, purchasing Real Estate Investment Trusts (REITs) is a great method for commercial real estate investors that are looking for a less involved approach. You do not need to think about management, liability issues, or working with tenants. When people invest in REITs, they are buying shares of companies that specialize in owning, operating, and managing commercial properties.

REITs trade on major stock exchanges, such as the New York Stock Exchange (NYSE). Investors are depending on the expertise of the REITs management teams to secure their investments. With a REIT, the investor is not responsible for making any monthly payments; in fact, most REITs pay regular dividends.

Additionally, investors are able to liquidate the investment extremely quickly; however, you cannot borrow against the asset. The investment may be as short term as selling the same day, or can be held in a portfolio for years on end, providing investors with extreme flexibility.

Written by GilverBook Team

REITs vs. Flipping Real Estate

bathroom-691341_1280Historically, Real Estate has always been a solid investment outlet with an abundance of opportunity to build wealth. There are many real estate investment options available; however, I will be concentrating on two in particular: Flipping real estate versus investing in Real Estate Investment Trusts, or REITs for short. Flipping property and REITS are an extremely interesting comparison, due to the fact they are on polar opposite ends of the real estate investment spectrum. Each have tremendous financial potential, but like any investment, there are certainly risks to consider.

Flipping Real Estate

Many investors have recently earned a fortune flipping real estate. Flipping typically involves purchasing property for well below how much it is worth, and selling it at a higher price, at or near market value. The principle is simple; however flipping real estate is not nearly as easy as it sounds.

Typically, most of the properties you will be able to purchase for less than market value, require extensive rehabilitation. In the minimum they need smaller repairs, and cosmetic updates. Of course this costs money, and most definitely needs to be factored into your investment strategy.

Anyone interested in flipping a property should bring in a professional construction expert. A good contractor will not only let you know the exact work that needs to be performed, but how much it will cost to fix up the property in order to sell it for the maximum amount. This figure is an enormous factor regarding profitability.

For example, if you purchase a property for $75,000, and spend $50,000 on repairs, and cosmetics, the market value must be well over $125,000 for you to earn a profit.

If you do not have the cash to purchase the property, and make the necessary repairs, and updates, then you will need to carry a mortgage. Factors to consider are the amount of cash required for the down payment, and the amount of the monthly principal, interest, taxes, and insurance. The property could sell extremely quickly; however, you need to be prepared for the fact that it may take several months to sell. Always factor in at least three to four months of mortgage payments when formulating your investment strategy.

Last but not least, you will need to hire a real estate agent to market and sell the property once all the work is complete. Please keep in mind that they charge three to five percent of the gross sales price to be paid upon the sale of the property.

For example, a $100,000 sale pays the agent anywhere from $3,000-$5,000, not too shabby for the agent, but a lot of money is deducted off the top of your profit.

Pros vs. REITS: If you are a hands-on person who enjoys being involved on a daily basis, then flipping real estate may be a great investment for you. There is also the potential to earn a huge profit. Some investors double, or even triple their investments when flipping real estate.

Cons vs. REITS: Flipping real estate often takes up a large amount of your time, and places you in a vulnerable position regarding liability. It can cost a lot of upfront money as well, and the asset takes time, energy, and money to turn liquid.

Bottom Line: If you have the time, and resources, and would rather be a big fish in a small pond, then Flipping can be a great method to invest in real estate.

Investing in REITs

Putting money into REITS also provides investors with an extremely lucrative method of earning enormous profits on their investments. Once you find a particular REIT to invest in, you’re able to sit back, and watch your money grow. Please see some other factors regarding investing in REITs below.

Pros vs. Flipping: When you invest in a REIT, you’re working with multi-million, or even billion dollar companies that control a vast array of properties located around the globe. Investors can rely on the REITs’ expertise in real estate in order to turn a profit on their investments. In addition, REIT investors have zero liability regarding the properties, so if a person slips on the front steps, the investor does not need to deal with it. REITs do not require huge amounts of money to invest, so anyone looking to get their feet wet in real estate investing should consider REITs. They also provide the investor with a means to liquidate the asset quickly.

Cons vs. Flipping: If you enjoy a more hands on experience with your investments, REITs do not provide a lot of action once you make the purchase, or decide to sell it. In addition, REITs do not provide day-to-day decision making for investors that like to control things.

Bottom Line: REITs are a great way to invest in real estate on the local, national, and international level. Investors do not need as much time or resources to partake in REITs as they do in flips. If you would like a less hands-on investment, and prefer to be a smaller fish in a much larger pond, then REITs are the way to go.

Written by GilverBook Team