Commercial Real Estate Investing Is Probably Not For Most People
You can most certainly make a lot more money from a commercial property investment than with residential investment. And depending on the type of property you buy, it could be more of a passive source of income and you may not have to be as hands on in managing the property.
The average commercial real estate deal for new investors involves a 20 percent to 30 percent down payment. If an investor put $30,000 down on a $100,000 property and had a lackluster 10 percent return in the first year, the investor enjoys a gross gain of $10,000, or over 30 percent. Were this investor to buy in a hot market and see a 15 percent return, he or she enjoys a $15,000 profit or 50 percent. Here’s where it gets interesting. Once established as a commercial real estate investor, it’s possible to increase your leverage because you have the financial assets and track record to get approved with lower down payment percentages.
Knowing all that you know now, one of the final steps is to figure out how engaged do you want to be in your commercial real estate investing activities. Some want it all from finding locations to dealing with building contractors. Others, prefer the quiet life of owning and leasing. Land development – an investor can be involved in various aspects of development such as the establishment of the project, management, and lease issues. Developers could buy land and build, for example, a retail store or office building. In this case, they would organize the financing, leasing, contract, and so on, and follow up the progress of the construction until it’s rented.
Things To Consider Before Investing In Commercial Real Estate
Commercial real estate investing is probably not where most people will start out investing. But i do know a few who have purchased a commercial property as their first investment. You can most certainly make a lot more money from a commercial property investment than with a residential investment. And depending on the type of property you buy, it could be more of a passive source of income and you may not have to be as hands-on in managing the property. A strip mall is the first example like that, that pops into my mind.
Commercial real estate offers significant opportunities for investors of all backgrounds. With a vibrant and diversified economy, south Florida is a major market for commercial real estate investing, offering a wide variety of commercial properties that suit almost every portfolio. However, like any investment, the risks can be as great as the rewards if you do not work with qualified real estate attorneys who have experience in this area. My team and I have helped investors from all over the world achieve big returns in commercial real estate investing while reducing their liabilities.
Investing in real estate is a great way to build wealth. Commercial real estate investing, in particular, is known to provide some of the highest income streams. If you’ve been investing in residential real estate for a few years and have been wondering how to invest in commercial real estate, this guide serves to break down everything you need to know to get started.
Different Kinds of Real Estate Crowdfunding Platforms
There are a lot of passive real estate investment options out there. Whether it’s old school real estate investment trusts (REITs) you can buy on the market or some of the many real estate crowdfunding platforms, passive investments in real estate are easier than ever. One area that hasn’t gotten as much attention in the crowdfunded world is commercial real estate. Most REITs available on the market play in the commercial real estate world, which is hard to get into as an individual investor because property prices are so high, but with a reit, you get no flexibility. The reit is like a mutual fund, you just buy and sell shares.
First and foremost, make sure you’re secure financially before you invest in commercial real estate. Several are types that require significant financial investment, so you must have funding secured upfront. It’s possible to obtain a loan for a commercial property. But these loans typically require large down payments and shorter repayment terms than residential mortgages. There are ways to invest in real estate without being the sole financier. Options like real estate investment trusts (REITs), limited partnerships, and crowdfunding platforms allow individuals to invest in commercial real estate with limited capital. However, before you invest in any of these options, be sure to do your research and make sure it’s a legitimate source.
I’ve been investing in income properties for nearly two decades now but have only invested in real estate crowdfunding for a few years so my experience in returns may be a little skewed. I did recently interview a real estate crowdfunding investor that shared his tips for using the new asset class. My own real estate crowdfunding returns have been just above 10% annually which is about average given a survey I did on income properties available on five platforms.
Why invest in commercial real estate?
Commercial real estate, much like the rest of the industry, will face some big changes in the year to come. Most notably, this property sector will be affected by smart building technologies, changing homebuyer preferences, and job growth in a few key markets. By keeping up with each of these trends, investors can bolster their deal analyzers and make smarter investment choices in 2020. One of the biggest changes to the real estate industry in recent years has been the adoption of new technologies, and 2020 will be no different. Commercial investors have already seen portions of the closing process, property management, and even the search for tenants move online in some way. Next on the list is the implementation of smart building technology.
One of the major reasons investors choose commercial real estate over residential is because of the leasing structure. Leases on commercial buildings can extend 10 years or longer, making them a more stable investment. The lease can either get paid monthly, although it is not uncommon for landlords to require large chunks of the rent get paid in advance.
Rental Property Licensing & Registration Fees
Licensing and registration fees are sometimes a local requirement for rental properties. For instance, in the city of Philadelphia, a rental license fee is required along with an inspection of the property. So, if you’ve had to purchase or renew a landlord or rental license for the property, that cost is deductible. Furthermore, some localities will require a vacation rental license for short-term rentals such as seasonal, Airbnb, and the like. These licensing costs are deductible as well.
Get Familiar With Key Commercial Real Estate Metrics
Successful commercial real estate investing requires knowledge of common key metrics that are used to evaluate a property. Cap rate, cash on cash, and net operating income (NOI) are common metrics with which to become familiar.
Getting into commercial real estate as a landlord can be quite scary if you are not familiar with the basics. But, once you decide to have your own place as a long-term investment, it is very important that you educate yourself on the basics of working with commercial clients. As key figures in the entire landlord lifestyle are you as the owner and your broker. You will need to work as a team with your broker and make sure that there are no blind spots in any negotiation and any contract you sign with any of your tenants.
There are several common key metrics used to assess commercial real estate. These formulas include cap rates, net operating income, loss factor, and several others.
Why invest via Real Estate Crowdfunding platforms vs. REITs
Some various online platforms and apps make it easy to get started in real estate investing. For instance, clever real estate allows property investors to search for homes and compare top-rated agents with investing experience in their targeted areas. If you don’t have the cash flow to buy a physical property and are wondering how to start investing in real estate with little money, there’s an app for that — actually, there are several. Real estate crowdfunding apps such as Fundrise and Realtymogul have competitively low buy-in requirements, with some as low as $500. They achieve these low buy-in rates by offering investors ownership of small pieces of larger commercial real estate projects.
Crowdfunding companies provide online platforms where real estate developers who need funding to finance projects can connect with individual investors looking for a return from real estate investing without getting their hands dirty. As part of the “crowd,” you can choose to participate in either debt or equity investments. Real estate crowdfunding platforms are plentiful; there are many to choose from. And each has its own niche. Many require you to be an accredited investor to participate. But even if they don’t require it, this is a strategy best suited for investors with enough real estate knowledge to do proper due diligence on platforms, sponsors, properties, markets, and opportunities.
I’ll go through the entire process of finding real estate properties, analyzing investments, and managing your passive income properties but new laws have been passed that may solve all the problems in passive income real estate. New laws around crowdfunding have opened the door for websites like streetwise which allow investors access to real estate projects. Properties are professionally-managed so you don’t have to worry about a 3 am call to fix a leaky faucet and management fees are lower than investing in REITs.
Real Estate Crowdfunding vs. Property Ownership
The first thing you should do when getting into commercial real estate investing is to decide where the money will come from. Do you have other investors that are willing to go in on it with you? do you want to do some crowdfunding? you want as much capital as you can get before falling in love with a commercial property. As with all real estate investments, your research is crucial to the deal you’ll get. You want to know your goal for investing and base the property after that. If your goal is renting, for example, you’ll want to know that rent in the area either has a solid track record of remaining steady, or is slowly inclining. You’ll also want to take a look at the location’s economy.
In order to buy and sell property professionally, one must have a real estate license. While each state has different licensing requirements, most require that you pass an exam that covers topics involving ownership, government rights, ethics, building codes, loans, and environmental regulations. Continuing education requirements may also be necessary in order for developers to stay up to date in the field.
The most feared risk in commercial real estate investing is getting sued. Every tenant you have can be a potential lawsuit. You can also be sued by contractors, city personnel, and the list goes on and on. How do you protect yourself? here are two lines of defense: obtain property liability and hazard insurance. Choose a protective form of ownership or holding, such as a limited liability company. Limited liability companies (LLCs) are by far the most popular form of ownership used today to hold commercial real estate. Warning: the worst possible method of holding a title is to hold it individually in your name. This way, you have zero liability protection and absolutely no privacy. In chapter 12, we offer many tips and strategies for holding and protecting your property and assets.
Real Estate Crowdfunding Vs. Other Forms of RE Investing
Traditional real estate investing means owning a property, either on your own or with others. But these days there are lots of options that let you invest in real estate without owning a property. For instance, you can invest in real estate exchange-traded funds for a more traditional-investing option that hinges on rising real estate rates. Or you can invest with a crowdfunding company like Fundrise. Fundrise lets you get a piece of the real estate pie by investing in REITs –real estate investment trusts.
P2p investment platforms are springing up that are based on real estate investing. The process is commonly referred to as crowdfunding. That’s where groups of investors get together to pool money for specific real estate-related investments. These platforms provide you with a way to invest in real estate online through different types of real estate, and in different ways. Your investment isn’t as liquid as it would be if you invested in mutual funds for ETFs, but it’s less complicated than real estate lps.
Crowdfunding real estate investing can be very passive as well. But the due diligence you should do is more involved than simply buying shares of a mutual fund or reit. Crowdfunding platforms provide an online marketplace for investing in a variety of real estate opportunities. There are hundreds of real estate crowdfunding platforms to choose from. You can invest in everything from high-quality real estate loans to single-family homes via crowdfunding. Crowdfunding sites allow individual investors entry into bigger deals (both residential and commercial) that were previously available only to those with substantial amounts of money to invest. Like investing in mutual funds or REITs, many crowdfunding deals offer very affordable minimum investments. The biggest advantage crowdfunding provides is that you can invest in specific properties and exclusive deals with very little money.
Renter & Property Management
Generating income from rentals is the top reason why investors purchase a property. 2 once you’ve secured renters, owning and renting out property is a great way to make additional income without a lot of effort. Other than needing cash on hand to cover any repairs or maintenance, your part is pretty hands-off. There’s even less for you to do if you hire a property management company—but that will cut into your profits. Regardless, you make money simply from being the owner of the property.
For those who are searching for a lower risk. Triple net leased assets are a fitting option. This strategy essentially requires the renters to pay for maintaining the property. As a result of this strategy, less involvement is required on behalf of the investor. For this reason, however, the financial yields will not be as high as other forms of commercial property investments. Though the financial yields may not match those of other investments, this strategy is much safer and requires less involvement. Net leased properties (in contrast to triple net leased) are those in which the monthly maintenance and management costs are paid by the renters, while the owners are responsible for paying costs related to parking, and maintenance of the structure and roof of the property.
A single-family home might be the easiest way for first-timers to get their feet wet. You have one property, one renter (or at least one party), one contract, and limited maintenance. While it might give you more peace of mind to turn property management over to a third party, you don’t have to if you don’t want to — your portfolio may be small enough to manage yourself. Since most people will have to develop experience navigating the world of residential real estate for their own living accommodations, it can be a simple place to start for property investing.
How To Value Real Estate Investment Property
Active income, as the name suggests, is money earned for services provided. In real estate, developing land, renovating and flipping properties, wholesaling, and conventional real estate brokerage all fall into the active income category as they all require a lot of your time and sweat to produce a positive outcome. Passive income, however, is earnings acquired through renting a property, limited partnerships, and other endeavors with responsibilities for management largely falling to someone else. You use your funds to make the initial investment, then sit back and reap the rewards. While truly passive income is rare, it can be done, and commercial real estate is one of the best methods for doing just that. So what are the best investments for passive income?.
The real estate industry is so gigantic that it presents a lot of possibilities to aspiring investors. When it comes to property investing, a first-timer needs to be familiar with the many real estate investment strategies. This way, he can avoid losses by minimizing risk as much as possible. To help you learn how to invest in property, here is 5 common real estate investment strategies to think about. You can find one that will be suitable for you in terms of budget, time, and long-term goals.
Pretty much every time you learn something new, you also learn a whole new vocabulary to go along with it. Real estate investing is no different. Real estate investors must understand the terms and investment vocabulary. Here are some definitions of common acronyms to get you started: 1. Piti principal (p), interest (i), property taxes (t), and insurance (i). This is basically the “bottom line” or the minimum you need to calculate when thinking about purchasing an investment property with a loan. Usually, it is calculated overall and on a month-to-month basis.
Valuing a Real Estate Property
We’re using the term “business property” here to describe purchasing commercial real estate that is specific to business use that’s currently operating and requires the operation of such business to bring value to the property. This includes properties such as hotels and assisted living facilities. When valuing these properties, you must look at the performance of the business that’s operating within the property. For a hotel, its best use is to continue being operated as a hotel so you must look at the performance of the current hotel operation to determine what type of return you will receive on your investment. Similar to various types of assisted living facilities. When buying these types of properties you are typically also purchasing the fixtures, furniture, and equipment (ff&e) along with the going concern, or the current operation.
Commercial Real Estate Equity Crowdfunding
This strategy really serves as more of a vehicle to pursue either of the above strategies, and it hinges on the jumpstart our business startups (jobs) act, passed in 2012. This act significantly loosened crowdfunding rules for real estate syndicators. In a nutshell, crowdfunding allows online portals to list potential syndication deals posted by sponsors, and investors can review a) the sponsors and b) the specific deals. For sponsors, these portals vastly increase the pool of potential investors for every deal. For investors, the portals create a one-stop-shopping mechanism for passive investing in commercial real estate deals.
Syndicated / tenants-in-common (“tic”). This is longer-term equity that is raised on smaller balance commercial income-producing, stabilized real estate assets that are placed on top of either… newly originated bank debt, or cmbs (“conduit”) loans that are assumed. These equity investors will benefit from any increase in market value when the asset is sold or refinanced. Structure: equity on top of new or assumed debt. Speed: slow how investors are paid: preferred return + promote (splits).
Tenacity manages project investments in commercial land tracts, specifically targeted to redevelop and rezone the land to significantly increase the value of the land to subsequent commercial real estate development companies. Typical project scopes include, but are not limited to, flood plain land reclamation, dredging of watershed sections of land, engineering land, and soil structure, and rezoning land for commercial real estate use. Typical time to equity distribution: 18-24 months.
There are two main ways to invest in commercial real estate. The first is to invest for rental purposes. As previously mentioned, commercial real estate leases are longer in length, meaning they are more stable investments for unstable markets. If the market does happen to take a dive, for example, your investment should be fairly safe if your lease term is not up yet. Investing for the rental income is often the more lucrative path in commercial real estate, especially if you have a class a or class b building.
With real estate crowdfunding investments, investors can get access to different property types and locations across the country. That’s critical to diversify your investments for safety and returns have been excellent. S t r e i t wise offers a hybrid investment between traditional reit fund investing and the new crowdfunding. The fund is like a real estate investment trust in that it holds a collection of properties but more like crowdfunding in its management. The fund has paid a 10% annualized return since inception and is a great way to diversify your real estate exposure.
Pay off debt, especially credit card debt before you mess around with real estate. Bonus points for paying off vehicles and student loans before investing in real estate. That’s my personal style, but some may consider that too extreme. I like to save up a 20% downpayment, then get a fixed-rate mortgage for 30 years at a low-interest rate. Less than 20% down, and you are wasting money on private mortgage insurance (PMI). Additionally, you don’t have any equity in the property should the market turn against you and you need to sell. At least 20% down is a safe way to go.