Commercial Investing Primer
23. Sep, 2008 
5 Comments
As the residential housing market goes berserk, many investors are making the move to commercial real estate investing.0o I personally do residential AND commercial real estate investing and I have to tell you that commercial investing is very different from residential. But it can be extremely lucrative for the investor that is willing to make the leap.
When I speak with investors who want to start commercial investing, the first question I get is “How do I start?” Well, I can tell you! But first let’s talk a little about the advantages.
One of the biggest advantages is that commercial real estate is valued differently. By “valued differently”, I mean the amount of income that a property produces determines its worth. So if a property produces more income, then it is worth more. This is totally different from residential real estate where appraised value and sales comparables determine the value.
The next biggest advantage is cash flow. Let’s look at an example. Say you were to buy a $200,000 home. That $200,000 home may rent for around $1,500 per month. The mortgage may be somewhere between $1,000 and $1,400 per month. So, the best case scenario is that you are clearing $100 to $500 per month. That’s not a lot for the amount of work you have to put in.
Now, let’s take a look at a similar scenario in commercial investing.
That same $200,000 investment could get you an 8-unit apartment complex.
Let’s say each of those units were two bedrooms, which could rent anywhere between $400 and $600 per month. Let’s use an average of $500 per month. At $500 per month times eight units, you’re bringing in $4,000 per month – more than double the rent that you could get from that same $200,000 single family home. Your mortgage payment would be very similar to what you would expect on a residential property; for this example, let’s use $1,400 per month.
Your cash flow on this 8-unit apartment building will be $2,600 per month ($4,000 per month income, minus $1,400 mortgage payment). Now, we’re talking!
The reason why I personally invest in multifamily properties is because I get to spread my risk over eight tenants instead of one. If your single-family home goes vacant, you’re on the hook for the entire mortgage. Every penny of that mortgage is now your responsibility. If the house is vacant for two months, you’d better be planning on spending a minimum of $2,800 to cover that mortgage plus miscellaneous expenses including maintenance, utilities, taxes, and insurance. Potentially, you’re looking at a very heavy negative cash flow.
With commercial investing however, if one of your eight units goes vacant at $500 per unit, you’re still bringing in $3,500. So, you get slightly less cash flow but you’re still in the black. Say three units go vacant – you’re still covering your mortgage and experiencing positive cash flow.
I love multifamily investing. And it’s a lot easier than you think. Contrary to popular belief you don’t have to have a lot of experience. You just have to have a good deal and great financing. If you’re not already investing in commercial real estate I strongly encourage you to think about it.
Now is a great time to check out our next Investor Insights Teleclass. Coming up October 21st, I’ll be talking about… wait for it… Commercial Investing!
Click HERE for more info and to get registered.
I found your blog on MSN Search. Nice writing. I will check back to read more.
Eric Hundin
THANK YOU! FOR THIS BLOG, I FOUND IT INFORMATIONAL.I AM AN INVESTOR LOOKING TO JUMP INTO COMMERCIAL INVESTING,HELP ME GET STARTED.THANK YOU!
Found your blog by searching for “master lease option.” The Google entry said you have a 90-minute audio on this topic. If it’s still available, can you please post the URL? Thanks.
Hi Catherine – yes the virtual class replays are all available to Investor Insights Premium Members. You can get more info here: http://theinvestorinsights.com/premium-insights/
Hi Susan, I have decided I can’t afford to spend the time to find a commercial real estate investment in Calgary, particularly a 4+unit building that has rental potential. The marketplace here is conversion crazy and nothing remotely cash flows. The sale price is not based so much on conventional commercial income projections as on potential income if converted. This is poison to the marketplace presently and I am not aware that a single multi-unit project is in progress with the intention of renting units. What do you see in other cities and is the recession going to bring people back to their senses?
The only thing I have learned is you really need to stick to your basics. I think the condominium market in this city is in trouble with too much property coming on stream now that is brand new and yet I am not seeing a reduction in pricing on the few properties that are currently rental properties.