commercial real estate
- Commercial

Why You Should Start Investing in Commercial Real Estate

People frequently ask me how I got started in commercial real estate, and I always tell them that it was a deliberate decision on my part.

Most people who start investing in real estate begin with single-family residential homes since that is where they feel most at ease. They justify themselves by saying, “All I need are a couple of sales every month. I’ll make $5,000 or $10,000 for myself, and by the end of a few months, most of my difficulties will be resolved.” They don’t truly grasp everything that goes into getting these properties up and running.

They expect to make a lot of money, but instead, they frequently wind up with a lot of issues and hassles. They may have swapped in their work for a supposedly higher-paying position, only to discover that it is wreaking havoc on their life.

Take a glance about you if you are a member of a real estate investment club. Look at the persons who have built 25 to 50 residences or more. Are they living their ideal lives? Are they, more crucially, living the life of your dreams? They may be better off than you are right now, but is this truly what you want to strive for? I know a lot of folks who have a significant property portfolio but haven’t reached the sort of independence, success, and money that they genuinely seek. What can you do to fix this? Commercial real estate, in my opinion, is the answer.

WHY CHOOSE COMMERCIAL REAL ESTATE?

When I decided to begin investing in real estate, I took a step back and looked around. I learned that the folks who made the most money in real estate were those who owned buildings rather than residences. People who owned enormous apartment complexes, large office buildings, large warehouse and industrial space – these were the people who looked to be living the lifestyle I desired.

They didn’t have to be present to care for their properties; they hired property managers who did it for them. Despite this, they were the ones spending the money, flying to exotic locales and destinations, and enjoying the lifestyle that I so desperately sought.

After thinking about it for a bit, I thought that there had to be a method to get this done. They couldn’t have been brighter, studied more, or had access to more resources than I did. Even though I didn’t know how right away, I knew I could figure it out.

I sat down and took the time to study how to invest in commercial real estate, and I would advise you to do the same. I researched and determined exactly what it would take, and as I learned, commercial real estate became less of a mystery to me.

Where do you even begin? First and foremost, let’s discuss why you’d want to do that.

AN INCREASE IN CASH FLOW

What are the advantages of investing in commercial real estate? To begin with, one of the most significant advantages is that commercial real estate is appraised differently. By “valued differentially,” I mean that the quantity of revenue generated by a property is proportional to its value. As a result, if a property generates more revenue, it is worth more. It has nothing to do with “market comparables.”

Second, you will generate significantly more cash flow along the way. Consider purchasing a property for $250,000. That $250,000 property may rent for around $1,500 per month. The monthly payment on the home’s underlying mortgage might be anything from $1,000 and $1,400. As a result, you’re battling to generate positive cash flow of between $100 and $500 every month. For the amount of effort you’ll have to put in, that’s not a very high figure, and it’s certainly not going to get you on the jet set.

Let’s take a look at a commercial example of a comparable investment. Based on a $25,000 per unit acquisition cost, the same $250,000 investment may result in a 10-unit apartment building.

Let’s imagine each of those condos has two bedrooms and rented for between $400 and $600 per month in most parts of the United States. Let’s use a monthly average of $500 for the sake of simplicity. When you multiply $500 per month by 10 units, you get $5,000 per month, which is more than twice the rent you’d collect from the same $250,000 single family house. The underlying mortgage payment would be identical to that of a residential home; in this case, $1,400 per month will suffice.

This 10-unit apartment property will generate $3,600 in monthly cash flow ($5,000 in monthly revenue minus a $1,400 mortgage payment). That will make a significant difference in almost anyone’s life.

LOWER RISK

Third, and most importantly, you’re now distributing the risk over ten renters rather than just one. You’re responsible for the whole mortgage if your single-family house sits empty. You are now responsible for every cent of that mortgage, as well as all of the upkeep and other costs associated with it. If the house is unoccupied for two months, you need budget at least $2,800 to pay the mortgage, as well as other costs such as upkeep, electricity, taxes, and insurance. You might be looking at a significant negative cash flow.

On the other hand, if one of your 10 commercial units goes unoccupied at $500 a unit, you’ll still make $4,500. So you have somewhat less positive cash flow, but you’re not in any danger of running out. Even if three apartments are unoccupied, you’ll still be able to pay your mortgage and put money in your pocket! Do you see how commercial buildings really have LESS risk?

INCREASE THE VALUE OF ANYTHING AT ANY TIME

A notion known as “forced appreciation” is the fourth reason you should invest in commercial real estate. Forced appreciation refers to actions you do with your property that enhance your revenue while lowering your costs. Keep in mind that the more money your business property generates, the more valuable it is.

Let’s return to our ten-unit apartment building as an example. Let’s imagine we want to improve the quality of each apartment unit by changing the flooring, updating the doorknobs and bathroom fixtures, and perhaps adding some ceiling fans – all quite modest upgrades. As a consequence, we may now increase the monthly rentals by $50 per unit. That’s $600 more in annual revenue per unit multiplied by ten units for a total of $6,000 more each year (which will also recapture all the costs of the fix-ups).

Next, let’s save $100 per month by passing on a percentage of the utilities to the renters or looking around for a lawn-care firm that does the same fantastic job for less money each month. We’ve just saved ourselves $1,200 over the course of a year.

The total annual income gain is $7,200 ($6,000 plus $1,200). We’ve boosted the value of the home by $72,000 or more by boosting our revenue by $7,200 each year. Forced admiration has that kind of power.

You may use a variety of tactics to force appreciation, and these are just a few of the most basic. However, when you’re dealing with ten apartments in one building, as in our tiny example, you have a lot of opportunities to enhance a lot of things, which will help you justify the higher rents. In addition, you’ll be dealing with a superior tenant mix. Higher-quality buildings are more likely to attract long-term tenants.