Investing in Commercial Properties 101

If so far you’ve invested only in single unit residential properties, stepping out of your comfort zone, into commercial properties, can be a startling experience.  However, like anything else once you accomplish something, it gets a bit easier after each time.  Same goes for commercial investing.  It seems intimidating at first, but it’s like any other type of investment.  It requires due diligence, proper management, and a full understanding of all the figures.  Once you can fathom the idea of owning multiple units, everything else is straight forward.  If you are debating whether to invest in commercial real estate, here are some facts that may help you to decide.

What is a Commercial Property? A commercial property is any property over four units. It could span from a five unit varied use property to a 100-unit apartment complex. It could be a 20-unit mobile home complex or a small strip mall. If you invest in anything over four units, you are considered a commercial property investor. What makes commercial properties distinctive are the numerous income flows they provide. Instead of collecting rent from one tenant, you have multiple checks to collect. It sounds intimidating to jump from one tenant to ten, but it is often much easier than realized.

Economies of Scale: The idea of economies of scale is one of the reasons that the additional units are not really overwhelming. There may be ten different tenants, but the physical property remains the same. A single family property has one roof, one front yard and one living room. A five unit property still only has one roof and one front yard, so ultimately you are getting more for your purchase dollar. And management wise, you still only have one physical complex to worry about.

Vacancy Rates: There is a perception that dealing with multiple tenants is a nightmare when it comes to collecting rent, but the opposite is the case. With a single family property, if the tenant doesn’t pay, there is no income coming in and the property is inefficient. With a commercial property, there are multiple tenants paying rent, so one vacancy does not totally disrupt your business. Rent collection may be more consuming, but it is worth it to protect against a vacancy.

Increased Financing Options: Another perception is that it is extremely difficult to get financing for a commercial property. In reality there are many commercial financing options, including a handful of no income or limited documentation lender financing options. There are several commercial long programs aside from traditional lending. Banks as well as private lenders are attracted to large commercial projects, making it easier to find financing for these types of deals than small single family homes.

High Upside: When purchasing a single residential unit you are at the mercy of similar sales in the area. However, with a commercial property, comparable sales are not as significant. The property is evaluated based on the income it produces. An apartment complex with no vacancies is more valuable than what the market may indicate. Due to this, there is potential for higher appreciation. With the right commercial property, there can be a higher upside. There may be risk but the rewards are frequently much greater.

Instant Equity/Increased Cash Flow: A down payment on a commercial property can be anywhere from 25-40%, depending on the lender. This may hurt but the rewards are not far. You have instant equity from the first month you own a commercial property. With this equity comes the ability to generate a greater cash flow, which can be used to generate additional properties or make improvements on the property. Whatever you decide to do increased cash flow, this fact makes commercial properties an attractive investment.

Decreased Competition: The demand for commercial property is not as high as with single unit residents. There are less investors who have the means or desire to purchase these kinds of properties; therefor there is an advantage against your competition. You can take your time choosing and purchasing properties that you see value in without having to race against a bank levied deadline. You could end up sealing more deals on properties you actually want.

Commercial properties can be a great addition and while they may not be for every, these opportunities shouldn’t be blindly ignored on predetermined notions.

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