The Economist reported recently that residential property investment amounted to $48 trillion, while commercial real estate investment (CREI) was ?only? $14 trillion. This is certainly in part because CREI is much more complex.
Unlike stocks and other investments of that sort, real estate has a solid and very specific, tangible location. Investors may be many miles away, but the property exists as a part of its own very local market, which affects how it is appraised, bought, sold, and used. And unlike residential properties, commercial property is intended for business purposes. As a result, there are different considerations for valuing, financing, leasing, and maintaining these types of properties
A commercial investor must generally invest a great deal more into the purchase and sale of the property. He or she must be savvy, and willing to incur greater risk (and consequently, reap greater reward).
You?ll need to know how to estimate the Capitalization Rate (cap rate) and the Gross Rent Multiplier (GRM). The cap rate can be found by dividing a property?s annual net operating income by its purchase price. In the past, an investment with a 10% cap rate was considered a wise financial decision. Recently, though, that number has dropped to 8%, corresponding to a greater risk and lower expected return. To find your GRM, divide the purchase price by the property?s monthly gross operating income.
You should also consider the difference between a property?s assessed and appraised values, and the total income and replacement costs.
Commercial properties are more susceptible to market fluctuation, which makes them a greater potential risk. Be aware and sensitive to changes in general economic conditions. A smart investor should be concerned always with outside factors that will affect occupancy rates (domestic factors, and foreign alike). Issues across the globe can press heavily upon American business conditions overnight
Commercial property investment requires knowledge of local zoning and leasing regulations. Do your research. In addition, you will need to consider other financial issues. Rented properties need to be heated, cooled, supplied with electricity, and so forth. You will need to provide a security system, and fire suppression. Tenants will need telephone and Internet facilities, as well.
Mortgages and insurance is also more complicated than with residential properties. An exception is the triple-net lease, in which the tenant is responsible for any additional expenses related to building maintenance and repair. In this arrangement, the tenant would also be liable for insurance costs.
The risks are many, and CREI requires very specific local knowledge, but the potential for reward is far greater than residential property ownership. There is also something to be said about the satisfaction one may receive as part of the promotion and maintenance of our collective economic growth. Entrepreneurial dreams will be made and carried out between your walls, and you should certainly take some comfort in that.
Paulie Sabol, often called the ?legal bank robber? for his real estate financing and bank owned foreclosure investing, is a nationally recognized real estate investor, trainer and financial thinker. Sabol, has personally completed 100?s of real estate investments, and helps real estate investors learn to make more money with creative investing. Visit his site at http://www.reiunion.com/rei.html
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