Buying commercial rentals has become a popular investment over the last few years. While real estate in general has always been a great investment, commercial rentals have become even more popular. This aspect of real estate investment has a lot to offer potential investors. So what exactly does commercial real estate have to offer you?
The four main areas that commercial real estate can benefit you are in cash flow, appreciation, depreciation, and principal pay-down. These may seem like obvious benefits but some people don't really stop to consider how great these things are for an investor.
All investors could use more cash flow coming in on a regular basis. When you buy commercial rentals, you will get exactly this. When you rent out a commercial property you can usually expect a fair amount of money coming in from rent. As opposed to a residential rental where you might get one or two thousand dollars per month, commercial rentals are a whole different ballgame. Some commercial investments could bring in thousands of dollars every single month. While some of the money will be spent in paying expenses, the right property will still provide cash flow.
The other really great thing about commercial rentals is the appreciation that you will realize. Regardless of how bad the market is, your property should pretty much always have some form of appreciation over time. Granted, some years are better than others. When you buy a property that's worth a million dollars, even a 1-2% appreciation is a lot of money. This means that you are building net wealth that you will realize when you sell the property or refinance.
The depreciation is something that is very helpful when it comes time for taxes. Every year, you can claim a certain amount of depreciation on your properties. When you depreciate your building over its life, you will realize a great savings on taxes. Anytime that you can keep money out of Uncle Sam's pocket and in yours, this is a big advantage.
Paying down the principal on your investment is good for obvious reasons as well. When you use the rent to pay down the principal you are creating equity. This equity can be borrowed against to get more properties or will just add to your wealth when you sell. It's always good to get equity whenever you can.
While this isn't the best period in the life of real estate, it is still a great time for investors. Those that are looking to buy can find some fantastic deals. At the same time, lenders are looking for good investors to lend to. While it may require you to have good credit and some money in the bank, that's ok. It may limit the amount of people who can get involved, but if you qualify you can get a great rate. If you have the resources, this is a fantastic time to invest in commercial real estate rentals.
Before you get involved in commercial real estate rentals you should undoubtedly seek the advice of a professional. This doesn't mean your neighbor who knows a little bit about every topic under the sun. You should get involved with someone who actually knows what they're talking about. This means a commercial property manager or a reputable commercial broker. Seek out someone who can talk to you about cap rates, gross rent multiplier, or a number of other things that you'll need to know. If you're investing in a retail building, you'll need to know how much rent you can ask for. The market will prevail in every situation. You need to know what the market rent is for a square foot of retail space. This way you can justify making the decision to buy. You can actually predict how much money you'll make and how often your building will be vacant. If you have no idea what to expect, there's a good chance that you'll make a bad decision. When you're playing with thousands or millions of dollars, you can't afford to throw them away on a bad investment.
Another thing that you should do when looking for commercial real estate rentals is look for leverage. This means that whenever you can minimize your overall risk, you should. If you're considering buying a strip mall that has one tenant in place, your risk is pretty high. Your success depends greatly on whether or not you can get tenants in the other units. Otherwise your cash flow will be negative in the meantime.
However, if you buy a building that already has 10 out 12 units full of tenants, then your risk is minimized. The investor before you has taken away most of the risk. As long as you can maintain a good relationship with your tenants, there is no reason you should lose them. This means that you'll be getting a guaranteed cash flow for as long as the tenants are in business.
The only possible exception to this rule is when you have a fantastic tenant as your one tenant. For example, if you have a major chain like McDonald's or something like that that signed a 25-year lease. In this case, you can probably make an exception because you have guaranteed income for a long time.
Once you get involved in commercial real estate rentals it's hard to stop. Most investors find that it is such a great investment that they keep going. One property turns into two and two into ten. Before long, they are making a great income from all of their rentals. As long as you treat your tenants right and charge a fair amount for rent, you won't have much of a problem keeping them. Overall, commercial rentals are a great investment in most cases. With today's aggressive financing terms that are available, there is no reason to stay away from commercial real estate. Don't let the media trick you into thinking that it's a bad time to buy.
About The Author: James Janel is the Executive Director of the National Association of Commercial Real Estate Property Scouts. He is a Professional Property Scout, as well as an experienced commercial real estate investor. To find out more about property scouting and real estate investing, or to request our free report, Prospecting for Profits: Turning Dirt into Cash, go to http://www.NACREPS.org.
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