Most people in Northern California started investing in real estate by buying their own home. And most have made money as Northern California real estate continued to increase in value. So when they move, they decide to rent out their first home. And then they acquire a few more houses. They know they have negative cash flow, but they make a profit through appreciation. This is the typical story of how most real estate investors invest in homes. Luck has been on their side so far.
As interest rates have gradually risen over the past 12-24 months while rents in the Bay Area have remained virtually flat, the negative cash flow gap is widening. The risk of investing in residential property is increasing. The same old formula of investing may no longer work. At best, investors can still make money, but not as much in percentage terms given that property values are already quite high. In the worst case, investors could lose money as residential real estate could stay the same or even fall in value. Is there a solution for Northern California real estate investors? Of course, these investors can use the same old formula in a new area that has potential for appreciation. So the key is to find this new area. They just need to talk to someone who knows this new area. It could be Bakersfield or Sacramento or Fresno. Alternatively, investors can invest in commercial real estate: high streets, malls, medical office buildings. Let’s take a look at this paradigm shift to see if it makes sense to invest.
1. Income: commercial real estate generates 50 to 200% more rental income compared to residential properties in the Bay Area. In addition, there is no rent control for business premises. So landlords can charge your tenants as much as the market allows.
2. Rental contracts: in general, commercial property leases are more favorable to the landlord than residential leases. In addition to the basic rent, tenants must also pay property taxes, insurance and all maintenance costs to the landlord. These leases are called Triple Net or NNN leases. Because of this rental form, commercial properties are better maintained than homes. In addition, the NNN leases also remove many risks from the landlord, as the maintenance costs are unpredictable. On the other hand, landlords tend to postpone maintenance on homes to reduce costs. Consequently, the overdue maintenance will have a negative impact on the value of the properties.
3. Better Renters: tenants of commercial real estate are financially stronger. They could be Walmart or Home Depot with billions of dollars in the bank. They are less likely to do business with you. In addition, they also guarantee the lease with their assets. If they have to leave the property for unforeseen reasons, they continue to pay the rent or find another tenant to sublet. They are also motivated to keep your property in good condition to attract their customers to their stores. While the majority of residential renters are good, some think that once they pay the rent they have a license to trash your property and then vanish into thin air with no forwarding address!
4. Long Term Rent: commercial tenants move less quickly. They often sign leases of 5 to 10 years. Tenants such as Walgreens and Walmart sometimes sign leases ranging from 20 to 50 years. In contrast, residential rental contracts are short-term. They could move to a new place a mile away to get a $25 rent reduction! It is a fact that the turnover of residential tenants is very high compared to commercial tenants. This gives you as a landlord more unnecessary migraine headaches and stress.
5. Management: It is much easier to manage a mall with 10 tenants than 10 individual homes in 10 different places. If you own 10 rental properties, your tenants have probably worn you out and we’re exhausted. They often move in the summer just around the time you want to go on vacation. Yes, it is a fact that housing is very management intensive due to the high turnover rate. Also, if you have to hire a property manager, it will cost more as a percentage of the rent to manage properties. Plus, managing these 10 property managers is probably already a full-time job!
6. Income tax return: it is much easier to keep records for income tax purposes for a 10-unit shopping center than it is for 10 separate rental properties in different states. You only need one file for the mall, while you need 10 folders for 10 rental properties. The job becomes more challenging because the IRS requires you to keep records for several years. Your out-of-state income tax return is also thinner for a 10-unit mall than for 10 rental properties.
7. Tax Depreciation: commercial real estate offers the same tax depreciation, 1031 exchange as residential rentals.
8. Impact on Credit Scores: most people don’t know that once they have about 10 home mortgages, their credit scores start to drop. The credit bureau reasons that credit risk is higher the more money you borrow and 9-10 mortgages seem to be the threshold. On the other hand, commercial mortgages do not negatively impact your credit scores as these mortgages are not reported to the 3 credit bureaus.
9. Pride in Property: most commercial properties are listed by name and not by their address, e.g. Lion Plaza or Valley Fair Shopping Center. They can be trophy properties that offer tremendous ownership pride. You get a lot of respect when you tell people that you own a particular mall they know.
10. Investment Size: commercial real estate often requires a significant amount of money, so it is not intended for someone with a modest amount of money.
So if you want to work hard for your money or bet on appreciation, invest in housing. If you want to work smart, go for commercial real estate. Investing in commercial real estate is a more prudent way to invest in real estate if you have more equity for down payment. Each month you have strong positive cash flow, so you don’t have to rely solely on valuation to make money. So if you have not invested in commercial real estate, now you know why you are not in the elite group of real estate investors. You’re probably wondering where to go if you want to explore this possibility further. These topics will be addressed in upcoming issues
o In which commercial real estate should you invest?
o Where should you invest in commercial real estate?
o How to pick and choose a good commercial property
o What you need to know before hiring a property management company
If you can’t wait to read these articles, sign up for a free seminar on Commercial Real Estate Investment at Transmercial. San Jose Real Estate Investor Club (phone number 408-264-3198) occasionally offers a similar seminar for a small fee.
Recommended
- Why Every American Needs a Will While the nation is still debating health care reform, Americans have a bigger problem. Seventy-eight percent of Americans own a home and fifty-five percent of Americans have minor children living at home, yet less than half of the country has even made a will, let alone the other documents that…
- Protect your real estate investment by purchasing property… When you take the necessary steps to buy a property, it is natural to assume that the person or company you are dealing with is giving you a fair chance. You certainly deserve to feel that the deed you receive is valid and correctly drafted. To ensure that your interests…
- Connecticut Government Mortgage Programs Connecticut home buyers can choose from state and local government programs when looking for a mortgage. Local government home loans include CHFA, HERO, and UR Home mortgages. Content: Nationally, government loans, such as FHA, VA, and USDA mortgages, are an option for borrowers who want to own a home. While…
- All About California Auto Insurance Quotes California auto insurance is traditionally among the most expensive of all 50 states, with few exceptions. Shopping for California auto insurance quotes only makes sense then.The state of California requires you to purchase a certain amount of some types of insurance before you can authorize your car in the state.…
- 7 steps to retirement planning for a secure future Retirement is a tricky thing, one day you'll feel good about it because you'll finally relax, and the next day you'll be worried about your finances. But people planning their retirement in advance may have little or nothing to worry about.Retirement planning is an ongoing process and you should try…
- Financing options for first-time homebuyers You and your family are ready to grab that biggest dream of yours - to have your own home. In fact, you have already chosen one of the Arvada houses for sale, but came to a halt when you realized that you have yet to face the biggest challenge yet:…
- Bahamas Property Guide to Licensing, Residency and more In 1993, the International Persons Landholding Act was enacted to encourage foreigners to buy second homes in the Bahamas. And it couldn't be simpler. If a foreigner buys a single-family home or vacant land to use in the construction of such a home, he no longer needs to obtain a…
- Sylvie Potignon: the best African business entrepreneur The SOFIAA INTERNATIONAL COMMERCIAL BROKER DWC LLC, owned by Sylvie Potignon, is a transnational brokerage firm. It advises and provides transaction services in real estate and investment searches. The firm assists with structural, logistical and managerial real estate designs through cross-functional team coordination.The primary role of the organization is to…
- Top ten tips when buying real estate! In the current financial climate, real estate remains a strong investment in many areas. Educated buyers will always get the most out of the real estate market. These top ten tips for buying real estate will help you enter your next real estate transaction with confidence.TIP #1: Hire the right…
- Who should have life insurance and why? Anyone who has a desire or need for instant, tax-free cash should have life insurance. It creates an estate or protects an estate. Does this mean that if someone buys a life insurance policy, they will automatically and immediately have access to tax-free cash? It is possible but unlikely. If…
- Protect assets from unexpected medical expenses Many people get into big trouble when they have unpaid medical expenses. These expenses can threaten your home, savings or income. Without health insurance, a prolonged hospital stay can become a financial burden that can run into tens of thousands or even hundreds of thousands of dollars. If a reasonable…
- How to use incentives to sell your home in a tough market Here are some ways you can sweeten the pot and beat your competition with a saleOut here in the field, we're seeing home prices fall as sellers respond to housing pressures. Some sellers still expect high sales prices for their homes, but the changing real estate market is resisting high…
- Sell your own home tips Home values have risen steadily over the past sixty years. Everyone (even those who should have known better) believed that the rise would go on forever and the entire real estate industry was based on that concept. So the worst happens after house price hyperinflation starts to fall. The bursting…
- Put your idle property to use and apply for a mortgage loan A mortgage loan is a form of financing for your personal or business purposes. The special thing about a mortgage loan is the security you must provide in order to be able to use the loan. You can easily leverage the real estate you own to raise financing for a…
- How to find your dream home in Belize Shopping for real estate in Belize is not as easy as you might initially expect! First, brokers as we know them do not exist! Real estate agents that do exist are likely unlicensed, unregulated, and certainly not trained or insured. Second, the majority (and I mean the majority) of the…
- Favorable Choices Commercial Insurance Clovis gives an… Commercial insurance is important for business entrepreneurs, regardless of the size of their business. In addition to completeness, the Business Insurance that Clovis provides must also have sufficient flexibility. You may have an overwhelming number of options when considering insurance for your business. Before starting a business, the entrepreneur writes…
- Time is running out fast for real estate bargain hunters WARNING! If you are serious about buying a home in 2010, you may not have much time left! Now that the 2007-2009 recession is over, buyers are returning en masse to the real estate market. However, what most buyers don't realize is that there are many forces working against them…
- Medicaid Estate Recovery: What to Do? Merely being eligible for Medicaid isn't enough if your family has to pay back to the state every penny of benefits they paid on your behalf during your lifetime when you die. There must be some planning techniques you can implement, right? Some "secrets" to avoid that hard rule? Let's…
- What you need to know about life insurance before you buy Whole life, also known as straight life or permanent life insurance, provides lifelong protection for a specified amount. Whole life is in fact term life insurance with the addition of an investment component. Life insurance has many advantages over term life insurance.AdvantagesLifetime policies are generally a bit more expensive, but…
- Commercial Mortgages - The Benefits of Credit Tenant Lease… Credit tenant lease (CTL) financing is a very unique and highly specialized form of commercial mortgage loans designed to provide financing for the purchase, refinancing and construction of properties that are leased triple net (NNN) to creditworthy tenants.Unlike traditional commercial mortgage loans, CTL loans are underwritten based on the financial…