I know very little about commercial real estate. My real estate experience has been in residential as an agent and owner of a few residential single family rentals.
I have heard that as an invester the real money is in commercial real estate verses residential.
If I have $400,000 to invest what is the best way to get into commercial real estate investment?
It really depends on you and what sort of investment return you want. Are you looking for current cash flow or are you interested in long term holding? Are you looking for no management involvement on your part or do you mind a lot of management?
Since you are already familiar with residential, I would look into apartments as your 1st entry into commercial.
But if you really want to let go of managment and hold on for long term, then I would like into a NNN property.
Regards,
Patti Porter
Thank you for your response.
I am looking for current cash flow and I am open to management involvement.
What are the pros and cons of NNN verses apartments?
What kind of cash flow could I expect with a $250,000 down payment?
My credit score is excellent. My income on my tax returns is weak due to the fact that I am changing careers and just starting real estate investment full time.
If you are looking for cash flow, then NNN will not give you the bang for the buck (just look at some cap the rates they are being sold at). The reason why NNN are so attractive is because there are no management hassles. But they are sold at a premium.
You can’t determine potential cash flow based only on how much you put down. There are a lot more factors involved in cash flow analysis.
What are some of the more important factors involved in cash flow analysis?
INCOME & EXPENSE DATA
Vacancy & Collection Percentage:
Annual Gross Income (PGI):
Laundry income:
Other Annual Income:
TOTAL ANNUAL GROSS INCOME:
Vacancy & Collection amount:
EFFECTIVE GROSS INCOME (EGI):
Real Estate Taxes:
Property Insurance:
Flood Insurance (if applicable):
Off-Site Management:
Combined Utilities:
Trash Removal:
Pest Control:
Janitorial:
Res. Mgr. salary:
Repairs & Maintenance:
Interior & Exterior Dec:
Cleaning Expenses & supplies:
General & Administrative:
Association Fees:
Professional Fees (Legal & Audit):
Miscellaneous:
Other:
Replacement Reserves:
TOTAL EXPENSES:
Expenses as % of EGI
NET OPERATING INCOME:
ANNUAL DEBT SERVICE:
DCR:
I have a very good 10 year analysis form that really covers it all. 400,000 is a very good chunk of change.
I have been doing commercial real estate for the past fifteen years, and would be glad to discuss this with you and answer specific questions. I know people who have made millions, and others who have lost millions on the commercial side. Most of them spent a considerable amount of time and energy getting started, and very few of them had any understanding of residential investing or sales.
While commerical investing provides many opportunities, there are hundreds of ways of losing money (I am not sure I have discovered half of them yet). The good news is that when you work with people who know how to manage risk properly, many of the downside factors in the commercial markets can be mitigated and controlled to a certain extent, if you know what you are doing. If you don’t, you can get yourself and a lot of people in trouble.
I hope that you have found some answers you were looking for, and I would be glad to help with any others.
What are the pros and cons of NNN verses apartments?
NNN properties are cashflow oriented properties without management. They are the bonds of real estate investment.
But like a bond, they have a place/and not in peoples portfolios.
Because NNN properties are longterm, their value is tied more closely to financing rates and programs. They don’t tend to appreciate the same way another investment property might because their rents are stable and predictable during the term of the lease (some cases up to 75 yrs with options)
I’d stay away from the NNN property unless you were exchanging, looking to avoid management, or over 55. Typically, apartments/office/retail will cash flow and appreciate more with careful management and elbow grease.
There are many types of Commercial Properties. Do you plan to actively manage it or have someone else manage it? What types of returns are you looking for on your $400000 invested? Given your skill sets, perhaps you might want to give it Apartment Complexes a try. A similar commercial product which is also lucrative if location and good brand is a Hotel. With apartment complexes you get monthly cash flow and with a Hotel you get cash flow everyday, with both you can implement a good management team so you can concentrate on your profession, Real Estate. I am with a mortgage company and was a Realtor myself for 10 years before giving up my license in Dec 2005.