Why do Commercial

[Bluemoon06]

fdjake asked a question a while ago. He asked why would we deal with residential real estate when commercial is so much better. I didn’t know how to make money in commercial so I got with a guy I know that does a lot of commercial real estate. What I found out is that you don’t get rich in commercial real estate; you get into commercial real estate because you are rich.

The returns are so much better in single family than any other type of investment. I can buy a house worth $100k for $60k put $10k into it yielding me 30% (I can actually finance the whole thing using none of my own money for a yield of infinitely). Apartments yield 10% to 15% on the money you have invested. Commercial yields 4% to 6% on the money you have employed.

When you are getting started you don’t have enough to invest in anything but single family, you use single family to get enough to be able to invest in apartments. You do single family until you have enough money to do apartments and do apartments until you have enough to throw your money down a hole in the ground. At that point you invest in commercial.

My buddy owns 1500 units of apartments. He is making about $100k/month. His living expenses are about $10k/month. He has to do something with the rest of his money. He can’t do 10 single family houses a month, so he slams that money into commercial. So the reason you see all those rich guys doing commercial is not because they got rich doing it, they are doing it because they are rich.

[Salverston]

It is not only because they are rich. Commercial properties as a rule a pretty much self running. You don’t have near the maintenance and managenement time spent on them as SFR. If you have a Retail Strip Mall with 8 units - the businesses are relatively stable - mnay will be on 3-5 year leases. Almost all will be responsible for their own utilities and expenses, so you only have some very minor (from total cost perspective) expenses for common area cleaning and maintenance. Managed right, most commercial properties practically manage themselves.

For SFR or apartments, management is far more costly and time consuming.

Also, commercial properties are tied strictly to income/expense. It can be incredibly simple to decrease expenses or increase rents, thus making massive gains in overall value at resell. SFRs are much more tied to market, raise the rents all you want and it is still a house and will be sold based on the market and the neighborhood.

I have to disagree with your buddy about only making 4-6% on commercial properties. If you buy a full-priced property with maxed out rents that is what you get. I’d like to point out that if you buy an SFR at top price and rent it out you will LOSE money in almost every area of the country.

On the other hand, if you buy a commercial property like most savvy investors buy SFRs for investment - find an underperforming property with a seller that is motivated - it is much more common to get seller financing at great terms - make changes either by rehabbing or simply improving management - you can quite realistically find the $500k property you bought for $325k is now worth $875k in one year in a BAD market, and takes much less of a time commitment.

Try doing that with SFRs.

What makes SFRs so good is there are lots of them, and financing is relatively easy and is perfect for newer investors to get started. But, despite what your friend said - amazing profits are available in commercial.

[fdjake]

I have to agree 100% with Salverston. I didn’t get into commercial real estate because I had so much money laying around I didn’t know what else to do with it. I got into it because the BS of dealing with the VELVET HAMMERS (residential real estate) got to be a pain in the *ss.

My commercial properties could be managed by my 7 year old son. I build most of my properties so I never pay retail. I have a very wealthy friend about 60 years old, he told me straight out… “We all start out in residential, as you learn and earn you realize that banging your head against the same wall over and over again evenually starts to hurt.” To me that sums up renting homes or apartments to individuals. I’ve done it, I made money doing it, and I’m glad I will never have to do it again.

Compared to renting a home or apartment, my commercial tenants have about the same legal rights as share croppers did in the 1920’s. It’s a BUSINESS, not someone’s HOME. I can not stress how big a of difference that is.

Nothing in this world beats a triple net lease on a commercial building with a 4% anual rate increase.

Done both…never going back.

Try this… take a look at some single family homes in commercial areas. I’ve purchased Colonials on busy streets, ripped the roofs off, coverted them to a flat roof, and covered them in Dry Vit. INSTANT commercial doctors/insurance/dentist office! I have one building that I purchased after a fire a few years back that now generates over $100,000 in annual income. Show me a single family home that can do that. That’s what this building was, by changing it to better fit the needs of the area (hospital down the street) it became a gold mine.

But if your making money and your area is better suited to single family home rentals, your a winner. It really doesn’t matter, either one will make you rich. I don’t agree at all with your assessment that just rich people own commercial property. You can do it either way. It WILL take more money to own a commercial building, but in MY experience there is absolutely no comparison as to which is more profitable. Commercial wins by a landslide.

The great thing about residential rentals is the amount of knowledge you gain doing it. I guarentee that you will use the exact same methods when you buy your first commercial property. If your buying your single families for 60 cents on the dollar you should be looking to do the same for any commercial building you look at. Remember, there are lot’s of rich people out there like Attorneys, Doctors, ect. who don’t like getting dirty. These guy’s buy the types of buildings your buddy has. They pay top dollar and just pick up a return.

That is NOT the way I do commercial property. I try and find a building that I can convert or land I can buy for a certain use. The fact that I have 20+ years experience as a GC is an enormous advantage. Doctors, and Lawyers don’t have the time, knowledge or desire to get into these projects. Your doing everything, right now, that is required to be a successful commercial investor. Compared to residential homes commercial property is a joke to build. Think about it, steel studs, dry wall (no plaster) no fancy kitchens, no fancy bathrooms, no media rooms, commercial carpet on everything in the office. If it’s a warehouse, even easier, machine finished concrete.

Don’t take this the wrong way, because it’s meant to be totally constructive…But, instead of trying to find reasons why commercial ISN’T better, look for reasons why it IS better. There’s a reason no one rents 300 single family homes. It’s 300 times easier to own a few commercial buildings instead. At $60,000 each 300 single family homes equals $18,000,000. You could EASILY cover that amount with just 10 commercial properties.

Think about the difference in AGGREVATION!