Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing by Desich Richard

Author:Desich, Richard [Desich, Richard]
Language: eng
Format: epub
Publisher: Equity University
Published: 2015-11-01T22:00:00+00:00

Chapter 11: Investing in Commercial Real Estate

Commercial real estate contains a number of elements that are much different than residential real estate. Many investors begin investing in real estate with single-family homes because that is what’s familiar to them. Once they begin to see the profits that can be made on the residential side they begin to look for other opportunities and soon discover the benefits that may be obtained through commercial real estate. Commercial real estate provides scalability. Scaling the profits across multiple units or through larger deals, and spreading costs across the larger volume are two benefits of commercial real estate.

What is Commercial Real Estate?

As investors consider the move from single-family homes they typically think of multi-family homes such as apartments and condominiums. Yet the commercial real estate industry includes so much more – such as strip malls, hotels and motels, shopping centers, mobile home parks, industrial buildings, office buildings, airplane hangars and independent commercial buildings.

One of the key differences between residential and commercial real estate is the size of the deal. Residential real estate typically ranges between $20,000 to $500,000 properties. In commercial real estate the numbers can range from several hundred thousand dollars to millions of dollars or more. As a result, the transactions are handled quite differently than a single-family home.

Commercial real estate not only involves more money than residential homes, it will likely take six months or longer to put a deal together so patience is required.

Commercial real estate requires more money down than an individual home so identifying sources of financing is one of the many factors to consider. Banks and lenders will look at cash flow (the amount of income the property is currently generating) to forecast the income it may generate in the future. Additionally, the location and economic development in the area are two factors used to estimate the property value.

These are all factors that need to be taken into consideration when evaluating if this type of investment is suitable for you. Residential home investors look at loan-to-value ratio, rehab costs and the costs of acquiring a renter. Depending on the goals for the property, the numbers used in commercial real estate often change. Net operating income and cap rates become more important than buying a property below value.

Partnerships

Buying your own personal home is difficult enough to finance. Obtaining financing for multi-million-dollar deals is generally not accomplished by one individual. Partnerships are often the key to success and the bridge to increased wealth in commercial real estate. Partners can come in several different forms. It may be a partner or group of partners that provide financial backing. They may provide credit backing to help secure a loan by traditional means. They may provide expertise finding properties, renovating or upgrading, finding tenants or other needs of the investment. Even political connections are important, as the investor will want to stay up-to-date with changes in zoning, updates of roads, mass transportation, surrounding business development, and other government decisions that impact the real estate investment.

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