Is it easier to invest in commercial than residential real estate? Here are 3 insights that will teach you how commercial real estate investors leverage the same techniques you already know to make big profits.
Valuation: Residential investors find the sales comparison approach easier than other valuation methods. If you’re buying a 3 bed, 1 bath and want to know its worth as a 3 bed, 2.5 bath, then you look at similar homes sold in the neighborhood and determine your after repair value.
What makes residential investors nervous is trying to apply the sales comparison approach to valuing a commercial property. It’s actually harder to value a commercial property using the sales comparison approach.
To make it easier, commercial real estate investors treat buildings like a business. That means they value the income that the commercial properties produce. The more income the property produces, the more it’s worth. This powerful method liberates you from caring what the guy down the street sold for because your commercial property will be valued based on its performance.
As a bonus, commercial lenders like the income approach. The more cash flow your commercial property throws off, the more money they’ll lend against it, which frees up your equity to pursue other deals. You don’t have to wait for the neighbor to sell first.
Creative Investing: If you’ve worked the lease option a deal, subdivided land, negotiated a short sale, or bought a home using other people’s money, then you understand the basic fundamentals of creative investing.
When you start investing in commercial properties, these techniques are not considered creative, rather the norm. Many of the techniques that real estate investing gurus teach residential investors come from the commercial real estate investing world. If you’re already using these tips, then the transition should be easy for you to commercial real estate deal making.
Take a successful flipper of residential properties: he might flip 20-30 houses per year and make about $15,000 per house. That amounts to $300,000 to $450,000 per year. He makes a nice living, but it is a lot of hustle.
Commercial real estate investors can flip a deal and make that money in one transaction. For example, you might find a former bank branch for sale. The property had been used for banking purposes for 30 years, so you know the location’s solid.
You might buy the property for $700,000 and approach another bank and offer them them a deal on the location. If they’re expanding into that market, they might agree to pay $90,000 per year, triple net, for 10 years.
In most markets, deals like this one trade on an 8 cap rate, which means that with the new tenant, the building’s value instantly increased to $1,125,000. You might call a cash investor and offer him the deal. He closes in 30 days and you pocket $425,000.
Is it easier to invest in commercial or residential properties? Not really. Both have their positives and negatives, but these 3 powerful, must-know insights highlight the key distinctions that commercial real estate investors leverage to make larger, and sometimes, easier profits than residential investors.