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Commercial Real Estate Investing 101


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Commercial Real Estate Investing

 

Although my self-proclaimed investment property “sweet spot” is 2-4 unit multifamily properties, I can definitely see the benefits of commercial real estate investing (office buildings, large apartment buildings, mobile home parks, etc.).  That said, the commercial game requires extra patience, capital, and risk tolerance and as such is not appropriate for those with weak stomachs. 


What follows is a list of some of the key differences between residential and commercial real estate investing.

As I’ve already mentioned, generally speaking the commercial investing market requires a lot more funds.  Since the property values of commercial real estate are higher than what we see at the residential level, your mortgage down payment requirement will be higher as well.  Plus, your building & landlord insurance, property tax, and other operating expenses will be higher.  Additionally, you will generally need to spend more money during the acquisition phase on things like environmental inspections, attorney’s fees, etc.


The second major difference is time – specifically, commercial properties take a lot longer to close than regular rental properties.  This makes intuitive sense, as the amount of money on the line is much greater.  Thus, the negotiating process generally takes longer.  Also, you’ll have to coordinate more inspections than at the residential level, all of which take time to complete.

The third major difference is that relationships are more important at the commercial level.  This is because many commercial properties are sold without even being listed.  Thus, in order to be aware of all the opportunities, you’ll have to network and keep tabs on other property owners in your area.  Of course, it’s also important to have relationships with a couple of good private lenders, a good attorney, and a real estate agent who has expertise in commercial real estate investing.

Finally, your legal structure for commercial properties will be different.  At the residential level, it’s generally ok to have 4, 5 or more properties in a single real estate LLC, but at the commercial level it is recommended that you have each property in its own legal entity because the stakes are too great.  Thus, your legal and accounting workload will be a little greater.  Definitely consult with an attorney on this.

In the final analysis, in general the greater the risk / level of effort, the greater the potential rewards.  And this principle applies to commercial real estate investing as well. 

Just keep in mind how commercial real estate investing differs from residential investing, and build relationships with people who are qualified and willing to help.  And perhaps most important of all, manage your own expectations. Good commercial property deals do not pop up everyday, but as long as you are patient and diligent, sooner or later you will have success. Good luck!



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