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When it comes to commercial real estate investing, investors often want to know what types of real estate they should consider investing in. This article discusses about 5 real estate groups and the reasons why you should or should not consider them.
1. Earth: People who invest in raw land often hope to purchase farmland near commercially allotted land at a few thousand dollars per acre. They dream of reallocating their plot of land into a commercial area in the near future that is worth hundreds of thousands of dollars or more in an acre. People who persuade you to invest in raw land will often try to sell you this dream. While in reality this dream takes place just as if it were possible to hit the jackpot in Las Vegas, the reality is that most investors lose money or get little return on land investment. It is a risky investment as the land yields no or very little income. From an income tax standpoint, land does not depreciate, so you cannot claim its depreciation. Moreover, the interest rate on a land loan is quite high compared to other types of commercial real estate. So every month, you will need to bring in the money to pay for the mortgage while collecting nothing. You should consider investing in land if you are
– Learn how to develop so you can turn raw land into a shopping mall.
– Know exactly what you’re doing and have a deep pocket.
– Owns a commercial center land (does not own buildings).
2. Flats: This is an intensive management investment as the turnover is high. Leases are short term often in one year month to month. When tenants move in and move out, you’ll need to spend money to get the unit ready for occupancy. Apartment renters tend to have a higher late payment history than other renters because their budget is often tighter. If you don’t like the headaches that deal with so many renters, you’ll probably want to stay away from apartments. The key to successful condo investing is
Adjust or reduce expenses. This may seem like a trivial task until you see the list of expenses provided by the property manager. These expenses include: advertising, accounting, bank fees (for insufficient funds), capital improvement, coin-laundering support, cleaning, collection fees, garbage disposal, insurance, landscaping, legal (eviction) fees, maintenance, and property management outside Site, on-site property management, pest control, painting, repairs, sweeping, security, property taxes, utilities, and water.
– Invest only in real estate in a good location without deferred maintenance.
Stay away from rent-controlled areas, such as Berkeley, Los Angeles.
Otherwise, you may end up with little cash flow or even negative cash flow. If one of your investment goals is to have a high cash flow, you may want to stay away from apartments. In California, if you own 16 or more condominium units, you must have a manager on site. This increases expenses. In general, apartments are easy to buy and hard to sell. There are always a lot of them in any markets. The upside with apartments is that they tend to have higher occupancy as everyone needs a roof over their head. Due to this fact, the interest rate on apartments is often ½ to ½% lower than on other commercial properties.
3. Special Purpose Characteristics: These are properties designed for a specific business, such as restaurants, gas stations, and hotels/motels.
Restaurants: Some investors like to invest in branded fast food restaurants such as Burger King, Pizza Hut, Jack in the Box and KFC. These are single tenant properties with a long term triple net absolute lease which often requires no management responsibilities from the landlord. However, the rental income or cap rate for these restaurants is often lower in the 5-7% range. Restaurants with emerging regional brands like Johnny Carino’s, Back Yard Burger, Zaxby’s, or Tia’s TexMex tend to offer a higher cap rate in the 7-8.5% range. However, when you look deeper into the financials, you may not be making a profit yet. Restaurant operators sell properties to investors at a higher cap rate and lease back the property for 20 years. They, in turn, use the proceeds from the sale to expand their business by building more restaurants. So if you are willing to take higher risks, you will be rewarded with high income with these emerging restaurants.
– Gas Stations: When you buy a gas station, you buy real estate and a gas station business. Most gas stations also have convenience stores and sometimes several auto repair places. The profit margin for gas is fixed at 10-20 cents a gallon [many customers wrongly blame the high gas prices on the innocent gas station operators] But it is too high for a small shop. This is an owner occupied property which qualifies you for an SBA loan with a 10% down payment. If you do not plan to go into gas station management, auto repair and convenience store business, then you might want to stay away from gas stations because benzene is a chemical that can contaminate the soil. Once a spill occurs and pollutes the environment, it takes years and a lot of money to clean the soil. You may be vulnerable to damages from neighboring property owners as contamination may spread to their property. It is almost impossible to sell your property as no lender is willing to lend buyers money to buy it.
Hotels/Motels: Once you buy a hotel/motel, you are buying the property and a business that operates 24 hours a day, 365 days a year. This business requires hard work and marketing skills to fill the rooms. The rooms are worthless if they are vacant. The business tends to be seasonal and may be immediately affected by economic downturns and political events, for example 9-11. Many of these properties are owned by Indians with the last name Patel as they seem to be hard working and know this business well.
4. Office buildings: These properties are single or multi-storey buildings. Older two-story office buildings without elevators tend to have difficulty finding tenants upstairs because many service companies may have physically challenged clients who cannot climb stairs.
Single Tenant Premises: The properties are used as headquarters for major corporations such as Cisco. These larger buildings tend to be more sensitive to the economy. Once vacant it is difficult to find a replacement tenant.
Multi-tenant buildings: These properties are rented by small businesses, such as real estate and tax accountants. Investors who buy these properties want to spread the investment risks. When a tenant moves out of a unit, you only lose a small percentage of the rental income.
– High quality tenants: most have good credits, many assets and pay rent promptly when due.
Rentals: Office building leases vary from full service [landlords pay property tax, insurance, maintenance and utilities] to NNN [tenants pay property tax, insurance, maintenance and utilities]. The NNN lease is an essential test to see if the office building is in high demand by the tenants or not.
– Medical buildings: These properties are mainly rented by doctors and dentists. A good medical building should be in front of or across the street from the hospital. This makes it convenient for doctors to move back and forth between the hospital and their offices. Some investors prefer medical buildings because medical tenants are recession proof.
5. Shopping Malls/Retail: These centers are mostly single-storey and can accommodate a variety of tenants: retail and service, catering, medical, schools, and even a church. As a result, this is the most popular type of commercial property investors are looking for. It is always in high demand because there are more buyers and fewer sellers.
– Multi Tenant Sector: The advantage of this investment is when a tenant moves out, you only lose part of the total income while looking for a new tenant. So you distribute the risks in this property.
Single Tenant Building: The advantage is that you only have to work with one tenant. Some lessees, such as Costco, Home Deport, Walmart, and CVS Pharmacy sign a 10-20 year lease and guarantee their company’s assets that could be worth billions of dollars. This makes your investment very safe.
– High quality tenants: most have good credits, many assets and pay rent promptly when due. They often sign long-term leases ranging from 5 to 30 years, so you don’t have to worry about finding new tenants every year. They keep your property in good shape and sometimes even spend their own money to make it look better in order to attract customers to the stores.
Three-way leases (NNN): Leases for retail centers are often in favor of the owner. Tenants pay base rent and pay the landlord property taxes, insurance, maintenance, and sometimes property management fees. This takes a lot of risk from you as an investor. An NNN lease is in a sense a basic test to see if the property is in high demand by the tenants or not.
Ground lease: Sometimes a retail center is offered with a ground lease. When you purchase this position, you only own the improvement and not the land beneath it. It could be a memorial property but you should think three times about the investment. Once the ground lease expires and the landlord refuses to extend the land lease, you own nothing! So this position is easy to buy but very difficult to sell.
