Investing in commercial or multi-unit properties is the secret that wealthy real estate investors have found to accomplishing all these important real estate investing goals.
What are the types of commercial or multi-unit properties available to real estate investors, even new investors? What are the specific advantages of investing in and owning commercial or multi-unit real estate?
Multi-unit properties include a wide range of investment options:
Office Buildings (small two unit office to a high rise building),
Retail Stores (small retail stores to a giant shopping center),
Industrial buildings (small shops to a huge industrial park) or
Self Storage or Private Record Storage (from small to large self storage complexes).
Key Advantages of Investing in or Commercial Properties
The ten key advantages of investing in Commercial or Multi-Unit properties are:
1. Higher Income Potential,
2. Lower Risk on Vacancies,
3. Less Competition from other Real Estate Buyers,
4. More Flexible Sellers,
5. Depreciation Tax Shelter,
6. "Triple Net Leases" and Tenants paying expenses,
7. Equity Build-Up,
8. Solid Economic Value,
9. Massive Leverage (seller financing or partial seller finance),
10. Long term Capital Appreciation.
Multi-Unit/Commercial real estate has a higher income per square foot than residential single family investements, or even apartments, and therefore a Higher Income Potential for the investor.
Multi-unit real estate by its very nature has the advantage of lower vacancy risk, because it always involves two or more units. The vacancy risk with commercial or multi-unit properties is much smaller than single tenant investments such as a single family home, because the vacancy risk is spread over several units.
For example: One office being vacant out of 20 offices is only a 5% vacancy. For the multi-unit investor, this 5% vacancy is significantly less financially traumatic, than a single family house being vacant, and the real estate investor experiencing a very painful and costly 100% vacancy.
Another point in favor of investing in commercial or multi-unit properties is there is less competition from other investors. This is because some investors are not comfortable in larger investments such as an apartment, mobile home park, office building, retail strip center, or industrial complex. These types of larger real estate investments are out of many peoples' comfort zone.
Paradoxically the owners of commercial or multi-unit real estate are usually more flexible sellers. Multi-unit property sellers are not as emotional when selling their property. The sale of most multi-unit Properties such as an office building, retail strip center, or industrial complex, is simply a business decision.
Commercial or Multi-unit property sellers are in a business frame of mind. Multi-unit real estate sellers are more likely to understand and agree to the request from the Buyer for either 100% Seller financing, or Secondary Partial Seller Financing. These sellers are likely to agree to a partial Seller carry back financing, such as a second mortgage, or second trust deed behind an institutional lender first lien. [In Canada, this is commonly referred to as "Vendor Take-Back Financing."]
Investing in and holding onto multi-unit or commercial real estate provides significant Tax Shelter to the multi-unit investor through Depreciation of the building and improvements. The depreciation write off allowed by the IRS, and most States, then shelters the massive passive income from the commercial real estate or multi-unit properties, such as an office building, a retail strip center, or an industrial complex.
Another advantage to the investor is that in many commercial or multi-unit properties the tenants pay all the building's operating expenses. This is especially true in "triple net Leases," which are commonly found in office building leases, retail leases, and industrial leases. In these "NNN Leases," the lessee in addition to paying the base monthly lease payment, the lessee also pays for their "pro-rata" portion of the entire property's expenses. The lessee with NNN lease also specifically pays for their portion of the real estate taxes, property insurance, and maintenance.
The tenants' lease payment provides the commercial or multi-unit owner with the cash to make the mortgage payments, which results in the owner having a nice equity build-up over time.
Investing in commercial or multi-unit properties has the advantage of providing solid economic value. This is because most existing office buildings, retail strip centers, or industrial complexes can be purchased for less than replacement cost, or in other words, the cost to build one new.
Commercial or investment real estate such as office buildings, retail strip centers, or industrial complexes, enjoy the advantage of financial leverage with long term fixed rate institutional debt. Another option is for the possibility of 100% Seller financing, or a combination of institutional financing combined with partial Seller financing.
Holding on to multi-unit or commercial properties over the long term will provide the investor with possible Capital Appreciation and increased cash flow through higher rents over time. The increased cash flow can lead to long term massive passive income, with appreciation as the frosting on the cake.
Due Diligence is Essential for Commercial Investments
The due diligence process in multi-unit real estate begins in the initial interaction with the seller, or the Seller's Commercial Real Estate Agent or Broker. The due diligence process in multi-unit real estate is well underway in the contract negotiation phase.
A multi-unit real estate investor needs to clearly identify to the Seller exactly what will be needed to intelligently analyze the potential multi-unit investment. The investor should frame the request for documentation with phrases such as, "in order for me to make an informed intelligent business decision I will need the following documents..."
Generally multi-unit property owners are more knowledgeable and sophisticated. Start out with a simple request for basic information, such as a current rent/lease roll, copies of all the current leases, and the income and expenses for the multi-unit property for the last two or three years. The more sophisticated the Seller, the less they are surprised or upset by a detailed comprehensive list of items needed for the complete due diligence on the property.
Most Sellers', or their agent's, will give what an investor asks for in a timely manner. Only Seller's who may be hiding something will refuse the buyers reasonable request for information. If the Seller or their agent refuses to provide the information requested, then the potential Buyer should be prepared to just walk away from the deal.
GOOD MULTI-UNIT INVESTMENT HUNTING!
