How Many Ounces Of Formula For My 3 Month Old Should You Invest in Residential Or Commercial Properties?

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Should You Invest in Residential Or Commercial Properties?

Most people in Northern CA started investing in real estate by buying their own homes. And most made money as real estate in Northern CA continued to appreciate in value. So when they move up, they decide to rent their first homes. And then they get a few more homes. They know they have negative cash flow, but are making a profit due to appreciation. This is the typical story of how most real estate investors invest in residential properties. So far luck has been on their side.

As interest rates have gradually increased in the last 12-24 months while rents in the Bay Area remain very flat, the negative cash flow gap is widening. The risk for investing in residential properties increases. The same old formula of investing may no longer work. In the best case, investors can still make money but not as much from a percentage because the value of real estate is already quite high. In the worst case scenario, investors may lose money as residential real estate may remain flat or even decline in value. Is there a solution for real estate investors in Northern CA? Of course, these investors can use the same old formula in a new area that has potential for appreciation. So the key is to find this new area. They just have to talk to someone who knows this new area. It could be Bakersfield or Sacramento or Fresno. Alternatively, investors can put money into commercial properties: retail strips, shopping centers, medical office buildings. Let’s just explore this paradigm shift to see if it makes investment sense.

1. Income: commercial properties generate 50 to 200% more rental income compared to residential properties in the Bay Area. In addition, there is no rent control for commercial properties. So landlords can charge your tenants as much as the market allows.

2. Rentals: generally commercial real estate leases are more favorable to the landlord compared to residential leases. In addition to the basic rent, tenants must also pay landlord taxes, insurance and all maintenance expenses. These leases are called Triple Net or NNN leases. Because of this type of lease, commercial properties are better maintained than residential properties. In addition, the NNN leases also take away a lot of risk from the lessor because maintenance costs are unpredictable. On the other hand, landlords tend to postpone maintenance on residential properties to reduce the cost. Therefore, the delayed maintenance will have a negative impact on the value of the properties.

3. Better Tenants: tenants for commercial properties are financially stronger. They may be Walmart or Home Depot with billions of dollars in the bank. They are less likely to nickel and dime you. In addition, they also guarantee the rental with their assets. If for unforeseen reasons they have to vacate the property, they continue to pay the rent or find another tenant to sublet it. They are also motivated to keep your property in good condition to attract their customers to their stores. While most apartment tenants are good, some think when they pay the rent they have a license to trash your property and then disappear into thin air without posting an address!

4. Long-term rental: commercial tenants are less likely to move. They often sign 5-10 year leases. Tenants like Walgreens, and Walmart sometimes sign 20-50 year leases. In contrast, residential rentals are short-term. They could move to a new place a mile away to get $25 in rent! It is a fact that the turnover rate for residential tenants is very high compared to commercial tenants. As a landlord, this gives you more unnecessary migration headaches and stress.

5. Management: It is much easier to manage a business center of 10 tenants than 10 individual homes in 10 different locations. In fact, if you own 10 apartments, your tenants have most likely worn you out and we are sold out. They often move in the summer right around the time you want to take off for vacation. Yes, it is a fact that residential real estate is very management intensive due to high turnover. If you have to hire a real estate agent, it also costs more as a percentage of the rent to manage residential properties. Plus, it’s probably a full-time job just managing these 10 property managers!

6. Income Tax Returns: it is much easier to keep records for income tax purposes for a 10-unit shopping center than 10 separate residential rentals in multiple states. You only need to have one file for the mall while you will need 10 files for 10 residential rentals. The task becomes more difficult because the IRS requires you to keep records for several years. Your out-of-state income tax return is also thinner for a 10-unit shopping center than 10 residential rentals.

7. Tax Accelerations: commercial real estate offers the same tax breaks, 1031 exchange as residential rentals.

8. Credit Score Impact: Most people don’t know that after they have about 10 home mortgages, their credit scores will start to go down. The credit bureau argues that credit risk is higher the more money you borrow and 9-10 mortgages seems to be the threshold. On the other hand, commercial mortgages do not have a negative impact on your credit scores because these mortgages are not reported to the 3 credit bureaus.

9. Pride of Ownership: most commercial properties are referred to by name and not by their addresses, for example Lion Plaza, or Valley Fair Shopping Center. They could be trophy properties that offer tremendous pride of ownership. You get a lot of respect when you tell people you own a certain mall they know.

10. Investment size: commercial properties often require a large amount of money, so it is not intended for someone with a modest amount of money.

So if you want to work hard for your money or bet on appreciation, then invest in housing. If you want to work smart, look for commercial properties. Commercial real estate investment is a more sensible way to invest in real estate if you have more equity for a down payment. Every month you have a strong positive cash flow, so you don’t need to rely on just appreciation to make money. So if you haven’t invested in commercial real estate, you now know why you’re not among the elite group of real estate investors. You are probably wondering where you should go from here if you want to explore this possibility further. In the coming issues, these topics will be discussed

o Which commercial property should you invest in?

o Where should you invest in commercial real estate?

o How to pick and choose a good commercial property

o What you should know before hiring a property management company

If you can’t wait for those articles, you can sign up for a free seminar on Commercial Real Estate Investing at Transmercial. San Jose Real Estate Investor Club (phone number 408-264-3198) occasionally offers a similar seminar for a small fee.

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