|
Have you ever thought about investing in Real Estate? Have you ever wondered…what are the differences in residential real estate investing and commercial real estate investing? Which one is right for me? How much time and money does it take to get started? These may be questions you have as you pursue the American Dream through real estate investing. These questions can be easily answered, but it is difficult to find someone who has the expertise to do it. Here you will find the answers to your questions.
Residential real estate investing involves the purchase and leasing, or remodeling and reselling of single family homes, duplexes or four-plexes. The amount of initial investment in this area can be less than in commercial real estate. The amount of time required depends on the amount of time you personally wish to spend. Many investors prefer to have a property management company and spend very little time on the properties. Others prefer a hands-on approach and have the time to spend on their properties.
If you want to make a larger investment for larger returns, then commercial real estate will be your niche. In commercial real estate there are four major areas for investors to consider:
- Office Buildings
- Industrial/Warehouse
- Multi-Family (apartments)
- Retail
The management of the property, the size of the investment and amount of inventory available are things you will need to consider in order to determine which investment is the most suitable for you. The value of any particular property is determined by four primary factors:
- Market conditions - such as location
- Physical attributes
- Current demand for that type of property
- Income or rental stream
Commercial properties usually require professional property management. This is appealing to many investors because they can simply purchase and monitor their property without having to deal with the day-to-day management. If, on the other hand, your dream is to be the business owner/operator you can manage your own property and eliminate management fees. You can also find and purchase a business for as low as $30,000. Once you have made the decision to invest in commercial real estate the most important consideration is how to calculate the return on your investment. Most properties are evaluated based on the cash flow they provide. Cash flow is determined by subtracting the expenses of ownership from the rental or income stream. One way to evaluate this is by using a calculation known as the Capitalization or “Cap rate”. The Capitalization Rate helps to compare different types of properties and to evaluate the quality of an investment based on the income you will receive relative to the price you will pay.
For example, if you are considering an apartment complex that is priced at $750,000 you could determine the cap rate as follows:
- Price - $750,000
- Annual rentals - $86,000
- Expenses - $26,000 (taxes, vacancy, repairs, insurance, etc.. It is important to note that the expenses do not include your debt service or mortgage payment for this calculation.)
- Annual income - $60,000
- Income/Purchase price - $60,000/$750,000 equals .08 or an “8 cap”
Cap rates are a very effective way of comparing similar properties and of evaluating potential investments.
Of course, the question is “What cap rate should I look for when I am investing?”
“Is a 6 cap good or should I be looking for an 8 cap?” The answer is…well, it depends. Cap rates vary wildly depending on the location, the future potential of the property, the quality of the tenants and many other factors. It can be difficult to determine what the cap rate for a particular business or property shoud be and it is important to consult an expert in your area if you are unsure. Another important consideration in investing is taxation. Real Estate investors often take advantage of IRS Code 1031. This part of the tax code allows owners of investment property to defer the payment of capital gains taxes when they sell an investment property as long as they purchase a property of greater value within 180 days. This is very common in commercial real estate and is a great way for an investor to increase their real estate holdings. It is a tremendous vehicle to gain tax free cash while leveraging their real estate assets. Of course you should always consult your accountant for the most recent information.
|
Investing 
