Saturday, December 24, 2011

Commercial Real Estate Investing: Complicated but Profitable!

According to a recent study in The Economist, residential property investment in developed countries amounted to $48 trillion, while commercial real estate investment (CREI) was 'only' $14 trillion. Though the number may be smaller, CREI is much more complex.

Real estate, unlike stocks or other investments, is always local - property is always somewhere, but somewhere specific. The actual investor may be far away, but the property has a location that forms part of its local market.

That affects how it's appraised, bought, used and sold. Unlike residential property...even though one in four homes are bought by investors...commercial property is usually intended to be used for a business purpose.

It may be a multi-dwelling apartment complex used as residences by others, but to the investor it's a commercial enterprise. As often, the commercial property is a multi-tenant commercial building on land zoned for that purpose. That introduces different considerations for valuing, financing, leasing, maintaining and a host of other tasks.

The commercial real estate investor has, usually, to invest a larger amount...requiring superior credit and incurring greater risk...and to estimate capitalization rate (cap rate) and Gross Rent Multiplier (GRM).

The cap rate is calculated by dividing a property's annual net operating income by its purchase price. Historically, good investments had a 10% cap rate, but the last few years has seen that decline to 8% corresponding to a greater risk and lower expected return. The GRM is arrived at by dividing the purchase price by the property's monthly gross operating income. These, along with consideration of assessed vs appraised value, and comparables, total income and replacement costs form the hard-fact base for estimating the worth of a deal.

Commercial real estate investment properties are at greater risk of unpredictable changes in general economic conditions. A building that enjoyed a 100% occupancy rate can quickly become only half full because of factors far outside the local market. Events in Asia or elsewhere around the globe can turn business conditions for some upside down overnight, whether the tenants are located in California or Barcelona.

Commercial property real estate investment requires increased knowledge of law, maintenance and finance. Zoning, leasing regulations, and other legal issues are more complex than for residential property. Where properties are rented, rather than just bought and sold — often the case with CREI — owners usually have to consider large electrical, air-conditioning and security systems, along with fire suppression, telephone and Internet facilities. Even plumbing is more complicated in commercial structures. Mortgages are more complicated and insurance is more costly.

The exception is the triple-net lease. In this arrangement the tenant is responsible for all the expense and arrangements for maintenance and repair as well as insurance.

But not to be gloomy, there are great potential rewards from CREI. The risks are greater, but often the return is as well — especially during good economic times. And the satisfaction of being part of sustaining and helping grow the dreams of other entrepreneurs is a great bonus for the commercial real estate investor.

And, after all, sometimes, "more complicated" means "more interesting".

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Tuesday, December 20, 2011

Cheap Repairs Can Make for Big Profits When Investing In Real Estate

You want the most profit you can get for that property you sweat blood to buy. Is there anyway to improve your chances, without investing a lot more? Fortunately, there is.

Even a person who is not really very skilled in carpentry, plumbing, and other traditional trades can improve the saleability of a property with modest effort and a few common tools.

One of the first things a potential buyer will notice when viewing your property is the condition of homes and other properties around it. Encourage your neighbors to clear away children's toys, junk cars, or other unsightly objects before buyers come looking.

If necessary, you can offer to mow the lawns of those to the left and right, or take their trash to the dump as an incentive. A small cash offer oin the event of a successful sale might also motivate cooperation.

At the same time, you can show them that you're getting your own house in order.

Curb Appeal

Mow the lawn carefully and repair any bare spots. Trim the edges. And invest in a few dozen inexpensive flowers and plants if the season permits it. The exterior is always what is seen first and first impressions linger.

Since a professional home inspection will almost always be done prior to a final bargain being struck, take the opportunity to make those inexpensive plumbing repairs BEFORE showing the house. Some of the more expensive ones might wait, and may even be used as a bargaining chip. But fix that leaky sprinkler head that sprays outside the tub and replace that dripping bathroom faucet.

Replacing the carpeting in a house, or even one room, can be expensive. But getting it cleaned can cost a lot less. Repair any small damage or try to cover it with a piece of furniture. Clip a piece of carpet from the back of a closet and patch the room carpet with that if necessary. Eventually, you'll have to show every flaw when you have a concrete deal. But it doesn't need to be the first thing they see. Replace those old welcome mats and small entrance rugs with new ones.

New screens are another low priced quick-fix which can make the exterior look fresh and new. To save even more, you can replace the screen itself with mesh and rubber kits, provided the frames are still in good shape.

Definitely, replace any cracked or broken windows. You'll usually have to do this anyway as part of closing the deal. Of course, all the windows should be cleaned thoroughly to give that shiny new feel. Even a brand new house that's dirty will fetch a lower price.

If your house has air conditioning and heating ducts, replacing defective or worn conduits can get very costly. But many parts in a house that are not seen use silvered duct tape anyway, so patch any holes carefully to give a professional look. Replace old filters to give the appliances a newer look and the air a fresher smell.

A bit of spackle and a coat of paint on those rooms that have seen accidents needn't cost a lot and don't take a lot of effort. Be sure the work is done carefully, though, or it can come out looking worse than before you started.

A buyer that sees that you've made efforts to keep the property up will be more inclined to offer a better price. Think of the last time you bought a car. Didn't you favor the one that was well maintained? You were probably willing to pay a little extra to get that one. They will be too.

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