Tuesday, February 15, 2011

On the differences between Residential and Commerical properties

This is a commentary on some of the differences between buying residental (1-4 unit) and commercial (5 or more unit) buildings as investments.

When you mention apartment building, you step into a whole bigger world of income properties. The financing requirements for 5 or more units are completely different than 1-4 unit Fannie/Freddie backed bread and butter mortgages. Commercial lenders want 30-35% down and the rates are higher and rarely fixed over 10 years. The loans cost more to get, but that's because 5+ unit buildings tend to make a lot more money. The cost per square foot is usually much lower in multiunits, and decreases with size of the building. Conversely because you're packing them in the revenue is much higher on these multiunits than a fourplex. A 4000 square foot 2+1 4plex at $1200 per unit is beaten out by a 4000 square foot 1+1 8 unit at $800 every time.

Compared to the flood of buyers for 1-4 units (especially single family houses), there are a scant few buying up apartments. It's an awesome time to buy because the commercial market is going through the same foreclosure mess that residential went through in 2008-9 and the banks are giving these places away. The only buyers I see out there are organized investment funds, some from NY and most from Malibu/Santa Monica/Newport Beach. The property price tags are higher than single family or small income properties, so these funds rarely pay all cash like we see happening in the residential market. They too have to get financing for the properties. The biggest investment funds of all, life insurance companies, usually hold sizable commercial property portfolios and many also lend on the big deals (Office towers, Shopping Centers, Etc.). The old saying "Big Money Never Loses" is applicable here. Commercial Real Estate can be extravagantly lucrative.

But for all that pep talking buying a commercial property is a serious endeavor and is probably biting off more than you can chew for your first rental property. Most of the big fish start with 2-4 and get the hang of it before going for 8 or 10. There is ample learning material out there to get into the lucrative realm of commercial real estate.

No comments: