Beat the crowd when investing in real estate

We are all thinking about it and some of us are actually taking action and getting our hands on real estate investment properties. The longer the New York Stock Exchange doesn’t produce desirable returns, the more people start investing in real estate.

For most of us, the obvious property choice is single-family homes. Although you can invest in real estate without owning a home, most people follow the experience they had in buying their own home. This is familiar ground and the learning curve for doing such a real estate deal is pretty skinny.

Of course, there is a downside to this approach. Competition is fierce and there are markets where investors artificially increase the cost of properties while discouraging first-time homebuyers altogether. If this is the case, the bursting of the housing bubble is only a matter of time.

How do you avoid these situations and still successfully invest in real estate? How to stay ahead of the competition and also be prepared for bad times in real estate investments? The only answer I have is commercial real estate.

What commercial real estate you might ask? Commercial real estate is a solid investment in the ups and downs of the local housing market. The commercial real estate I am referring to is multi-unit apartment buildings.

Yes, you will become the owner and No, you do not have to do the work yourself. You are the owner and not the manager of the apartment building. The cost of owning and managing the building is part of your expenses and will be covered by your rental income.

Apartment buildings are considered commercial real estate if there are 5 or more units. For the numbers to work out, you should consider owning several small apartment buildings, or you should opt for larger buildings. This will keep the expense/income ratio in a positive cash flow. Owning rental properties is all about positive cash flow.

With investing in single-family homes, it’s easy to achieve positive cash flow. Even if your rental income does not cover your expenses 100%, the appreciation of the house will contribute to positive cash flow. With commercial real estate the rules are different.

While single-family homes are appraised for the value of recent sales of similar homes in their neighborhood, commercial real estate doesn’t care about the appreciation in value of other buildings. Property value is based solely on rental income. To increase the value of commercial real estate, you need to find a way to increase rental income. The formula for how this is calculated would be too much for this short article. I have listed some very useful books where you can find all the details.

What is another advantage of investing in commercial real estate? Commercial real estate financing is completely different from financing a single-family home. While you’re financing a single-family home, you’re at the mercy of lenders who want to make sure you’re able to pay for the house with your personal income. Commercial real estate financing is based on the properties ability to generate positive cash flow and cover the cost of financing.

After reading all this information on commercial real estate, you’ll want to get out there and dive into the deals. Not so fast. First, you need to learn as much as possible about real estate. In commercial real estate you are dealing with professionals. If you come across as too much of a novice, you will waste these guys’ time and your commercial real estate career will be over before it really begins. Second, no commercial real estate lender will lend him money if he can’t demonstrate at least some real estate investment experience.

What is the solution to this? Get out there and make an offer or two on single-family homes yourself. It doesn’t matter if you make big profits to start with. Regardless, most novice investors are losing money on their first trade. If you can manage to show positive cash flow with your single-family home offerings, you’re ahead of the pack.

My advice, buy a small single family home in a decent neighborhood and rent it right away. This will keep your out-of-pocket expenses to a minimum and you will have rental income to cover your monthly expenses. Bonus, you gain experience as an investor and as a landlord.

Here’s another observation I made during my real estate investing career. Most people like to analyze, learn, discuss and analyze some more. They never actually did a real estate deal. They love to talk about real estate investments, but they never did it themselves.

My approach to real estate investing was simple.

– I bought some books on real estate investment.

– I read every one of them.

– I made a simple plan for how I want to start.

– I started looking for properties.

– I bought my first investment property 30 days after I started reading my first book.

– Made a positive cash flow with all my properties so far.

What is my point? You have to go out and practice what you have learned. The only valid credential in the real estate business is hands-on experience. With a couple of businesses under your belt, you can go out and start shopping for commercial real estate and even impress seasoned investors with your knowledge. Because you did this experience by yourself and you know what you are talking about.

Reference book for commercial real estate investments:

Gary W. Eldred, PhD: “Make money with low-income properties”

Jack Cummings: “Investment and Real Estate Financing Manual”

You’ll find these books and many more on my real estate investing website at http://www.suncoastrenttoown.com/author_directory.htm

To be honest,

Pedro Dobler