Investing In Commercial Real Estate - Is The Grass Always Greener? Maybe.

Investing in commercial real estate is a huge topic that has a ton of great angles.

We deal exclusively with investors and focus a lot of time and energy into residential real estate investing. And just being in this line of work regularly leads to discussions around commercial investing.

Commercial investing (think apartment buildings, strip malls and town house complexes etc.) has a lot of differences than residentail investing.

Around financing there's things like larger down payments, more expensive inspections (including environmental assessments), mortgage broker fees, slightly higher mortgage rates, property managers.

Many new investors figure there's a lot of money in larger commercial investments just because they are larger than residential investments.

Now this may be the case but there's a few things to think about.

The down payment required is going to be 25%. So if you're looking at a $4,000,000 building you need to pony up $1,000,000 to purchase it.

Or on a smaller scale you for a $1,000,000 six plex in the out skirts of the Greater Toronto Area you need $250,000.

With $250,000 you can acquire over $2,000,000 in residential investments with the newly minted mortgage programs for investors. So you can definitely "leverage up" with residential easier than with commercial.

Investing in commercial real estate may be more "passive". Isn't that everyone's goal? Lie on the beach while the cheque role in right? Well I can tell you that there's nothing that is truly passive in real estate.

Commercial buildings with property management may be more passive than residential but they're definitely not 100% hands free. And if you treat them like that you're property manager while likely be making more money from the venture than you do.

And the expected capitalization rate in the Greater Toronto area when investing in commercial real estate is around 8%.

Another thing to be aware of but a point that is regularly overlooked are the valuations.

Canadian commercial investment properties are valued according to the revenue/income that they generate.

Residential investment properties are typically valued according to comparable properties on the street.

So if you are renting out a single family home and the other homes in the area appreciate your property typically appreciates along with it. Recently that's been a very healthy rate.

The downside of course is that if the market falls for homes on your street then your investment property goes down with the rest (remember, think long term and don't let the short thinking masses who are often distracted by shiny objects get to you).

Investing in commercial real estate usually doesn't have this issue, because again, the value of commercial investment properties are more closely tied to the rent they generate and because that flucuates less the value of the properties fluctuates less.

So when you are looking to build wealth investing in commercial real estate has it's place but its not the silver bullet you may think it is.

The most wealthy investors will look at commercial investing the same way we look at residential investing. Find a deal, lock it up, profit from it.

Canadian commercial real estate "deals" are properties that are mismanged, can be acquired for less than market value because the rents are low, and then turned around quickly by raising rents with a better management team.

Investing in commercial real estate has the same basic fundamentals of any types of investments.

In my opinion there's one common mistake that many beginner's getting started investing in commercial real estate make.

They'll go off and buy an 8-plex because they believe that if one of units goes vacant they have 7 other units generating cash for them.

And if they investing in a single family home and the tenants leave they have no other income stream.

Here's some insight into my thoughts around this.

Basically the quality of a property is directly tied to the quality of its tenants. A family renting out a single family home may be more stable than bachelors renting out units in an 8-plex.

So if I own several single family homes, purchase them wisely, and manage them smartly, a pool of three or four nice single family homes in good areas spreads out my risk more than a single 8-plex. Of course, this is just an opinion.

To wrap this up, there's no one right answer. For some residential investing is the key to their success. For others its investing in commercial real estate.

Your journey will likely involve both at some point. As with everything, there's no one single right answer.

Focus on your long term goals and then make decision accordingly.

There are specific strategies to make big bucks investing in commercial real estate.

We'll discuss it in another article at some point, but it's more along the lines of commercial development and is definitely an active, not passive, process.

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