When thinking about investing in real estate, there are two main options to choose from: residential properties and commercial properties. Although investing in residential properties is usually the way to go for many people, the booming commercial real estate industry and it wide and compelling marketing strategies are starting to make their mark on investors.
Because of this, many people are finding it difficult to choose which of the two they should invest in. In order to make the process easier, it helps to know the different pros and cons associated with investing in either of the said properties.
Cost of Investment
Investing in commercial properties is generally more expensive than investing in residential properties. However, this still depends on several factors like the location and size of the property. You will find that a large residential property in a high-end subdivision can cost just as much as a small commercial property in a not-so-well-known business district.
Return on Investment
The ROI for commercial properties are also generally higher than in residential properties. This is because there is potentially more means of earning with the former than the latter. For instance you can rent out an office space or property much expensively than you would with a residential estate. In addition, the appreciation value of commercial properties tends to be higher and rise faster.
Investing in a commercial property or residential property does not come without risks. However, the risks tend to be higher with commercial properties. For instance, there is the problem with long-term vacancies, due to difficulty in finding businesses or firms who are willing to rent your commercial property. When businesses fail, you may find that those renting your commercial property may be unable to pay you.
All in all, investing in a commercial property may seem more appealing than in a residential property. However, the risks involved are relatively higher. The most important thing to consider though is how you intend to make money out of this investment. If you want to rely solely on land appreciation and do away with the risks associated with rents and leases, you may want to consider investing in residential properties. However, if you are brave enough to face the challenges and risks of owning and managing a commercial property in exchange for the possibility of higher profits, then commercial properties are the better choice.
Investing in commercial real estate is a big decision, and so you would want to make the most out of it in every way possible. One way of doing so is by conducting a site visit to the commercial real estate of interest. Like in any other purchase, you’ll want to see the product first before you put your money down, just to check if it’s really worth it.
To make the most out of your commercial real estate site visit plan, you need to make some preparations. These will guide you into successfully completing the site visit and determining whether the commercial real estate is worth investing in.
Visit the Site Online
Nowadays, it is very common to Google a product before buying it. The same is true for commercial real estates. If you can’t find a website which discusses in detail the commercial property you intend to invest in, you can also try using Google Maps. Using the satellite view, you will be able to see an actual image of the property, including the surrounding areas like residential houses, commercial establishments and so on. The point here is to get an overview of how the property looks and of its surroundings.
During the site visit, you should observe and inquire about the prevailing and possible market conditions of the place where the commercial real estate is. Remember that you are investing in a commercial property, and you will want it to have a viable and easy access to your target market.
You’ll also want to know about the major local issues affecting the area. For instance, if any residential homes were demolished to give way to the commercial real estate development, or if the utilities like water and power work fine in the area. Any unresolved issues like this can make it harder for you to see gains and profits.
Possible Business Opportunities
If you are looking to grow your investment, you need to look at expansion projects for the commercial real estate in question. For instance, is there are possibility of expanding the estate by purchasing the surrounding lots? Will there be any reasons for contest among the locals in the place? Answering these questions will make sure that you are investing your money on a winning property that can earn you more than you expected and give you the best returns for your investment.
Questions You Should Ask Yourself BPare Applying For A Mortgage
On a recent trip to Greece, I was very surprised that everywhere we went we would see homes that were only half built and looked abandoned. When I asked if the economy was really that bad to justify all these abandoned homes the response shocked me. These homes weren’t abandoned and in fact they were all being built. I found out that in Greece as in many other countries they don’t have home mortgages. When you want a home you buy the land then as you get extra money you build a little more. Eventually, sometimes 10 – 20 years later you have a completed home.
For me, this moment was an epiphany as I just assumed all countries had a system in place for financing a home and that all counties would want to incent home ownership. A home purchase is usually the largest expense that we make and for the most part it is this consumer spending that keeps our economy flowing. Upon my return from Europe, I realized that the United States, a country of only 316 million people, has the largest economy in the world due in large part to our home mortgage system and our ability to access inexpensive long term money.
Now that I have set the stage let’s talk about all the home mortgage questions that we get and see if I can answer them. I was surprised to read that 31% of buyers don’t think it’s possible to get a mortgage for less than 5% down; 34% don’t know what the term “annual percentage rate” (APR) means and 75% of buyers don’t know how a ARM loan works. We often see clients more focused on negotiating a lower price on the home and ignoring the importance of finding the right loan. We are not mortgage brokers or loan officers but we have compiled and answered our most frequently asked questions.
#1 How much money do I have to put down?
It depends on what type of loan you get and if you want to pay mortgage insurance which is an insurance policy protecting the lending bank in case you default on the loan. There are three loans that have very little to no down payment requirements.
- USDA loan: This is a rural loan but they define rural as being any towns with populations less than 35,000. In Jackson County that includes almost all the city’s except Medford. It will fund 100% of your home purchase and has a fixed percentage rate. To qualify you have to make enough to pay the mortgage but not too much or you’re disqualified. For the most part you cannot make more that 115% of the median income for your area.
- VA loan: They can cover as much as 100% of the loan. The catch of course is you have to be a veteran, reservist or on active duty
- FHA loan: FHA has been around since the 1930’s as a government loan helping buyers buy homes with only 3.5% down. The catch is mortgage insurance is included in the monthly payments so this loan maybe more expensive that a VA or USDA loan.
- Conventional Loans: You don’t have to get a government loan for a low down payment! You can get a conventional loan from any bank or mortgage lender and pay as low as 5% down.
#2 How do I come up with the down payment?
Good question! If you don’t have a down payment we would suggest you start looking at 100% loans. There are other creative ways of getting a down payment. If you are a first time home buyer and have an IRA or SEP your can borrow from it. Unfortunately you can’t use a 401K. Many loans also allow a “Gift” from a family member which you can use for the down. Lastly, there is the old fashion way, save.
#3 How large of a loan can I qualify for?
There are lots of factors in determining how much you can qualify for but your credit score and your Debt-to-Income ratio are the two largest factors. The higher the credit score the more you can borrow but you must have a Debt-to-Income rate of 43% or less. So figure out the mortgage payment on the house you want to buy, go to bankrate.com for a mortgage calculator, and see if that payment added to your current fixed debt is less that 43% of your income.
#4 What is APR and how does it relate to my interest rate?
Your interest rate doesn’t reflect the true cost of your mortgage but the “Annual Percentage Rate” or APR, does. The APR includes various aspects of the loan including interest rate, points, origination fee and underwriting fees, which in theory makes it higher that your interest rate. When comparing the cost of two loans, use the APR not the interest rate.
#5 Should I lock in my interest rate?
Before locking in a rate it is important to understand there may be fees associated with an interest rate lock. Bear in mind, should rates decline during the period between application and closing you will not be able to take advantage of those lower rates. It’s somewhat of a gamble but if you go to bankrate.com they do a pretty good job of predicting where the interest rate is going and that may help you in making your decision. Bankrate.com’s interest rate predictor is called the “Mortgage Rate Trend Index” and can be found at the lower left corner of the home page. Also, rate locks expire and if your closing is delayed you could lose your lock.
#6 Can I get the bank to loan the cost of the home and extra monies to renovate it?
Yes you can get a FHA 203(K) rehab loan which is an all-in-one mortgage loan and remodel loan. These loans aren’t meant for upgrading your kitchen granite but can help pay for a new roof or a heating system. There is also a HomePath rehab loan available on Fannie Mae or Freddie Mac owned properties.
#7 Are interest rates going up?
Mortgage rates have remained at the lowest levels in history, primarily because of the Federal Reserve buying bonds and mortgage backed securities. The Federal Reserve has started tapering that bond purchase and even the news of tapering has increased the rates by almost 1%. Bottom line, as the economy slowly improves interest rates will slowly increase.
Next month in “part two” we will talk about; improving your credit score, refinance if you’re under water, ARM’s, reverse mortgages, HELOC’s, financing a rental property, getting a loan after a short sale and more!
Commercial real estate has turned out to be a great source of income for many people. If you have the right skills and talents, you can earn more six figures in a single transaction. There are many ways of making an income from commercial real estate, and below is one of them: the Two-Step Purchase Offer Process.
This process is, as the name suggest, comprised of two major steps which are writing the letter of intent and the purchase and sale agreement.
Letter of Intent
The letter of intent is the first of the two steps in the process. In this letter, you are going to convey your intention of buying the commercial property in question. Thus, you need to mention exactly which property you are interested in, how much you are offering, and the earnest money deposit you are willing to give. It should also include the conditions for the offer including financing, defaults and other conditions which you deem necessary.
However, the letter of intent is not considered as a binding, and instead only seeks to inform the receiver of your intentions. It is very helpful though in getting the attention of the receiver and sparking their interest in making a deal with you.
Purchase and Sale Agreement
The purchase and sale agreement is the legal and binding document in this process after it has been duly executed. In its simplest sense, a purchase and sale agreement is a legal contract between the two parties involved, you being the buyer and the other party being the seller. Once this contract has been executed, you are obligated to buy the property and the seller is obligated to sell the property. The execution of the purchase and sale agreement finalizes the deal between the two of you.
Once you have acquired the property you are now eligible to conduct repairs if necessary or simply sell it for a higher price than you purchased it. Being the new owner, it is now up to you to price your new property according to the profit margin that you want.
If you’re planning to put your commercial structure or property up in the market, you need to have a commercial real estate broker to represent you. There are many debates and discussions about how to choose the right commercial real estate broker for you needs, but there seems to still be no clear cut and fool proof way of finding the right commercial real estate broker. Hopefully, the tips and considerations mentioned below will help you in your search for the one.
If the company you chose works primarily in residential real estate, then you may start seeing some problems soon. Residential real estate is far different from commercial real estate. In the case of the latter, the clients who will be buying your property or leasing it are not concerned about kitchens for the wife and garages for the husband. Instead they are more concerned about the population and possible market, the location and its accessibility to customers and so on. Thus, be sure that you work only with brokerage firms that focus on commercial real estate.
You should also ask about how successfully they’ve worked on projects like yours in the past. It would be helpful if they could show you some testimonials from previous clients. Aside from the length of time they have been in service, you can also ask them about what special accommodations they can do for your specific requirements, which would be a big plus on the scorecard.
When possible, ask your commercial real estate broker what kinds of marketing materials they usually use for projects such as this. Go over their brochures and portfolio, and try to attend presentations if possible to see the processes behind their marketing strategy and see for yourself if this is effective.
The engagement period basically locks you in with the commercial real estate broker. The engagement period, which can be anywhere from six months or more, is the time for the commercial real estate broker to find the right buyer or lessee for your property. The engagement period should be long enough for the broker to find clients, but short enough so you can start looking for a better broker.