The trend in hopping out of the residential game and into commercial real estate investment is picking up steam fast. So what does it take to make the leap and what do you need to know to really make it work and worthwhile for you and your portfolio?
More and more real estate investors from individuals to the world’s largest private equity funds seem to be increasingly exiting the single family foreclosure or REO to rental game and are moving into leasing multifamily apartments and other forms of commercial real estate investing. It makes perfect sense as the residential foreclosure crisis seems to be winding up and the commercial market seems to offer more opportunities and a better long term outlook for buy and hold investors.
However, there can be a huge difference between these two worlds of real estate and it pays to recognize where they are dissimilar. From financing to types of tenants, expenses and which factors matter most for future value be ready for a new way to do business, but a potentially far more profitable one if you know how the system works.
So what do you need to know and do to make the most profitable transition into leasing multifamily?
Commercial real estate isn’t just rising in favor because commercial mortgage underwriters are loosening up faster than residential ones, but it is a major factor. Also consider the wider variety of loan types at your disposal from blanket mortgages and bridge loans to leverage existing equity in other properties to mini-perm loans for positioning and of course non-recourse loans for maximum protection. However, you also need to recognize what criteria commercial mortgage lenders place the most importance on compared to those busy denying home loans today. Look at the ability to better structure deals, management strength and the difference a great executive summary can make.
2. Property Management
When it comes to leasing multifamily properties you aren’t going to want to take on property management yourself, at least not if you plan to invest in any sizable way. Beyond the headaches and time constraints it is just much wiser and more profitable to pass on the extra property management expenses including staffing, health care, liabilities and more to a professional third party firm to maintain the highest possible returns.
3. Future Value
Remember that when it comes to valuing multifamily properties it is really all about yield and the income approach. Not only does this mean extremely diligent bookkeeping, but low interest rates too. So can you lock in low long term rates on an assumable loan someone else can take over later? Plus recognize the advantage of being able to increase real value and income at virtually any time by making improvements.