Commercial Income Producing Real Estate
If you are a real estate investor who wants a long term investment with current income and appreciation of your investment you know the value of income producing property. Now may the best time in your lifetime to invest in commercial income producing properties because the prices are low yet the income and value are high.
In today’s market you are able to purchase property twenty percent to forty percent or more less than what it sold for just three years ago while you get the same rents or higher than owners received a short time ago. I call that a bargain. This is how you buy low to maximize your short term and long term return on your investment.
Commercial Versus Residential Income Producing Property
If you what to determine if buying residential properties (4 units or less) or commercial multifamily properties (5 units or more), consider the fact that financing for residential is tougher than ever while there are down payment assistance programs and many other creative financing options available for multifamily buildings.
You may be able to purchase an apartment or office building for little or know money down. You must also consider that purchasing one building with many units is much more cost effective than buying many properties. What is better, one 12 unit building or 12 one unit homes? Which is more cost effective? The choice is yours.
Though we discuss which option is best for you everything lies in the value of your investment. Before you purchase any property you must access the value. The value of Residential Real Estate is based on the sale price of similar properties in the same area.
This appraisal method is the sales comparison method. Commercial Income Producing Properties also use the sales comparison method, but not as the primary determining factor. The method that is predominant in determining the value of income producing property is the income method. The Income Method simplified is:
The Gross Potential Income minus a vacancy factor (5% to 10%) equal effective income.
Effective income minus expenses (not including the mortgage) and repair and replacement reserves
Divided by the capitalization rate for the property type in the area.
This gives you a value based on the net income of the property.
The income method and the sales comparison method are reconciled by an appraiser to determine the appraised value of a property. A commercial appraisal can cost you from $1500 to $15,000 or more depending on the size and type of property. So you want to establish a conservative value before you pay for an appraisal to determine your interest in a property.
Investing in Commercial Income Producing Property
As an investor in anything your objective should be to buy low and sell high. This means you will never pay the value of a property based on the income method. Typically you want to pay substantially less. You can in this market now. In doing so you increase your monthly income and open the door for many creative financing options. Once you master estimating value based on the income and sales comparison methods you have taken a very important step to being a successful real estate investor.
By Gavin Jackson