Buying commercial real estate now might be your best chance to get in on another ground floor opportunity. The opportunity to buy residential real estate at the bottom of the cycle has come and gone. However, buying commercial real estate at the bottom of the cycle, could be the next opportunity of a lifetime, for investors. Most sectors of commercial real estate have been making a slow but steady come back for the past year.
Although improving, there is still plenty of upside left in the market. According to CBRE Group's third quarter report, the national office vacancy rate improved by 10 basis points (bps) but still stands at 15.1%. This is a year on year improvement of 50 basis points.
5 Reasons Buying Commercial Real Estate Could Make Sense For You, Right Now!
- Buying commercial real estate now is the chance of a lifetime.
- Buying Commercial Real Estate in a Rising Market
- Industrial real estate had a much more impressive improvement in the third quarter.
- The vacancy rate improved by 30 bps from a year ago and has improved 130 bps from its recessionary peak.
- Now at 11.7%, it makes for an attractive sector when considering buying commercial real estate.
Apartment buildings remain the star for buying commercial real estate but most are now fully priced in local markets. What continues making apartment buildings attractive to investors looking at buying commercial real estate is the super low vacancy rate of 4.6%.
The retail sector is making steady but slow improvement. Third quarter saw the vacancy rate decline 10 bps. A 70 bps improvement from a year ago.
Why Buying Commercial Real Estate Makes Sense
Economy of scale means you can manage a lot more trailer parks, apartments, and offices with more cash flow than you can manage individual homes. Buying commercial real estate means you have income from 100 or more apartment units compared to maybe 5 single-family homes. Obviously, the difference of having one or two vacancies between the residential and commercial is a huge factor also.
Buying commercial real estate comes with a separate set of rules.
Residential houses are valued based on the market value of recent nearby sales. Buying commercial real estate is based on the net operating value of the property.
Buying Commercial Real Estate With Creative Financing
Creative financing is another reason for buying commercial real estate. It's much easier to find private money partners interested in buying commercial real estate than it is with residential. Commercial loans are also more flexible. You can combine private financing with a bank loan and use other creative financing solutions when buying commercial real estate.
Larger Multifamily Buildings are Lease Option Possibilities Also
As most investors know, the separation between residential and commercial properties is between 4 and 5 units. Anything up to 4 units is considered a residential property. Anything with 5 units or more is considered a commercial property.
You can certainly lease option commercial properties. The biggest difference residential and commercial is financing the property when you decide to buy. Commercial financing is very different from residential financing. You will most likely need a much larger down payment. Also, it's common for banks to require you have a up to 6 months of reserves. This means having enough financial liquidity to cover 6 months of loan payments and operating costs.
I do my best to make the most current real estate investing information available to readers. This time, it's about buying commercial real estate and I wish you best of luck with your real estate investing!