10 Money-making Advantages of Investing in Commercial Property

Investing in commercial properties is the secret to success for many of the world’s most wealthy real estate investors. There’s no reason you can’t also build massive, passive cash flow; spread your investment risks; use leverage effectively; and build substantial equity.

Whether you’re investing in office buildings, retail stores, or industrial complexes, commercial property has several real advantages.

No. 1. Higher income potential
Commercial real state garners a higher rent, or lease payments, per square foot than residential singe-family real estate, or apartments, and therefore, the investor has a better chance of earning more income.

No. 2. Lower vacancy risk
By its very nature, commercial real estate has the advantage of lower vacancy risk, because it always involves two or more units. Unlike single-tenant investments, such as a single-family home, the vacancy risk with commercial properties is spread over several units.

For example, one empty office out of 20 is only a 5-percent vacancy. For commercial real estate, this 5 percent is less traumatic financially than a single-family home sitting vacant – in which case the investor experiences the painful and costly loss of 100-percent of his monthly rental income.

No. 3. Less competition
There is less investor competition in commercial real estate because some investors are not comfortable in larger investments, such as office buildings, shopping centers, or industrial complexes.
But remember: Though these types of larger investment are out of many other peoples’ comfort zone, they don’t need to be out of your reach.

No. 4. More flexible sellers
Perhaps a direct result of the fact that there are fewer investors, the owners of commercial real estate typically are more flexible when selling their properties. They aren’t as emotional as people selling their homes; the sale is simply a business decision.

And because they’re in a business frame of mind, the sellers are more likely to understand and agree to a buyer’s request for 100-percent seller financing; partial seller carry-back financing, such as a second mortgage; or second trust deed behind an institutional lender’s first lien. Note: in Canada, this is refereed to as vendor take-back financing.

No. 5. Depreciation tax shelter
Investing in and holding onto commercial real estate provides you a significant tax shelter through the depreciation of the building and improvements. The depreciation write off allowed by the IRS, and most states, shelters your new passive income.

No. 6. Expenses paid by tenants
Another advantage: In many commercial properties the tenants pay all the building’s operating expenses. This is especially true in triple net leases, which are common in the commercial industry. In addition to paying the base monthly lease payment, the lessee also pays his or her pre-rata portion of the entire property’s expenses, real estate taxes, property insurance, and maintenance.

Plus, most retail leases include a provision indicating that the landlord receives a percentage of the retail establishment’s sales – or a “percentage rent” bonus. For example, the tenant pays a base monthly lease payment and the landlord gets a bonus if sales exceed a specified number.

No. 7. Equity build-up
the tenants’ leases payments provide you, the owner, with the cash to make the mortgage payments, which results in a nice growth of equity over time.

No. 8. Solid economic value
Another advantage of owning commercial real estate is that you can buy a stable cash flowing property for less than it would cost you today to build the exact same commercial building new, in the same neighborhood. Because most existing commercial properties can be purchased for less than their replacement cost, or the cost to build them new, they provide solid economic value. The economics of commercial real estate investing are based on their historical documented Net Operating Income, or NOI. Net Operating Income is simply the actual Adjusted Gross Income [scheduled rent – vacancies], minus the actual Operating Expenses of the commercial property, excluding the debt service.
[Don’t accept “proforma” financials on the property, get the real actual NOI for the last three years- the Du Diligence Section of this article to understand what you need to get!]

No. 9. Massive leverage
With commercial real estate, you get financial leverage combined with long-term, fixed-rate institutional financing combined with partial seller financing.

No. 10. Long-term capital appreciation
Holding on to multi-unit or commercial properties over the long term will provide you with possible capital appreciation and increased cash flow, as a a result of higher rental rates over time. The increased cash flow can lead to long-term massive, passive income, with appreciation as the frosting on the cake.

Due Diligence Is Critical

The commercial real estate due diligence process begins when you initially contact the seller or the seller’s agent or broker. During the contract negotiation phase, the due diligence process is well underway.

As a commercial real estate investor, you need to clearly identify for the seller exactly what you need to analyze your potential investment intelligently. Frame your request for documentation with phrases such as, “in order to make an informed, intelligent business decision, I will need the following documents…”

Commercial real estate property owners are, generally, more knowledgeable and sophisticated than residential owners. Start with a simple request for basic information, such as a current rent-lease roll, copies of all current leases, and the income and expenses for the commercial real estate property for the last two to three years. The more sophisticated the sellers, the less they are surprised or upset by a detailed comprehensive list of items needed for a complete due diligence. Start with the request for basic information that you need and then add additional requests, as necessary.

The final due diligence analysis of a potential commercial real estate investment should be the request for and review of the IRS Schedule E’s [the income and expenses reported to the IRS] for the subject commercial property for the last three years. You don’t need to request their entire tax return, only the last three years Schedule E’s.

FYI I recommend as part of your Due Diligence, that you should request they will be sent directly from the owner’s CPA to you. [In Canada, instead of the IRS Schedule E, investors should ask for the T776 Form submitted to Revenue Canada for the last three years and to receive it directly from the Vendor's ( Sellers's)Chartered Accountant.]

Most commercial property sellers, or their agents, will give you what you need in a timely manner. Only sellers who may be hiding something will refuse a reasonable request for information to the potential buyer, such as the last three years Schedule E for the subject commercial real estate. If the seller or agent refuses to provide the requested information, then you should be prepared to walk away from the deal.

Copyright © 2005-2010 Dr. Howard E. Haller. All Rights Reserved.

Author's Bio: 

Dr. Howard E. Haller, Professional Real Estate & Intrapreneurship Keynote Speaker
President & CEO, Haller Companies & RealEstateMentor.co
(Real Estate Broker, Contractor & Developer), and
Chief Enlightenment Officer of the Intrapreneurship Institute
Licensed Real Estate Broker & Licensed General Contractor

http://www.RealEstateMentor.co (Real Estate Mentor Co.)
Email: RealEstateMentorco@gmail.com

Dr. Howard E. Haller is a real estate developer, Licensed real broker, real estate investor,and real estate mentor. He is a Professional Speaker (Member NSA) delivering Keynote Speeches and Seminars on Real Estate investment (US and Canada), Real Estate Finance, Real Estate Development, Leadership, Intrapreneurship, Entrepreneurship, and Innovation.

Dr. Haller has been a Licensed California Real Estate Broker for 25 years. He is a Licensed California Engineering Contractor & General Contractor for 20 years. He has built or project managed the building of well over 2.1 million Square Feet of Commercial Real Estate across the US.

Dr. Haller has been personally involved in $465 Million in Real Estate deals: Buying, Selling, Rehab, Flipping & Developing Residential & Commercial Real Estate in the US & Canada..

Dr. Haller’s Intrapreneurship Institute can companies or associations help evaluate, design, and implement an Intrapreneurship Program within a company to effectively utilize the intellect and creativity of human capital of an organization to help maximize productivity and profits. The Intrapreneurship Institute can provide Keynote Speeches, Executive Briefings, and Workshops on the benefits and program features of an intrapreneurial program.

Dr. Howard E. Haller is a successful serial Intrapreneur, an accomplished serial Entrepreneur, seasoned senior corporate executive, and published author of two books: "INTRAPRENEURSHIP SUCCESS: A PR1ME EXAMPLE" published by VDM Verlag Dr. Müller AG & CoKG ISBN 978-3-639-17509-7, and is now available on Amazon in the US, Canada, UK and Germany. “Intrapreneurship Success” tells the inside full story of how a small OTC listed company grew to be the #1 performing stock on the NYSE in only five years.

Dr. Howard E. Haller, Real Estate Investor, Licensed Real Estate Broker, Licensed General Contractor, Real Estate Developer, published Author, and Professional Keynote Speaker on Intrapreneurship & Real Estate