Investing in commercial properties

[Marylou]

I am interested in investing the commercial properties. Any one has any good idea about how to start?

[pingpong]

Investing in commercial real estate is essentially the same procedures as you would buy your primary residence.

However, here are something that you may want to know:

First of all, you are going to buy an income-producing property and that you will need to assess the potential of a deal, such as what is the CAP rate, what is the occupancy rate, what is the traffic count in that area, what is the population count and how good is the structure of the property and the location of the property, business-wise.

These you will need to find out from the seller or the agent.

Besides, financing for commercial property is harder than residential property. The lender see it as higher risk to lend to an investor, and thus the interest rate for commercial property is usually higher than the residential property. Also, the US government does not regulate the commercial lending, thus your bank/lender can choose to create any kind of terms for your loan. Usually the commercial loan is for short terms balloon loan for such as 5 years, 10 years or 15 years terms. The amortization is going to be based on the lender decision to give you choices for 15 years, or 20 years amortization. Interest rate is usually based on Prime rate plus a certain margin and your interest rate may be fixed for a short period of time and then fluatuated with then current condition.

I say if you really want to invest in commercial real estate, find a good agent who can really help you assess the potential of the property, otherwise, it may be hard for you since you are a rookie. Anyway, good for you to think about going deeper in real estate investing. Good luck.

[Johnck]

Another way for you to get your feet wet is to invest in residential properties first and then gradually move up to commercial properties.

If you buy a townhome to rent it out, that will be financed as investment property, which will have higher interest rate than your primary residence but the interest rate is locked for a fixed term whether you choose to have short term like 3/5/7 ARM or 15/20/30 years. Much like you are owning a second home with a fixed rate and term. Since residential loan is easier to obtain than the commercial loan and it is also cheaper in closing costs, I would get myself into residential investment properties first and then commercial.

If you have a primary residence that you can convert into your investment property in the future when you upgrade your home or move to another location, do so because you will have the benefits of buying another home with owner-occupied residential loan which has the lowest interest rate and still taking advantage of your existing owner-occupied residential loan for the converted property, assuming that you have lived there for a few years at least.

Well, try to use the Taxpayer Relief Act of 1997 for home sale to reap the benefit of exemption of capital gain tax if you can qualify for it.

[Tomcat]

Can you please explain what is the taxpayer relief act of 1997 for me? It's new to me. Thanks.

[Johnck]

Basically the 1997 tax law allows people to avoid all capital gains taxes on profits up to $500,000 for married couples filing jointly or up to $250,000 for those filing singly.

The rule which benefits anyone selling their home after May 6, 1997, only applies to a person's primary residence, defined as a home occupied for at least two of the five years prior to the sale. Individuals can claim the $500,000 capital gains tax exemption every two years.

This is new to people who are used to the old tax law where you can avoid paying capital gain tax by rolling over the profits from the sale of your primary residence to your next one which is technically "deferred the capital gain tax".

This to me is the biggest tax break if you can use it tactfully.

[master01]

An increasingly popular investment amongst smaller investors and retirees is through syndicated property trusts. This is known as direct property investment where smaller investors buy small parcels of a larger property through a prospectus. These projects are managed and marketed by licensed property dealers.

[Tomcat]

Can you explain more about that? Is it the same as REIT? Do small investors buying the stocks for the project that is managed by a management company?

As far as I know REIT is like buying a stock from a real estate company, which is not of the same nature as investing in the real estate yourself and managing it to reap profit.

[Rowena105]

Another thing that you can do is invest in a multiple dwelling property. For instance a large house that has been divided into 3 to 4 apartments and utilize one apartment for yourself.

As you are a resident landlord you will find that this will benefit you when it comes to taxes as well. Also when you sell it you are selling an income property which makes it easier to sell.

That will get your foot in the door for complete commercial properties and depending how long you hold onto it before you sell it could actually help you to prove yourself in the commercial property market.

[Johnck]

Originally Posted by Rowena105

Another thing that you can do is invest in a multiple dwelling property. For instance a large house that has been divided into 3 to 4 apartments and utilize one apartment for yourself.

As you are a resident landlord you will find that this will benefit you when it comes to taxes as well. Also when you sell it you are selling an income property which makes it easier to sell.

That will get your foot in the door for complete commercial properties and depending how long you hold onto it before you sell it could actually help you to prove yourself in the commercial property market.

That is true. You will take good care of your property and maintain it well when you live in one of the units.