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Should You Invest in Residential Or Commercial Properties?

Most people in Northern CA started investing in real estate by buying their own home. And most of them have made money as real estate in Northern CA has continued to appreciate in value. So when they move, they decide to rent out their first home. And then they get a few more houses. They know they have negative cash flow but are making a profit due to appreciation. This is the typical story of how most real estate investors invest in residential properties. So far luck has been in their hands.

As interest rates have gradually increased over the last 12-24 months while rents in the Bay Area have remained fairly flat, the negative cash flow gap continues to widen. The risk of investing in residential properties increases. The same old investment formula may no longer work. In a best case scenario, investors may still get paid but not as much as a percentage because the value of the real estate is already so high. In the worst-case scenario, investors may lose money because residential real estate may stagnate or depreciate in value. Is there a solution for real estate investors in Northern CA? Of course, these investors can apply the same old formula to a new area that has the potential for appreciation. So the main thing is to find this new area. They just need to talk to someone who knows this new area. It could be Bakersfield or Sacramento or Fresno. In addition, investors can invest in commercial properties: shopping malls, shopping centers, medical office buildings. Let’s just explore this paradigm shift to see if it makes investment sense.

1. Income: Commercial properties generate 50 to 200% more rental income than residential properties in the Bay Area. Additionally, there is no rent control for commercial properties. So landlords can charge your tenants as much as the market allows.

2. Rental: commercial real estate leases are generally more favorable to the landlord than residential leases. In addition to the base rent, tenants also have to pay property taxes, insurance and all maintenance costs to the landlord. These leases are called Triple Net or NNN leases. Because of this type of lease, commercial properties are better protected than residential properties. Additionally, NNN leases also take a lot of risk away from the owner because maintenance costs are unpredictable. On the other hand, landlords tend to postpone maintenance on residential properties to reduce costs. Therefore, deferred maintenance will have a negative impact on property values.

3. Better tenants: Commercial real estate tenants are financially stronger. Maybe it’s Walmart or Home Depot with billions of dollars in the bank. They rarely have nickels and dimes with you. In addition, they also guarantee the rental with their property. If for some unknown reason they have to vacate the property, they continue to pay the rent or find another tenant to rent it out. They are also motivated to keep your property in good condition to attract customers to their stores. While most residential tenants are fine, some people think that once they pay the rent they have a license to trash your property and then disappear into thin air with no return address!

4. Long-term rental: Commercial tenants are less likely to go. They often sign 5-10 year leases. Tenants like Walgreens, and Walmart sometimes sign 20-50 year leases. In contrast, residential leases are short term. They can move to a new location a mile away to get $25 in rental assistance! It is a fact that the turnover rate for residential tenants is much higher compared to commercial tenants. As a homeowner, this gives you more headaches and unnecessary migraine stress.

5. Management: It is much easier to manage a 10-tenant shopping center than 10 individual homes in 10 different locations. In fact, if you own 10 residential properties, your tenants are most likely tired of you and we are tired. They usually come out in the summer just around the time you want to get up for vacation. Yes, it is a fact that residential properties are very manageable due to high turnover rate. If you have to hire a property manager, it also costs more than a percentage of the rent to manage residential properties. Besides, it’s probably a full-time job to manage these 10 property managers!

6. Income tax return: it is much easier to track records for income tax purposes for a 10-unit shopping center than for 10 separate residential tenants in several states. You only need one folder for the shopping center while you will need 10 folders for 10 residential rentals. The task becomes more difficult because the IRS requires you to keep records for several years. Your out-of-state income tax return is even steeper for a 10-unit shopping center than for 10 residential rentals.

7. Tax Writing: Commercial properties offer the same tax write-off, 1031 returns as residential rentals.

8. Impact of Credit Scores: Most people don’t realize that when they have as many as 10 residential mortgages, their credit scores will begin to decline. The credit bureau reasons that the credit risk is higher the more money you borrow and a 9-10 mortgage looks like a bond. On the other hand, commercial mortgages do not have any negative impact on your credit score because these mortgages are not reported to the 3 credit bureaus.

9. Pride of Ownership: most commercial properties are referred to by their names rather than their addresses, for example Lion Plaza, or Valley Fair Shopping Center. They can be trophy properties that offer tremendous pride of ownership. When you tell people you own a shopping mall they know, you get a lot of respect.

10. Amount of investment: Commercial properties usually require a lot of money, so it is not intended for someone with little money.

So if you want to work hard for your money or bet on appreciation, then invest locally. If you want to work smart, go after commercial features. Commercial real estate investing is a more efficient way to invest in real estate if you have more equity to pay. You have a strong positive cash flow every month, so you don’t have to rely on praise alone to make money. So if you haven’t invested in commercial real estate, you now know why you are not among the elite group of real estate investors. You may be wondering where to go from here to explore this possibility further. These topics will be discussed in the next issues

o Which commercial property should you invest in?

o Where should you invest in commercial real estate?

o How to choose and choose a good commercial property

o What you should know before hiring a property management company

If you can’t wait for those articles, you can sign up for a free seminar on Commercial Real Estate Investing at Transmercial. The San Jose Real Estate Investor Club (phone number 408-264-3198) occasionally offers such a seminar for a small fee.

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