I am getting starting in commercial investing. I have the ability to make a large down payment, so I've been looking at properties in the $1 million - $2 million range. So far I've been focusing on apartment buildings, but not finding cap rates to my liking. Should I instead consider offices or industrial properties? Seems like cap rates are a bit better for these types of properties. Any reason not to invest in offices or industrial spaces?
Any advice would be most welcome.
What is your exit strategy? Is your investing for current income or for later? Do you want something aleady in good condition or do you want to fix it up yourself? Do you want to manage yourself or hire management?
You get the idea. What is your stategy? It can depend on your age as well. Are you young and just starting out or want to put saved money to good use for your soon to be retirement?
Thank you. :D
I'm investing for current income. I'm 40, so I'm nowhere near retirement, but I want my assets to produce more income that I can live on now.
I prefer something in decent condition and would hire a management company to manage the day-to-day operations. I will most likely hold the property for the long term.
With this strategy would you recommend apartments or offices? Thanks for your response!
In general the tide has turned.
What happened is anyone with a pulse who lived in a rental property (apartments or houses) was able to qualify for a home when the interest rates were so low. Many also purchased with ARMs (adjustable rate mortgages) which are now coming out of their flat interest rate period and starting to adjust upward, some at alarming rates. In addition, many purchased too much house and barely qualified for that.
So what does this mean? They can't afford these houses now and are shifting back to rentals again (they are dumping or loosing their houses). To see if that trend is occuring in your area check around and see if forclosure rates are rising strongly and the vacancy rates of both houses and apartments are dropping steadily.
Therefore, it is a good time to buy apartments as the increasisng occupancy rates (just recently beginning) will cause rents to rise -increasing the value of your complex with each rent increase. :D
A very good post. I agree with your fundamental analysis.
Lee makes some very valid points.
I would also add that Office and Industrial carry significantly more risk. The vacancy rates in offices tend to be higher and industrial property carries contamination risk as well.
That's not to say they are not good investments. IMO, if you're just starting out, smaller office buildings are an O.k. revenue generator. Just make sure the numbers work and your leases carry all the necessary items to keep it profitable.
I'm sure you're probably aware that Cap Rates can vary from one type of commercial property to another. Even though the Rental Caps may not be what you hope, as Lee mentioned we are entering a time in many areas where rentals will not only be in high demand, but will also generate very good cash flows.
I would only add a few things to what the others have posted here. First, have you considered retail properties at all (shopping centers)? They require less intensive management than apartments and from my experience tend to be a little less risky when it comes to vacancy than office/industrial. Second, do you intend to purchase the property using leverage (debt)? If so then your return on equity will be going down as you build equity in the property, in other words as you make payments of principle and interest you will build equity in the property therefore when you compare your annual return (what you get in rents-expenses) to the equity you have built that return (as a percentage) will decrease over time. My point here is you would need to either trade out of the property every several years trading up to something that will allow you to bring in more or you would need to refinance so that you could pull the equity out of that property and use it to invest in other things. I apologize if any of this post was unclear, if you have a question please let me know.
I agree with what Jessie said about the risk factor.
I've often heard "You eat better with office buildings, but you sleep better with apartments."
Depending on the economy, the office and industrial income will vary. People always need a place to sleep, though.
I like that quote about eating better and sleeping better.
You've made a number of excellent posts on our forum
and I'd like to welcome you to our boards.
Your contributions are important to us and we're glad
Thanks, Wesley. I'm glad to be here.
a general downside to apartments can be evictions, the lentgh of time it takes and possible emotional aspects.
good management and initial screening avoids those problems.
a general downside to commercial will be time on market when you go to sell.
I own 81 apartment units. While I have management companies, you would not believe some of the stories that I could tell. Generally people invest in apartments because of the "everyone needs a place to sleep" thing, which is true. However, if you took care of the only downside of retail, which is exposing yourself to big spaces by purchasing a retail development with many tenants, as opposed to one big tenant, filled with qualityNNN tenants that have corporate guaranteed leases, you will sleep much better than with apartments...guaranteed.
I will most likely hold the property for the long term.