Residential

Real Estate Agents

Do You Really Need a Real Estate Agent to Sell Your Property?

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Real Estate Agents are expensive and there is always a question on back of every seller’s mind if they should sell their property without employing services of an agent thereby save on commission fee. It is comparatively easier these days to advertise your property on the internet given the fact that numerous websites offer services that allow owners to list their property for a nominal fee.

Given the current technological scenario is it advisable for you to use services of a real estate agent or should you try and sell your property on your won? This is a very important question not to be taken lightly. Your property is a huge asset and the decision you make will have a huge impact on your finances.

I have written series of articles to help sellers with various aspects involved in selling a property to achieve maximum price.These articles will be of great value if you decide not to use services of an agent. There is no reason as to why you cannot do it on your own. However, knowledge is the key to successful selling of your house or investment property.

Ways to Sell Property

How to achieve the Best Sale Price for your Property?

This is perhaps the most important factor on a person’s mind when they put their property up for sale. It is natural for you to expect best possible price for the property. But ask any agent and they will tell you that there is no magic formula and a property will only sell at a price dictated by the market forces. According to them no one can sell a property more than its market value in the prevalent market. If this is the case then why use a realtor?

The truth is that there is that there is no fixed sale price but a broad range between which a property sells.A competently marketed property will hit the upper bracket whereas a property that is not exposed properly to prospective buyers will sell way below its market value.

To achieve the best price for your property you have to generate huge buyer interest, get them to view the property and then explain them advantageous features of the property. If the buyer is an investor you have to explain them not only return on investment but how they can add value to the property by making few simple changes.

Selling a property to achieve the best possible price is a process.  Let us examine this step by step.

Why is it Important to Value a Property Correctly?

If you under price or over price a property it can cost you thousands of dollars. The best opportunity to sell a property is when it first comes on the market.

If your asking price is too high, you could close out the most important ingredient of real estate selling – a combination of qualified prospective purchasers who are looking for properties in your price range at the same time. If you over price your property then it will fail to attract prospective buyers. Your property can sit in the market for months until the price is lowered. Such properties become stigmatized. Even if price is lowered to the right value few weeks later it still may not sell because an impression is created that the seller is unrealistic.

Overpricing also will lead to purchasers having higher expectations of your property. This leads to their disappointment and your lost opportunity. Buyers quickly reject properties they perceive to be overpriced. This can greatly extend the selling period. While a prospective buyer might submit a lower offer, many buyers are embarrassed to make offers that are substantially below your asking price so unrealistically priced properties tend not to receive offers.

If you under-price your property it will sell very quickly but then you would have sold your asset for much lesser money than it is worth. It is therefore very important that you price your property correctly based on market conditions.

How to Determine True Value of a Property?

How can you determine what is the true value of your property? One method is by paying subscription for Property Guru or RPNZ to obtain recent sales figures of properties sold in your area. This will give you some idea of comparable sales but may not be accurate as the published sales figures are 3 to 4 months old and market may have moved. In addition you cannot arrive at correct value of your property simply by looking at raw data because each property is unique. Properties differ in location, character, construction material, land area, built up area, quality ofchattels, up keep and zoning.

The value of property is also determined by zoning and what future development is possible on the property. You should also find out if any zoning changes are likely to take place in your area that will affect the price of your property.

Character of an area is always changing because of development in the vicinity. This can impact value of your property both positively or negatively. You can get this information from the Council or an experienced real estate agent in the area.

It can take years to understand local markets and these can change extremely fast. It is very difficult and takes a lot of time for someone with experience to determine value of property correctly.Through expert local knowledge, your agent can establish a realistic appraisal for your home based on its location, age, size, features and market variables such as interest rates, demand and the availability of financing. Avoid the temptation to be excessively influenced by the experiences other people have had in the sale of their homes/ Properties.

Another method for you to determine the property value will be to get a professional appraisal done but this can cost a lot of money. There is also risk for appraisal to come at a lower value than your expectation. If you have knowledge of the local area and figures of recent sale you will be able to present your case to the appraiser to modify his report. You can enlist help of a professional or a real estate agent to help the appraiser and also challenge an appraisal if it comes in low.

How Best to Market Your Property?

Choosing a marketing plan that ensures your property is exposed to the maximum number of buyers is critical to achieving the best price.

A well planned campaign targeting the right buyers will help ensure that those who are attracted to inspect your home are not disappointed.

Marketing brings buyer leads that are crucial for successful sale of property. This requires knowledge of cost effective ways to advertise to generate buyer interest. An uninformed person can waste thousands of dollars in advertising and generate very low quality leads. Advertising should be focused on target markets by demographic and geographical area. This requires   knowledge and skill on where to advertise so as to get best bang for your bucks.

In all cases, it is important to select the web marketing, social media, newspapers, magazines and target areas that contain the widest audience for your type of property. The value of the internet as a marketing component is now beyond question. Nine out of ten purchasers begin their search for a new property online. Advertising on the internet will also reduce your advertising budget.

A right marketing mix is important to attract buyers.

Top selling tip – You can’t Sell a Secret

The more buyers who know your property is for sale, the greater the opportunity you have in achieving a premium price.

Why Copy Writing is Important?

Copy writing is a very important skill. A well written headline can generate buyer inquiries where as a poorly written advertisement will generate no inquiry. Length of advertisement is restricted by words or space. You have to give exciting but limited information in your advertisement so that a person is excited to either email or call you by phone. The aim is to get a person to view the property. If you give too much information in your advertisement then a person may not contact you. It takes minimum 5 to 7 contacts with a person before a lead can be motivated to make an offer on the property. This is why it is important to get a lead to email or call you so that you can follow up.

If you are not confident then you can hire services of a copy writing professional. Most experienced real estate agent will have developed skill of copy writing because they do this on daily/ weekly basis.

What Advertising Materials are required?

You have to prepare flyers, information memorandums, website advertisements, newspaper/ magazine ads, sign boards etc. Videos and high quality photography is a must to attract buyers.

Pre-paring advertising materials that are professional requires skill and can consume lot of time,money and effort. Mass printing can be expensive. In addition there is delivering effort and costs. You have to load advertisement and pictures on to several websites. At times you may like to translate advertisement materials into other languages like Chinese to increase your reach.  In case of flyers you have to either post them or place them physically in letter boxes.   You can hire someone to do the job but it will cost money.

Real estate companies have bulk advertising rates for videos, photography, website, newspaper/ magazine, sign board advertising etc. As individual buyers you will pay anywhere from 50% to 100% extra.

How to Use Social Media?

Social media is very strong these days. It is a great marketing tool but it has to be used correctly. Your friends and colleagues will turn away from you if you start advertising your property or selling any product to them using social media. The trick to generate interest through social media is to share information that is of value or fun. The information that you are sending should be linked to your website that is marketing your property. This is an in offensive way of marketing your property.

If you have a website or a blog then social media marketing can be very effective. You should use social media posts on Twitter, Facebook, YouTube, LinkedIn and Pinterest that point to your blog or website.This is a great way to generate traffic to your website and indirectly get people to view the property you are selling. Your website should have landing pages to capture email and telephone numbers of prospects so that you can drip feed them details of your property.

You can also place targeted paid ads on social media to drive traffic to the page on your website that is marketing your property. These ads can be targeted demographically or geographically. Social media marketing can be very effective only if you know how to use it correctly. Alternately you can hire a professional to do the job.

Information Marketing is Key to Selling Your Property

The key to selling your property is information marketing. Have you ever wondered why we Google so often? It is for gaining information to solve a problem that we may have. It may be to find the cheapest air ticket for a holiday you are planning or a medical issue about which you may wish to learn more. You may be lonely and looking for a bit of romance to perk up your life or simply find which bank is offering the cheapest interest rate to fund your property.

Same is true when you market your property. Buyers want information regarding your property to know if it is suitable for their needs. Does it fall within their budget? They want to know information regarding schooling, transportation, recreation, shopping, weather, crime rate, financing the purchase, values of property in the area, rentals, capital gain, add value potential, return on investment. The list is endless.They have limited time and want to know as much as possible about the property even before they decide to view the property.

There is a process to giving the information they need. The first step is to perk up their interest regarding the property through a short advertisement with attention grabbing headline. Once a buyer has become interested the aim is to get his contact details so that you can contact them on regular intervals and drip feed information regarding the property. It takes anywhere from 5 to 10 contacts to elicit an offer from a buyer. You have to build a relation of trust through emails and telephone calls with a buyer before they become serious about your property.

Apart from a flyer that gives basic information about the property you will need to prepare a document that real agents call an information memorandum which gives detailed information about the property to a prospect. When a buyer gets more interested they will request for Certificate of Title, LIM report, Building report, tenancy schedule, zoning information, development that is possible on your property, copy of the leases if property is rented,  area information like schools, transportation, shopping areas, entertainment etc. You have to be prepared to forward the information and answer any related questions.

You may have on an average of up to 20 to 40 inquiries depending upon how well you have marketed the property. You will need to send basic information regarding the property to the buyer when they first contact you.A third of them may request for additional information. It is important to keep tag of all inquiries and send information expeditiously. The prospective buyers will also phone you at all odd hours seeking clarifications on information you have sent them. This may be relating to title of the property or something in the LIM report that they do not understand. You will have to be prepared to answer all queries.This will need patience and effective communication on your part.

Preparing and sending information about the property is an arduous task. You have to be accurate about the information you send to a buyer so that there are no legal issues later on. It is important that you consult your solicitor or a real estate professional if you have any doubt.

How Staging Can Increase Selling Price of Your Property

How you present your property to a prospect is of utmost importance. A well-presented property can fetch you extra tens of thousands of dollars. Whereas an ill presented property can turn off buyers.  This is especially important when selling residential houses where emotional appeal pays a huge role in the selling process.

For every dollar you spend on staging your property you should be able to increase the price of your property by atleast 5 to 10 dollars. This needs skill and knowledge. If you spend too much money then it may result in diminishing returns. You can hire a professional to do the job or an experienced real estate agent can help you on how best to present your property.

A well-presented property says “welcome”. It doesn’t have to be a showroom but it should appear to be a comfortable place to live.

Your property will be just one of many on the market at any given time. You therefore need to present your property as appealingly as possible. Presentation counts. Experience shows that vendors who make an extra effort usually achieve a quicker sale and, in many cases, a higher price.

The property selling process typically starts several months before a property appears on the market. It’s necessary to look at a home/ property through the eyes of a prospective buyer and determine what needs to be cleaned, painted, repaired and tossed out.

Ask yourself, if you were buying this property, what would you want to see? The goal is to show a property which looks good, maximises space   and creates as much demand – as possible.

Conducting Open Homes

Conducting open homes professionally is an important part of selling your property. You have to clean up your property, mow the lawns, and trim the hedges for the best visual impact. There should be no cooking smell or bad odder of any kind. This can put off many buyers.

The house should be presented uncluttered. Everyone in the house must leave with the exception of the person who is showing the property. There should be no pets because some people may feel uncomfortable.

You have to be appropriately dressed to show the house and answer all questions. You should also have information broachers handy to distribute to buyers with your contact details so that they can contact you for further information. You should also have pen and register handy to jot down each buyer’s details and any information they may need you to send.

Prompt follow up action is very important after an open home. Your property is competing against several other properties in the area. Buyers drift off if there is no proper follow-up.

Open Home Tip

Here are some tips on how to maximise the effectiveness of your property’s presentation.

Less is more!

While you’re cleaning, think about each room and what type of furniture really needs to be in it. Rooms look smaller when they’re crowded with sports equipment, excess furniture and general clutter. Clear out anything that’s not needed to create a feeling of spaciousness. And don’t forget your cupboards – keep them neat and not too full. This creates a perception that your home has plenty of storage space.

When buyers look at a home, you want them to look at the features of the home, not your personal pictures.  You want buyers to picture themselves living in the home, not someone else living there.

Repairs can make a Big Difference

Make sure that all minor repairs are completed. Sticking doors and windows, loose door knobs, faulty plumbing, peeling and cracked paint or faulty fly screens may affect your sale.

Letting the Sun Shine in

Let plenty of light into your home. Nothing improves atmosphere more than brightness. On a dull day, it is advisable to switch lights on prior to the arrival of prospective purchasers.

Make them Comfortable

A warm, comfortably heated property on cold days, adds a feeling of cosiness. On a hot day, don’t forget to turn on the air conditioner or fan (or simply let the breeze flow through).

Inspections: Three’s a crowd

Avoid staying inside the house/ property while a buyer inspects. Buyer’s sometimes feel they cannot openly discuss concerns with your agent in your presence. Golden opportunities may therefore be lost.

Silence is Golden

Should it be necessary for you to remain at home, be courteous but don’t force conversation with a potential buyer. The prospective purchaser wants to inspect your property – not pay a social call. However, should you be asked questions about the property, the neighbours or the district, answer them truthfully, concisely and directly.

Keep it Peaceful

As a general rule it is advisable to turn off radio and television sets during inspections as they can be very distracting. Keep your pets out of the way (preferably out of the house) and clean and stow pet food bowls (other than water of course). Let the agent and buyer talk, free of disturbances.

Negotiating and Accepting an Offer

Negotiating and accepting offers are perhaps the most difficult part to handle if an agent is not involved in the deal. Let me explain.

In any buyer/seller relationship, it’s normal for the seller to ask themselves “I wonder if I should have asked for more?” On the other hand, the buyer may question whether they could have paid less. Direct negotiations often lead to a deadlock. A third person who is neutral to both parties can help narrow the gap between buyer and seller. Using solicitors to close a deal is at times counterproductive because not only are they very expensive as they charge by the hour but try and protect their clients (which is their job) to the extent that that a negotiated deal becomes impossible.

In negotiation there is a saying that he who blinks first loses. Supposing if you as seller take a tough stand and the buyer does not respond to your price then there is no one to break the ice. If after waiting for two to three days you contact the buyer then your position in negotiation is greatly weakened.  Similarly a buyer is hesitant to approach you with a counter offer as he is afraid that his bargaining power will be reduced.

If the buyer is an experienced negotiator then this can work to the detriment of the seller. There are many professional property investors in the market. They are always on lookout for private sale by vendors. This is because they feel that in a private sale situation they are at a great advantage against an inexperienced vendor who may not understand full value of his property and easy to manipulate during negotiations.

The art of negotiation is crucial to success of the deal. Knowing the right time to stand firm, and when to yield, requires experience and a heightened ability to sense the buyer’s intent and level of motivation. In negotiation you can trade terms of the deal for price or vice versa. This requires skill and problem solving approach. An experienced real estate agent can be of great help in negotiating a deal. As a seller he can give you feedback on the financial status and motivation of prospective buyers. He can act tough on your behalf without compromising your position on the deal. As per law agents work for the vendor and therefore it is an advantage for you to employ their services especially during negotiations.

The buyers also discount commissions when they make an offer during a private sale. They make calculations on how much fee a vendor will be saving and make an offer after subtracting the commissions. This defeats the basic purpose of not using an agent which was to save on commission fee. You do all the work without any reward.

You may save a commission by selling a house yourselves, but trying to sell a house without an agent may actually cost you more money than the commission you will save. In addition you will land up in doing all the hard work that an agent is supposed to do; no help with marketing, contracts, negotiations, inspections, appraisals, etc.

People will claim they saved thousands on selling their home and they sold it in one day without an agent. There is a reason they sold it in one day, they left a lot of money on the table! An experienced real estate agent could have more than made up for the commission they charged by pricing a house right and working for the seller’s best interest.

Real estate agents are experts in marketing, educated in the sales process and know how to value a home. Agents are not paid just for the time they spend selling your house. They are paid for all the licensing courses and continuing education they must take. They are paid for their experiencing marketing homes and getting the most money possible for a seller.

You may not save as much as you think when you sell a house yourself

Conclusion

It is almost always better to use a real estate agent to sell a property instead of selling it yourself. A real estate agent will make you more money on the sale of your home/ property, even though they charge a commission. I know many professional investors who have their real estate license and they still use another real estate agent to sell their property for them. Those investors know that another agent has the time needed to sell the property and the market expertise in the area where the property is located. Before you try to sell a house on your own, consider if it is worth the time it will take to understand the process and if you will actually save any money.

Here is a great statistic from USA for people who try to sell a home themselves versus use a real estate agent;

For Sale By Owner (FSBO) Statistics

  • FSBOs accounted for 9% of home sales in 2013. The typical FSBO home sold for $184,000 compared to $230,000 for agent-assisted home sales.
  • FSBO methods used to market home:
    • Yard sign: 36%
    • Friends, relatives, or neighbours: 28%
    • Online classified advertisements: 16%
    • Open house: 14%
    • For-sale-by-owner websites: 13%
    • Social networking websites (e.g. Facebook, Twitter, etc.): 7%
    • Multiple Listing Service (MLS) website: 7%
    • Print newspaper advertisement: 7%
    • Direct mail (flyers, postcards, etc.): 1%
    • Video: 1%
    • Other: 2%
    • None: Did not actively market home: 32%
  • Most difficult tasks for FSBO sellers:
    • Understanding and performing paperwork: 18%
    • Getting the right price: 13%
    • Preparing/fixing up home for sale: 12%
    • Helping buyer obtain financing: 3%
    • Attracting potential buyers: 3%
    • Selling within the planned length of time: 7%
    • Having enough time to devote to all aspects of the sale: 6%

Source: 2014 National Association of REALTORS® Profile of Home Buyers and Sellers

A real estate agent knows how to handle state contracts

Speaking of contracts, have you seen your state contract recently? In Colorado the state contract is 17 pages long and that does not include the four addendums and disclosures that need competed as well. A real estate agent knows exactly what to look for in a state contract, what is customary for the seller to pay and what is customary for the buyer to pay. In Colorado it is customary for the seller to pay for title insurance and many other costs to be split by the buyer and the seller. There are many costs that the buyer customarily pays. If you have no agent to guide you on what is normal for a seller to pay and what is not, you could easily pay many more costs than you should.

A real estate agent knows title companies, lenders and other agents

A real estate agent knows the market and they also know people in the business. They can help a seller find a title company with the lowest fees and best service. They can help the seller find the best contractor if repairs are needed before the listing or after an inspection.

 

 

Investment Risk

How to Reduce Investment Risk through Real Estate Investment

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The investment risk of stock market has made real estate investment the chosen area for many investors who are looking for greater safety. Not only real estate investment poses lower investment risk, it is also highly lucrative if handled properly. You can profit from real estate investment only when you have an effective risk management plan in place.

You can reduce investment risk in real estate by firstly buying property below value. You can then increase the value of the property by doing renovations, applying for change of use or zoning and increasing rent. By purchasing below value and then increasing value you are in effect putting a cushion in place that will reduce investment risk in case the property values move downward.

You can reduce risk by buying a foreclosure or a rehabbing property for very little starting cost, invest a little more on repairing and renovating it and then sell it for a brand new and expensive house. Alternately, you could turn into a landlord and rent out your house for generating a substantial rental income.

Apart from the high yielding nature of real estate investment, you increase safety as you build equity through your loan repayment over a period of time. Capital gain over a period increases the value of your property and increases your equity to loan ratio that provides additional risk cover.  

Investing in real estate provides substantial tax breaks. You can pay back your loans with the tax refunds to increase your equity and reduce investment risk.

What is more, real estate investment allows you to use other people’s money for running your own property business. Even though banks are reluctant to give loans for stocks or gold investing because of their high investment risk, they readily give out property loans since they get something immovable and tangible in case of defaulting.

By using proper investment structures like family trusts, trading trusts, LAQC and corporations you can limit your personal liabilities in case things go wrong with your real estate investment plan.

It is possible to insure your properties of any kind of risk such as fire, earthquake, damage or theft. You can also insure the contents and chattels. There are also innovative landlord insurance policies that cover you in case of rent default or damage to the property.

Why real estate investment is a better suited to a risk management plan?

No other investment can provide a better investment risk cover than real estate. It is not possible to buy stocks or for that matter any other investment below value. Apart from real estate you cannot increase the value of any other investment through your effort.

Risk Management Plan

In real estate it is very easy to put a risk management plan in place. Even if you are new to real state investment, you can understand its basic functional aspects more quickly than other financial instrument. That is why real estate attracts the greatest number of amateur investors looking to improve bad credit records and make money.

Real estate investment is more conducive to a superior risk management plan when compared to stock market because you can cover your investment risk through various types of insurance plans. Unlike stocks where you have no control over your investment, in real estate you have total control over your investment. No Madoff can run away with your money thereby reducing your investment risk.

Property prices have risen consistently by 8% to 10% during the past 300 years. This is because world population is increasing with every passing year and we are not producing any more land. Hence, real estate investment is free from the investment risk of abrupt fluctuations that is a regular feature of the stock market.

But what qualifies real estate investment to a good risk management plan is that the prices of all the real estate properties of an area move at a time. This definitively lowers the investment risk of real estate as compared to stock where not all the stocks will move in tandem even if the market is moving. Hence, in real estate investment you do not have to rely on guesswork and uncertainty, which increases your chances of financial success.

Real estate prices tend to move slowly and steadily. Even if there is a market crash, the property prices at worst go down in value by 5% to 20%. In case of stocks the prices can fall as much by 80% to 90% or the company may go into liquidation making the value of your investment worth a whole lot of toilet paper.

Real estate prices tend to have a built in inflationary proofing as they tend to move up when there is excessive money supply. This greatly reduces the investment risk when inflation goes out of control.

Real estate investment as better suited to risk management plan when compared to stocks or any other investment instrument. In fact, real estate investment beats any other forms of investment like stocks, commodity and currency trading because of its stability of returns virtually free from the investment risk volatility.

 

Property Management Software

How to Select the Right Property Management Software?

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You will find it difficult to manage your properties the manual way once your real estate portfolio starts to grow. There will be need for you to invest in property management software to derive maximum success from your real estate investment business.

Property management is not just about collecting rents from the tenants. It requires a great deal of money management that includes maintaining details of tenants, financial records, preparing balance sheets involving income and expenditure details, and bookkeeping. You also need to ensure that all the reports are ready for annual taxation purpose in order to claim back tax refunds.

Property management software is designed to handle normal accounting and general balance sheet requirements. Because of their user-friendly and affordable nature, the software can be used by individual investors, professional property managers, and management companies undertaking a range of property management reporting functions.

Key Features of Property Management Software

Features of Property Management Software

Good property management software helps you to:

  • Record your key property details like property condition, room sizes, home furnishings
  • Store images of all rooms and aspects of the property
  • Store property purchase and landlord details
  • Automatically generate landlord property management agreements

Some property management software come with unique facilities like pop-up reminders to remind you of late rent, expiring leases, and thoroughly categorized extensive reports. You can judge the user-friendliness of property management software if it allows you to manage your properties portfolio and database all on your own. It helps you to:

  • Store lease details like rental charge, payment frequency and deposit details
  • Automatically generate payment schedules for each tenant and property
  • Produce various tenant reports including lease expiration and account balances
  • View tenant payment history, account balance & future payment schedule

Inventory Management– You can list and keep track of every single detail about the property including the property dimensions, type of property, information about the chattels and even list out all the complaints received with respect to a particular property.

With good property management software you will be able to create groups or segregate properties depending on location, property values or monthly rental values.

Creating and Printing Reports – Report creation and record maintenance is an important function of the software. Whether you want to review the lease agreement, prepare an eviction notice, or send a late payment notice, you can easily create any report. With press of a button you can print out a balance sheet and other financial reports that are extremely important for year-end taxation purpose.

How to Choose the Right Property Management Software

Right Property Management Software

Prices for property management software can range from $100 to $10,000 (or more). You should not buy software more than what you need.

The two most common mistakes are that either investors go for an over kill or an under kill.

Over Kill

Do you need software to manage your properties and your office too? Buy property management software that does property management and not the extras.

You can buy plenty of inexpensive products that are perfectly suited for your office management. Select cost effective property management software that can integrate with your office management software.

Under Kill

You can land up buying a piece of junk software from an impressive looking web site. Look for the following features as a sign of a good quality product:

  • You should be able to use a ‘trial version’ before deciding to buy the product
  • Maintain a separate ledger for each Tenant and each Owner.
  • Deal with bank checks and deposits.
  • Automatically post rent, management fees, and late fees.
  • Should be able to handle different types of properties such as single family homes, multifamily homes, condos, and commercial units without having to buy extra modules.
  • It should be able to grow as your real estate business grows. Look for the ability to purchase add-ons, such as work order modules, online rent payment modules, or tax related modules

Storage Capacity

This is one important aspect to consider when deciding on property management software. There should be ample storage space that you can upload and preserve your tenants’ profile such as personal details, credit reports, references from past property owners and current employer details. It should store copies of all correspondence that you have had with the tenant and any other information that you might consider useful in future.

Some software’s even allow you to upload digital images of each and every room in the property and store them. These images are of great value when the property is rented out to tenants, as they can be used as evidence describing the existing condition at the time when the home was being given out on rent.

Check the Cost of Technical Support

Many property management software companies don’t offer technical support. Ongoing technical support is a must. You must always check out the cost of the technical support.

Some vendors force you to buy their expensive software updates in order to receive their technical support. Others offer free support for a short period of time then charge exorbitant prices from a dollar per minute (with a minimum amount per call) to well over $100.00 per hour for support.

Look for at least a 60 to 90 day free support plan as part of the purchase. Better still find a vendor that offers free unlimited support.

Lookout for the Hidden Costs

Difficult, unfriendly software costs you time. Calculate how much money in terms of time it costs you when you battle with your property management software. The software you select should be easy to install, easy to use, and has plenty of help.

Property Taxes

How to Reduce Property Taxes?

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Property taxes are local taxes that you need to pay annually for your real property. The amount of property taxes generally depends on the market value of your property. However, for the calculation of property taxes the tax base may take into account the land and buildings or other infrastructures too. Based on the configuration of your property, property taxes could be classified into Land, Improvements to Land and Personal (or moveable) categories.

How property taxes are calculated

Some states of USA follow an exception by not charging property taxes from Personal properties but realty investment property taxes are levied in all the states of America. The appraisal of the real estate investment taxes although performed at a local level is supervised by the state to ensure uniform application of the state property tax laws. Property assessment is performed at 100% of market value.

While evaluating the value of your property, an appraiser can use any of the three accepted methods – income approach, market value approach and replacement cost approach. If you are not satisfied with the particular method chosen for your property taxes valuation, you may approach a specific property taxes appeal board of the state you belong to and voice your protest.

For calculating the property taxes of your realty assets, the taxing authority undertakes an appraisal of the monetary value of the property and property taxes are assessed in proportion to that value. The property tax is generally represented as a millage rate or mill levy, calculated by multiplying the mill rate (which is one-thousandth of a currency unit) with the assessed value of your property and dividing the product by 1000.

The responsibility of determining the extent of the millage rate lies on the local taxing authorities. However, the chief elements of property taxes calculation are the tax base and tax rate. The tax base is determined by calculating the taxable value through the appraisal of the property. To this tax base, a tax rate is applied for calculating the total amount of property taxes due.

Investment Property Taxes

What kind of property attracts reduced property taxes?

If your property belongs to a professional tax depreciation schedule, as an investor you can enjoy greater depreciation benefits like enhanced after-tax return from your real estate investment taxes. Since the holding costs for depreciated properties (aged over 40 years) lessen over time, you would have to pay lower property taxes under building write-off allowance.

If your tax depreciation report mentions additional depreciation benefits, you could use the chance to generate a cash flow through plant and equipment claims. The equipments enlisted under this benefit could include AC, carpet, clothes dryers and also fire extinguishers, gym equipment, closed circuit televisions and monitors if you have strata titled property.

The depreciation time limit for plants and equipments is much lesser than that of building cost allowances. However, if you could qualify for both these property taxes reduction slots, you could enjoy great lower taxation benefits. Hence, if you opt for an older property over a newer one with high-quality buildings, you will have to lesser investment property taxes per unit of space.

Real Estate Investment Taxes

How to reduce property taxes by Buying Real Estate iInvestment Properties

If you are planning to invest in real estate and yet pay less investment property taxes, you ought to have a basic idea of what kind of property can serve your purposes. Generally, residential property assessment is done at 32% of fair market value while commercial property is assessed at 32% of fair market value.

You can claim depreciation only on improvements and not on land. If you buy properties such as apartments or leasehold properties that have high improvement component   compared to the land value you will be able to get more tax refunds because of the depreciation.

Besides these, real estate investment taxes offer deductions like mortgage loan interest, insurance premiums (though not applicable for homeowners) and maintenance expenses. The maintenance expenses would be considered deductible from your property taxes only when you are undertaking rotting wood repairs or painting jobs, which will be definitely higher for older, depreciated properties.

Real Estate Investment Strategies

Real Estate Investment Formulas – How to Calculate Profitability of an Investment

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To be successful in real estate, it is important to understand the real estate numbers behind an investment property. This includes knowledge of real estate investment formulas and ratios. These may look complex at first but are relatively easier to understand and master. The good news is that there are investment calculators that will do the grunt work and give all projections for sound decision making. Calculations apart you still need to understand what each terminology means to know the value and returns of an investment.

Gross Scheduled Income (GSI)

Gross Scheduled Income is the rental income collected in a year assuming the property is 100% tenanted and all rents are collected. Rents of vacant units are included at their reasonable market rent for the purpose of calculation.

Gross Scheduled Income = Rental Income (actual) + Vacant Units (at market rent)

Gross Operating Income (GOI)

Gross Operating Income (GOI) is calculated after subtracting from the GSI income from vacancies and adding income derived from other sources such as coin-operated laundry facilities. GOI can be considered as actual income the investor collects from the rental property.

Gross Operating Income = Gross Scheduled Income – Vacancy and Credit Loss + Other Income

Operating Expenses (OPEX)

OPEX function on annual costs associated with keeping a property in service and fully operational. These include body corporate fees, property taxes, insurance, routine maintenance and payment of utilities. Payments made for mortgages, capital expenditures or income taxes are not included in OPEX.

Net Operating Income (NOI)

Net Operating Income is arrived after subtracting OPEX from the Gross Operating Income.

Net Operating Income = Gross Operating Income – Operating Expenses

NOI is an important indicator to a property investor to arrive at a price he is willing to pay for an income stream.  It determines the property’s market value.

Cash flow before Tax (CFBT)

Cash flow before Tax is the income a property generates in a given year before tax after deducting all expenses.

Cash flow before Tax = Net Operating Income – Debt Service

Cap Rate

Cap Rate or Capitalization Rate is the ratio between the net operating income and a property’s market value. It is a very popular term used to calculate a property’s estimate of market value.

Cap Rate = Net Operating Income ÷ Market Value

Or,

Market Value = Net Operating Income ÷ Cap rate

Note of Caution – You can arrive at totally different and wrong market value by applying wrong Cap Rate. Great effort should be taken to find out the correct Cap Rate for a particular type of property in a given area.

Cash on Cash Return (CoC)

Cash-on-cash return is used in real estate to calculate the cash income earned vis-a-vis cash invested in a property.

Cash on Cash Return = Cash flow Before Taxes ÷ Initial Capital Investment

Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.

Calculating the Cash-On-Cash Return

For example, a real estate investor invests in an industrial warehouse that does not produce monthly income. Let us say the total purchase price of the property is $1 million.  The investor puts 10% ($100,000) down and borrows $900,000 from the bank. In the first year, the investor pays maintenance and insurance costs of $10,000 out of pocket.

In the first year, the investor pays $25,000 in loan payments which includes $5,000 is principal repayment and $20,000 towards interest. This will imply that the investor’s total out of pocket cash outflow during the first year is $135,000

After one year, the investor sells the property for $1.1 million. After repaying debt owed to the bank of $895,000, he is left with a cash inflow of $205,000.

In this case, the investor’s cash-on-cash return is: ($205,000 – $135,000) / $135,000 = 51.9%. This is a very healthy return in one year. In case the property was rented, CoC would have been higher.

Cash-on-Cash return can also be used to forecast future cash earnings from an investment. It is an estimate of what an investor may expect to receive over the life of the investment.

Operating Expense Ratio (OER)

Operating Expense Ratio is the ratio between a real estate investment’s total operating expenses dollar amount to its gross operating income. It is expressed as a percentage.

Operating Expense Ratio = Operating Expenses ÷ Gross Operating Income

Higher OER is matter concern when a commercial property is vacant. The owner will need to pay OPEX out of pocket that can considerably bring down rate of return from a property.

Debt Coverage Ratio (DCR)

Debt Coverage Ratio (DCR) is the ratio between annual net operating income and debt service (includes both principal and interest loan payments.)

Debt Coverage Ratio = Net Operating Income ÷ Debt Service

What DCR ratios indicate?

  • Less than 1.0 – Net Operating Income will not cover debt servicing requirement.
  • Exactly 1.0 – Net Operating Income will just about cover the debt requirement.
  • Greater than 1.0 – There is adequate Net Operating Income to cover the debt

Break-Even Ratio (BER)

Lenders use BER to calculate ratio between the cash out flow to cash inflow from a property to determine how vulnerable the investment is to defaulting on its debt obligations. BER is expressed as percent.

Break-Even Ratio = (Operating Expense + Debt Service) ÷ Gross Operating Income

BER analysis:

  • Less than 100% – expenses are less than income. Investment is in healthy shape.
  • Greater than 100% – expenses are more than income being generated. This is matter of concern to lenders as the investor may default in case they do not have alternate sources of cash flow.

Loan to Value (LTV) or Loan to Value Ratio (LVR)

Loan to Value is the ratio between the loan amount to property’s selling price or appraised value (whichever is lesser.) LVR is the lending criteria that financial instructions apply when approving a loan. It depends on their policy and type of property against which the loan is being given. LTV determines the leverage that an investor can use when purchasing an investment property. A higher leverage can result in higher returns but can also be risky.

Loan to Value = Loan Amount ÷ Lesser of Selling Price or Appraised Value

Annual Depreciation Allowance

Annual depreciation allowance is the annual tax deductions allowed on an investment property. It varies depending upon the tax code of a country.

Depreciable Basis = Property Value x Percent Allotted to Improvements

Next step:

Annual Depreciation Allowance = Depreciable Basis ÷ Useful Life

Taxable Income

Taxable income is the amount which the owner has to pay based on taxable income derived from the property which is calculated as per the formula below:

Taxable Income = Net Operating Income – Mortgage Interest – Depreciation – Capital Additions – Closing Costs + plus Interest earned in bank or escrow

To arrive at the tax payable by an investor, Taxable Income is multiplied by marginal tax rate.

Tax Liability = Taxable Income x Marginal Tax Rate

Cash flow after Tax (CFAT)

Cash flow after Tax. as the name suggests, is the cash flow accruing from a property after paying tax.

Cash flow after Tax = Cash flow before Tax – Tax Liability

This is the money that an investor can spend to either support their lifestyle or to make future purchases.

Time Value of Money

The value of money is dependent upon the time we need it for. Time of receipt of money, at times, may be more valuable than the amount we receive. This is an important consideration in real estate investing that may at times be hard to liquidate. It is the reason why some people sell their assets below value.

Present Value (PV)

Present Value (PV)shows what future cash flow is worth in terms of present value of dollars. We calculate PV by “discounting” future cash flows by applying “discount rate.”

Future Value (FV)

Future Value (FV) – as the name suggests – is the cash flow in the future at a specified time. FV is calculated by applying a given “compound rate” forward in time.

Net Present Value (NPV)

Net Present Value (NPV) tells an investor whether the investment is achieving a target yield based on initial investment: it is the difference between the PV of future cash flows after applying a particular discount rate minus the initial cash invested in purchasing those cash flows.

Net Present Value = Present Value of all Future Cash flows – Initial Cash Investment

NPV Analysis:

  • Negative – means the required return on an investment is not met
  • Zero – the required return is met as per plan
  • Positive – achieved higher than the required return

Internal Rate of Return (IRR)

The internal rate of return (IRR) for an investment property is the percentage rate earned on each dollar invested for each specified period of investment. IRR is also another term people use for interest or yield.

The internal rate of return (IRR) for an investment property is an estimate of the return it generates for each dollar invested during the time frame in which you own it. In simpler terms: IRR is the percentage of interest you earn on each dollar you have invested in a property over the duration of period you hold the property.

For instance, you purchase a retail shop to for a period of 10 years. The compounded interest earned over the 10-year period would represent the IRR.

IRR is a great way to estimate a real estate investment’s profitability over a period of time. Unlike Cap Rate, IRR looks beyond the property’s net operating income and its purchase price. It gives a clearer picture of expected returns on an investment from start to finish. This is a great tool to analyze profitability of an investment if you are planning to hold it for a long duration.

Formulas for calculating IRR are complex and it is advisable to use an investment calculator or software.

Escrow and Real Estate

Escrow accounts are funds held by a reliable third party to enable the buyer to preform due diligence on a property, assuring the seller they have the capacity to close deal at the end of the stated period. Once the conditions on the sale, such as building inspection or getting satisfactory valuation report are fulfilled, the escrow account holder will release and transfer the payment to the seller. The title of the property is transferred to the buyer.

How to Calculate Rate of Return (ROI) for Real Estate Investments

There are various methods of calculating Return on Investment or ROI of an investment property. In the succeeding paragraphs, we will discuss some of the important ones.

The most common method of calculating Return on investment (ROI) is by using the simple formula:

The above equation may look easy to calculate but care needs to be taken to get accurate figures on variables such as repair and maintenance costs, interest on loans, rates, insurances, etc. ROI will be higher if your initial purchase price for the investment is low. Apart from the initial purchase cost, finance cost is another important factor in determining ROI. You must shop for the cheapest loan. Even a small amount of variation in interest rate can have a major implication on ROI.

The Cost Method for Calculating ROI

In the cost method, ROI is calculated by dividing equity in the property by all costs incurred (these include the initial purchase price plus cost of improvements.)

As an example, let us assume that we buy an investment property for $100,000. Let us say that it costs additional $50,000 to carry out repairs and make improvements to the property. On completion of the upgrade, the property valuation comes to $200,000. The investors’ equity position in this example will be $50,000. This is arrived at by subtracting the initial purchase cost of $100,000 plus $50,000 repair cost from the revalued price of $200,000.

200,000 – (100,000 + 50,000) = 50,000

ROI from the cost method is arrived at by dividing the equity by all the costs related to the purchase, the upgrade and the repairs in the property.

ROI, in this example, works out to 33% ($50,000 divided by $150,000 multiplied by 100).

The Out of Pocket Method

The Out of Pocket method is very similar to Cost Method but in calculating ROI, only out of pocket cash is taken into account.

Using the same numbers in the example for Cost Method, let us assume that $100,000 purchase was financed taking out a loan in which the down payment was only $20,000. Out of pocket expense in this case will only be $70,000, which includes a down payment of $20,000 plus $50,000 for repairs and upgrade. If the property after rehab is valued at $200,000, the equity will be $130,000.

200,000 – (20,000 + 50,000) = 130,000

The ROI, in this case, will be whopping 185% ($130,000 equity divided by $70,000 out of pocket expenses expressed as a percentage).

The increase in ROI is attributable to leverage applied to the loan by only 20% down payment.

Real estate investors prefer the out-of-pocket method for achieving higher ROI results by applying leverage by putting minimum down payment for the property.

Note of Caution – When calculating ROI, cited in the above examples, care should be taken in adding costs of marketing and brokerage associated with selling. It is also prudent to remember that properties don’t always sell at market value. The actual ROI in all probability will be lesser than shown in the example.

ROI will increase if part of the property is tenanted during the rehab process. Rents will add to the cash flow and income.

ROI will also be affected by payment of interest rate during the period of rehab or if the property is refinanced.

The calculations in some cases can become very complex. It is advisable to use investment software /calculators or services of an accountant to arrive at the correct figure.

Property Management Company

Do You Need Services of a Property Management Company?

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Employing the services of a property management company is one the many decisions that you will need to make when investing in real estate. Once you build a large portfolio of properties and wish to have a life away from your real estate investing businesses you will need the services of a  property manager as a buffer between your tenants and your family.

Property Management Company Benefits

The benefits of a good property management company are quite numerous:

Handle Problems

They eliminate the need for tenants to have your phone number. A few late night phone calls can drive out many investors from the business of renting properties. If you’ve managed rental properties without the buffer of a property manager you will know that it doesn’t matter what time of night or the morning things go wrong and you are the first person your tenants call to fix those things. A property management service is able to handle problems for you while letting you sleep through the night.

Repairs to Property

Property management services also have a qualified and reliable trades people that can handle many of the things that go wrong with investment properties. The some cases (specially commercial properties) management fee may be included as outgoing charges payable by the tenant. Your property management company or property manager is often the best source to find contractors to handle the repairs they cannot make for you as well as the repairs that they can. If you have worked with trades people you will know how difficult it can be to get hold of someone in an emergency. It’s nice to know that someone else can deal with some of the negative things about owning rental properties.

Handling Legal Issues

My personal favorite reason to seek the services of a property management service is that they are qualified to handle the legalities of taking care of tenants who cannot make the rent for months on end. This is after all a business and while you can relate to the circumstances that leave some people unable to pay their rent you need the income from their property in order to pay your bills and mortgages. It’s much easier to leave some of the less pleasant tasks to a qualified manager, especially if you are a softy for sob stories.

Re-letting the Property

Property managers also handle the advertising for your property and the cleaning up and retouches that are necessary between tenants. They also allow you to take vacations and such filled with the knowledge that your properties and tenants are in good hands even when you aren’t there to oversee everything. Everyone needs to take a break sometimes it’s nice to know that with a reliable property manager you can actually sit back and relax while taking those breaks without worrying about all the particulars of the properties you own so far away.

Vacancy Rates

One of the pleasing things that I have found with employing a property management company is that my vacancy rates have come down. Property management companies shift around their tenants if they are up sizing or down sizing. Their first preference is to find tenants for properties that are under their management. Casual letting services comes second in their list of priorities.

Economics

The economics of employing services of a property management company works in your favor. The property management fees can be claimed back for tax purposes as expenses. In most cases you qualify for a landlord insurance only if the property is under professional property management. Getting landlord insurance has saved me thousands of dollars in lost rents when a tenant breaks a fixed lease term or damages a property. Even if the property manager reduces the vacancy factor on an average  by two weeks in a year you will find that the property management pays for itself. You pay very little or no money out of your pocket.

If you are going to invest in real estate and have fun doing it then employing services of a property management company is a must. It will save you time, effort and money. You will have the freedom to look, analyze and buy more real estate. The more properties you have, the more sense it makes to utilize the services of a reliable property management team.

How to Grow Rich with Property Investment course will show how you can build passive income with real eastate investing in shortest possible time.

commercial vs residential real estate investing

Commercial vs Residential Real Estate Investing

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It is important to understand differences between commercial vs residential real estate investing. They are completely different kettle of fish.

Complexity

Residential real estate investment, as the name suggests, is investing in property that people use primarily for residential accommodation. These include apartments, town houses, free-standing homes, duplexes, condominiums and apartment buildings.

Residential real estate investment is comparatively less daunting than commercial real estate when starting out your journey because everyone knows what constitutes a home that some could live in. You will straight away notice absence of a bathroom and a kitchen or if the property suffered from poor ventilation.

Real Estate Investment StrategiesCommercial properties include offices, industrial sheds, free standing retail shop, bulk retail, block of shop, medical centers, service stations, motels, hotels, back packers, health clubs, churches, funeral parlors, child care centers, car yards, convenience stores, shopping malls, to name just a few. Each type of commercial real estate investment has its own peculiarities, strengths, problems, rewards and risks.

In addition, you have to deal with contracts and leases that can affect the price of the property.

Commercial real estate investment is the natural progression from residential property investment. Experienced property investors tend to move into commercial real estate sooner than later – and for very good reasons.

Once your portfolio grows, it is very difficult to manage your investments if a large portion of them is tied in residential properties. Imagine you have $15 million worth of residential properties – that would be lot of homes and tenants to take care of.

On the other hand, $15 million will buy only a very small number of commercial properties, which will be comparatively easier to manage with much lesser overheads.

Tenants

In residential real estate investment, you are essentially dealing with people. Unfortunately, people create problems. Your tenant will ring you up at all odd times with even the smallest of complaints: at times, the rent is not paid in time, the lawns are not mowed or they will not keep the property clean and in worst cases, they damage your property.

Residential tenants have little or no interest in maintaining your property.

“The working components of a rental home (heating, cooling, electrical, plumbing, dishwasher, garbage disposal, doorbell and refrigerator) will break down 90% faster on the rental than the working components of your own home.”

If the tenant is not complaining, then you will find the neighbor complaining about the tenant for making too much noise or their children running into the neighbor’s property. So you need people skills to manage your property or you will need to employ a property manager.

“The sweet little girl with the baby you rented your house to will always have an abusive boyfriend, and their loud, passionate lovemaking at night, nasty quarrels and scream fests will be the talk of the neighborhood.”

If you have ever worked as a landlord—this reason will be very clear to you: residential tenants complain about everything on earth and mostly in the middle of the night or when you are watching a good game of football.

residential real estate investing

Commercial property on the other hand, is a space for doing business. It is a place from where a tenant sells his products and services. The success of his business depends on the presentation of the property and number of visitors they receive each day.

The tenant bases his monthly rent on a commercial property on a certain percentage of the profit the business makes each month. When a businessman approaches you to rent a property, they do so because the location is suitable to them.

The tenants know the value of a good location and they will pay to be in the right place.

Most commercial property tenants will fix problems and carry out minor repairs on their own without calling the landlord. This is because they realize that problems need to be taken care of immediately or they will interfere with their business. Residential tenants on the other hand, will always look for help from the landlord to take care of repairs—they will never spend a dime on the property.

Commercial property tenants can spend substantial money to upgrade the property for their business requirement. These improvements stay with the property long after the tenant has moved on.

Most commercial tenants need to put in networking and cable wires, sound systems, and electrical outlets – all of which increase the market value and marketability of your commercial property.

In commercial property, you tend to deal with contracts where as in residential real estate investment you tend to deal with people.

Vacancy Rate

The biggest advantage of residential real estate investment is that it is easy to find a new tenant once your property becomes vacant, which reduces the vacancy rate and there is always cash flow coming from your investment.

There is only one reason for your property to remain vacant for too long: your rents are too high for that location at the particular time. If you drop the rent by 5–10%, you will normally find a tenant, which is because people have to live somewhere at affordable costs.

In commercial real estate, properties are far more specialized and in case of a vacancy, you may not find a tenant for months or even a few years: this is a huge risk for a new investor who is not familiar with real estate investment and requires deeper pockets in case of vacancy. 

Return on Investment

The return on investment in commercial real estate is much higher than residential property: the income is net and not gross because the tenant pays all the outgoing expenses, and is also more stable because of the long leases.

The rate of return on residential real estate investment is much lower because in residential property, the owner has to pay all the outgoing expenses such as property rates, insurance, body corporate fees and maintenance costs. In commercial real estate, it is the responsibility of the tenant to pay these costs thereby increasing net returns.

It is typical to have returns of around 7–10% net for a commercial real estate investment and anywhere from 5–7% net return for a prime property.

The net return from residential property tends to be from 2–6% and can be a bit higher in less desirable neighborhoods and apartment buildings.

Value of Property

The value of a property is determined by its location, land size and improvements. This is true for both residential and commercial property.

Quick Money Making IdeasWhat is peculiar to commercial real estate is that its value is also greatly determined by the quality of the lease.  In general the value is determined by taking net contractual rental being paid and use of a capitalization rate to arrive at a value. The value is also determined by the quality of the tenant and length of the lease.

There is a saying in commercial real estate: “More leases you read in bed the richer you will become.”

The value of a commercial property can drop substantially if it becomes vacant. Often commercial properties are sold at 10–50% of their value if they are difficult to lease.

The value of residential real estate on the other hand, is determined to a large extent by location of the property. If the house is in a desirable area, it will command a better price.

Property leases

Residential property leases tend to be very short when compared to commercial leases that can run for several years. As discussed earlier, it is much easier to find a tenant for vacant residential property.

Finance

Commercial real estate financing is harder to get as banks look at the quality of tenants, length and terms of lease.

In general, commercial properties are more expensive than residential properties. Banks will lend up to 90 % or more on residential properties and only up to 50% to 70% on commercial property. You will therefore need more equity to buy. This reduces your leveraging power to buy more property.

The lending rates are also marginally higher, which reflects the risk that banks associate with commercial real estate investment.

You will require much lesser seed capital to start with residential real estate investment, and will be able to leverage your money better with residential property.

Government Laws

Government laws with respect to residential property are far more stringent and can override anything that you may have written in the rental agreement with the tenant. Politicians and bureaucrats put these protections in place so that residential tenants are not exploited.

In some countries and states the laws are so much in favor of the tenant that you cannot evict them even in case they are behind on their rents.

Real estate law is more flexible towards commercial lease contracts. You can insert any clauses in the sale or lease agreement that is agreeable to the contracted parties without any interference from the governing agencies.

It is common to charge penalty interest on the outstanding rent or lock the premises on continued default of rent.

Property Management Costs

commercial vs residential real estate investingResidential real estate investment management takes time and effort because you deal with people. Once you have several residential investments, it can become a full-time job.

Residential property managers charge anywhere from 6–8% of the rent collected towards the management fee.

Commercial properties on the other hand, do not require much of your time in managing them. Commercial tenants usually stay in the property for many years and it is in their best interest to maintain and make improvements to the property.

Commercial property management is also much simpler because tenants have a strong vested interest to maintain the property to a high standard: they usually derive their income from the property. They have to keep the property looking good and maintain functionality to impress their clients.

Commercial tenants spend hundreds of thousands of dollars to make improvements to the property. Most of these improvements stay with the property long after the tenant has left the property.

Commercial property management fees reflect the reduced work involved and charges range from 2–6% of the rent collected. The best part is that you can charge the management cost to tenant as a part of the out goings. In case you choose to manage the property then the management charges become payable to you thereby increasing the return from the property. 

Risks and Rewards 

So far, the biggest risk in commercial vs residential real estate investing is finding a new tenant in case of a vacancy. In commercial real estate, the requirement of each tenant in terms of size, location, use and rent payment capacity is so different that it is very difficult to get the right tenant for the right property.

For the reasons mentioned above, it is also difficult to sell or lease a commercial real estate investment. Higher the value of property, lesser the number of investors to buy the property.

A commercial real estate investment is less liquid than other investments because there are very few players in the market. For a residential house, there will be hundreds of potential buyers, which is not the case with commercial properties.

Commercial real estate investments are generally sold on capitalization rates and rarely on replacement value. It is therefore possible to purchase a poorly rented commercial property well below its market value. You can also increase the value of your commercial real estate simply by leasing the property or raising the rents during rent reviews or renegotiating the lease terms when it come up for renewal.

Commercial real estate investment provides professional investors with the opportunity to put their energy because of the higher returns and ease of managing them. For these investors, commercial property is their ‘bread and butter’ and they drive their speculative income by trading in residential properties.

Some commercial investors focus their attention to improve and add value to their commercial portfolio. Whilst others use their rental returns to fund development projects that show much higher returns, they need different and more advanced skill sets.

Final Thoughts

Here are my final thoughts about Commercial vs Residential Real Estate Investing. Commercial real estate investing is very rewarding but requires more knowledge, experience and capital out lay. It is not advisable to jump into commercial real estate from the very out set until and unless you have very deep pockets and risk taking ability. It is advisable to start with residential real estate investment to build your equity and cash flow.

You should buy at least 8–10 residential property investments before venturing into the world of commercial real estate investment that is far more complex.

For a new investor, it is very important to know the fundamental principles of real estate investing, thus making it much easier and less risky to get started with residential real estate investing because of the easy in understanding residential property, getting the finances, leveraging money and managing vacancies.