What to Know When Getting Started in Real Estate Investing
Many of the world’s wealthiest people obtained their status by investing in commercial or residential real estate. Of these two options, commercial real estate is generally the more effective way to passively generate wealth.
With residential real estate, investors purchase dwellings to renovate and sell at a higher value to make a profit, or they lease the home to an individual or family and collect rent. Commercial real estate involves purchasing a property that will be used for a public business (such as an office, restaurant, apartment, or retail space), then leasing the property to a business owner and profiting the rent money.
There are a few reasons why commercial properties are more profitable than residential. First, commercial leases are generally longer, which guarantees the investor stable monthly income for a longer amount of time. A family typically signs a residential leasing contract for up to one year, but a business may sign a lease for several years.
Additionally, the income from a commercial tenant is usually much higher. A private dwelling may provide an investor up to four percent return on investment while a commercial property may bring as much as twelve percent.
Investing in a residential property is simpler and less intimidating than a business property, but this makes for a crowded market. Since fewer investors are willing to take the risk on commercial properties, there is less competition and more opportunities for investors in commercial real estate.
Whether an investor desires a residential or commercial property, there are a few factors that must always be taken into consideration:
Location is everything. If the property is in an undesirable area, it will be difficult to find renters. Investors should research the area thoroughly, considering everything from traffic and accessibility to crime rate. Undoubtedly, potential tenants will be researching these things, too, as they are deciding where to live or open a business.
Potential investors should examine comparables, or “comps”, that are near the property they are considering. This involves comparing the selling prices of similarly sized properties that have been purchased recently in the area to determine the current value of the property in question.
Do the Math
Before purchasing, investors should do a few calculations. The investor is responsible for multiple expenses, like property tax, maintenance and upkeep costs, insurance and more. They must determine their net operating income, their “take-home” revenue after these operational expenses have been taken out. They should then compare this amount to the value of the property.
Doing adequate research is the key to success when investing in either residential or commercial real estate. When a property is clearly a wise investment, wealth-producing passive income is likely to follow.