Becoming a Smart Commercial Real Estate Investor

Commercial real estate investing can be approached from a number of different ways. Like the many choices to invest in, there are also numerous ways to finance the investments. We’ll look at a few of the options you have when financing commercial real estate. One of the most important concepts to understand in finance is the time value of money. This concept basically says that a dollar now is more valuable than a dollar a year from now. This is due to inflation. The one advantage that you have is time. You can put your dollar to work for you and it will be worth more in the future. If you do nothing with that dollar, it will be worth even less in the future.

This concept is what makes the use of leverage so critical to any investor. Through leverage, investors can multiply the effectiveness of their money. This leverage is attained through the use of other people’s money. This borrowed money creates an ROI (Return on Investment) for the investor. This means that in order to benefit the most, you must utilize your cash more effectively now. Let’s say that you have $100,000 to invest. You may initially think that it would be best to buy a property without using debt for $100,000. However, under closer examination, this is probably not the best scenario. Instead of buying one property, why not buy ten? You could put $10,000 down on ten different properties and finance the remaining 90% of the properties. Then in 20 years, all of the properties will be paid off. You will now own all 10 properties and have a nice little nest egg built up. This is quite a substantial difference from the other scenario. In the first scenario, you still only have the one house. This is one of the best possible examples to illustrate the benefits of leverage. As a word of advice about this example… if you have cash flow, you have taxable income. If you increase the equity, there is no tax until the property is sold. You must factor in all of the other variables such as tax implications when making an investment decision.

Another important thing to consider is the cash flow vs. cash reserves. Many people will disagree on this point and it is pretty much a personal choice. This depends solely on your personal goals and how you picture your financial future. Some can handle no reserves, while others need the feeling of security that comes with it. You must decide what is important to you. For example, you could have a $200/month cash flow and no reserve. You could also have a $100/month negative cash flow and $20,000 reserve. Many people think that the first option is better, but is it really? If you come across hard times, the bigger reserve is obviously better. If you have a vacant property for even a month, you might lose out on $600. At only $200/month in positive cash flow, you’re quickly three months behind. This is a losing proposition. With a $20,000 cushion to fall back on you can handle a lot of trouble. You could possibly withstand a $1200/year negative cash flow for 16 years! Hopefully it would never come to that, but it is nice to know that you could. Closely consider your options and make the decision that makes the most sense in your situation. Everyone is different in this regard. Trust your instincts.

Another area that is focused on is whether or not to pay down debt. Many investors believe that the ideal situation is to own all of their properties “free and clear”. While there are advantages to this, it may not always be the smartest move. There are a few other things that one must consider first. If all of your properties are debt-free, all of the cash flow will now become taxable. This can amount to a substantial increase in your taxes.

If for some reason you need cash, debt can also help you out. If you own the property free and clear, any sale of the property results in a capital gain. You will pay taxes on the sale of the property. However if you refinance a property, there is no taxable action. You can get the cash you need without paying an arm and a leg in taxes. Consider this…the higher the monthly mortgage payment, the less cash flow there is. Therefore, you pay less in taxes. No one wants to shoot themselves in the foot by paying unnecessary tax bills. If you can avoid them, do it at all costs. Don’t be blinded by the promise of having a debt-free property. It may not always be the best route for you. In any case it is advisable to seek competent advice. Someone who has done this before can be of great help to you. A CPA should be able to advise you on the tax benefits that you should pay attention to. Any successful investor should have a sound grasp on all of these concepts. They will save you thousands of dollars in the long run.

With all of these different concepts in mind, remember that there is not just one way to invest in real estate. There are multiple avenues that you can embark on and they can all be profitable. The main thing to remember is that the financing can play a big role in the ROI.

When you are trying to make a choice, remember that the “obvious” choice is not always the right one. Appearances can definitely be deceiving in this industry. Just because many people are doing something, does not mean that it is the most financially sound advice. Before considering the information above, many people would obviously say that debt is never a good thing to have. However, in certain cases it makes more sense. Think about the implications of any decision you make. Down the road it can either be to your benefit or detriment.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com