What Are the Dynamics of Commercial Real Estate?

In my book, nothing beats commercial real estate investing.

Why?

Well, let me ask you: Where else can you make one… five… twenty-five million dollars a crack using NONE of your own money?

In other words, one of the most appealing aspects of commercial real estate is abundance… abundance of properties, of creativity, of choice- and, especially, money.

It's all readily available.

Commercial real estate is a very dynamic industry and investment. Commercial markets are always shifting; land uses are being re-assigned by city planners, and new, big name stores and developments establish themselves in communities causing land values to rise all around them.

In commercial real estate there are many market segments that can hold the interest of many different people.

Let's look at some of the actions you can take in commercial real estate:

§ You can be a pure investor, buy and sell properties (“quick turning,” if you will).

§ You can develop and sell off lots to eager builders.

§ You can build entire infrastructures including apartments, malls and office buildings.

§ You can buy properties, fix them up and sell them… Yes, it's work. But the rewards can pay multiples on your sweat equity.

§ You can buy properties and rent them out while maintaining a project portfolio… recurring income is yours each month. This can be very, very, lucrative.

§ Or you can simply use the property for your own commercial use and keep it “in the family.”

Of course you cannot forget the professional experts that fall into each of these market segments that keep the real estate market moving with great momentum. These professionals include brokers, agents, lenders, engineers, appraisers, real estate attorneys and many more.

With so many options in commercial real estate as an endeavor, there is more than enough to go around, which allows market segments to never be saturated- only changing.

Money is abundant as well; not only is it apparent in the physical real estate itself, but in the businesses related to real estate, and in the hands of both private and public lenders.

Here is a term widely used in commercial real estate, and it happens to be one of my favorites- Other People's Money, or OPM for short.

Entire real estate empires are built purely on the concept of using OPM!

Where else can you use a lender's money to purchase a property, use a lender's money to develop, build, or fix-up a property, and walk away with millions of dollars with absolutely nothing personally invested except time, education and motivation?

Nowhere.

With literally none of your own money, you can have commercial properties that produce massive amounts of income, allowing you to create long term wealth.

So what are some factors that influence this dynamic industry?

Commercial properties produce income, allowing both property owners and business owners to create wealth. This is important to consider when you compare residential and commercial properties.

When you consider renting out 100 hundred homes from your property portfolio, or a 100 unit apartment complex, you must entertain the time and energy it would take to manage each scenario.

Vacancy factors are important as well. It can be much more difficult, and, frankly, more of a headache, as I am sure you can imagine, to rent out a single home than it is to rent out a unit in a popular apartment complex.

Opportunity costs are greater with single family residences than those of an apartment complex when the residence is vacant. Higher maintenance costs are also attributed to single family residences as opposed to larger commercial complexes.

A greater synergy can be created through commercial real estate. Overall effort, money and time yield better results and higher returns than that of residential real estate. How do you like that for this dynamic industry?

Commercial real estate can also provide both job security and a legacy to be passed on through generations. Sound, valuable businesses can be established that take care of entire families. It is incredibly valuable when the property a business sits on is owned by the business owner as well. The value of the land increases, as does the business.

Everyone knows the famous Hilton family and the legacy they have created through their hotel properties throughout the world.

Another factor that contributes to the dynamics of commercial real estate is the tax advantage.

What, exactly, is this tax advantage?

Well, both operational expenses and depreciation are subtracted from the gross income, arriving at a decreased overall taxable income. This can greatly decrease the amount of taxes that must be paid.

This is often recognized as a tax shelter.

As previously mentioned, using OPM allows people who work in commercial real estate to earn higher yields on their investments because little to no personal money is initially invested. Appreciation also allows for higher yields, as commercial properties can quickly appreciate or increase in value, not only over time, but with simple, low cost changes to the property.

For example, cleaning up a property, creating new landscaping, adding a new coat of paint, and renovating office buildings or renovating apartments in an old apartment complex community can increase a property by tens to hundred of thousands of dollars- not just a few thousand bucks often made with single family residences.

Then, if you rent out those units that were not previously creating profit or value, the money will begin flowing in exponentially. Another example would be to divide a large office into two smaller offices and quickly increase the rent from a single property!

The point I'm trying to make is small changes yield large results in commercial real estate, which greatly influence its benefits. What's required is just a small amount of “creativity” and effort to produce outstanding yields.

Another factor is how commercial real estate can escape the fate of inflation in the short term, and benefit from inflation in the long term. For example, a loan of $600,000 for a $700,000 property, with a down payment of free cash of $100,000, literally locks up the property's value as the loan is paid off over a period of 15 years.

When the property is owned free and clear, and is now worth $1,600,000… well you get the picture!

The amount of money paid for the property is not affected by inflation, so you do not have to pay more than what the loan's terms are, plus interest. However, at the end of the life of the loan, with a combination of both inflation and appreciation, the property's value is incredibly higher.

There are not many investments that enjoy such luxury, but, through commercial real estate, you can make smart investments and enjoy big profits.

Although commercial real estate is always in a state of change, look at it as an advantage, and realize how change can help your commercial real estate endeavors. Take into account these factors, and how they influence the overall dynamic nature of commercial real estate. I think you will discover, like I did, that commercial real estate offers multiple returns on your time, creativity, energy and effort.

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