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Why Residential Property Investors Hate Commercial Property

Commercial property has factors that are of great dislike to the residential investor. Personally, I can’t blame them because more than 5 years ago I was the same and thinking this way also, but there is more to be told about commercial property investing than the residential investor wishes to look at. Some of the benefits, if looked at closely, can outweigh residential in certain cases and market circumstances.

Let’s take for example gearing. In commercial investing the property investor will have to put some money toward the investment and the difference he or she can gear via a bond from a financial institution.

This is a factor that residential property investors simply don’t like. Because they can gear 100% in residential why will they want something that gives them less gearing?

But what residential investors don’t realize is that commercial property investing is very different. Though less geared, it is an investment for income. In residential property investing people are accustomed to shortfalls and one day they can just sell that property for more.

Therefore in hard economic times, when income is far more important than capital growth, some property investors are starting to look at commercial property and all of the sudden income makes sense.

Though for some the transition is not easy, as the mind set is really not the same in these property sectors.

That said, commercial property can be geared and has been ever since, just not at the same rate as residential. In other words, if one is accustomed to getting 100% or even 108% mortgage bonds in residential, in commercial this will be far lower and will depend on the deal itself. The banks, when lending for commercial property, will evaluate not only the property but also the lease agreements. The “tenant covenant” as it is described in commercial property, is a much more important ingredient of commercial property investing than it is in residential.

Therefore, a bank evaluation for commercial property will have to include the evaluation of the “deal” itself not only the physical property.

Now here is the good part, which residential property investors often just don’t see or can’t see and need some getting used to.

The financing model in commercial property and system of evaluation by the banks or financial institutions ensures that the revenue derived from the rentals pays for the bond.

As rentals escalate the investor makes more money, in residential we call this cash-positive, this money pays back the initial investment the investor put down and the investor can again take this money and re-invest it in something else.

You may want to read that again.

You could say, though this is somewhat generalized, that in commercial property there is no cash negative investment or at least shouldn’t be. You may want to read this sentence again also.

The reason why the above two sentences are so important is because residential investors are far too accustomed to 2 things:

  1. Cash negative investments
  2. Excessive leverage and gearing

In simple words, bonds that are too high and put the investor at risk if interest rates go up too high.

We’ve all been in the situation where an estate agent has told you: “There are no cash positive investments.” with a laugh on their face. Can you recall those days?

That may have been very true in residential, when prices became far over inflated and now, because bonds are too high to buy anything even at bond value. Finding deals was close to impossible, but in commercial it is far more different than residential, because commercial property investing is, for rental income, and income growth, not capital growth.

Just the mere fact of fully understanding commercial property sectors one may completely change some views even when doing residential deals. Not to mention that some residential deals fall under the commercial sector, but that is a whole different story.

Commercial property is a different world to residential, and some say far better than residential. Some investors will swear by commercial and never touch residential. Though being one sided should not be the case in any investing area, understanding commercial property can be an eye opener for the residential investor, even if one never buys a commercial property in their life. Learning about commercial property investing, changes ones views about property investing in general. This change is normally positive as it helps the individual investor understand the fundamentals of successful wealth creation.

Of course, in commercial property, without knowledge one can make a purchasing mistake. The same way that one can make a purchasing mistake in residential without understanding the fundamentals.

This is why we have started the commercial course for beginners. We’ve also received inquiries from estate agents that wish to move to commercial brokerage.

If you ever invest in commercial property or not, this course will be of immense value and give an extremely different perspective on property investing that will benefit you even if you only invest in residential.

When I initially looked at commercial investing, I really thought it was something close to rocket science, since then I have come to understand that this is not so, and the value that I gained from understanding commercial property has served me well even in residential investing over the years.

If you want to take your property investing knowledge to the next level, to expand your investment opportunities, take your business to new heights by joining the Commercial Course that starts on the 1st of August.

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Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved.

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