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Why invest in commercial properties now?

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guest | 30 Mar 2011, 05:24 PM Agree 0

Over the past 10 years I've been working extensively with real estate investors, I've witnessed quite a few changes in the lending landscape in terms of the banks' general appetite to lend in this niche.But the one thing that always surprises me is the fact that over 90% of the conversation surrounding banks, rules and products is in relation to residential mortgages and very little time and attention is given to commercial or multi-family investments - when in reality, more should.On the surface, I completely understand why the majority of investors choose to go the route of residential investments rather than commercial.A residential investment is generally far less complex, but the one factor that probably outweighs all others is the cost of entry.A commercial or multi-family purchase is, by definition, significantly more expensive and may require up to 35% down payment. This alone is enough to scare off the majority of new real estate investors.But it is important to point out that while many investors are lamenting the new mortgage rules that are being enforced by Ottawa; none of those rules have an impact on commercial/multifamily financing.The first thing investors should know about commercial/multi-family financing is that the new rule changes that Ottawa has made over the past few years to CMHC do not apply to commercial/multi-family purchases. For example, whereas you can no longer buy a residential investment property with less than 20% down, the same is not true for a multi-family apartment.If the cash flow warrants it, CMHC will actually finance up to 85% of your purchase and, in most instances, the interest rates offered by the lending institution are significantly better than that offered on a residential mortgage.But that's not the only appeal for an investor to start looking at multifamily as an option.A major issue I see today with investors who are looking to build large residential real estate portfolios is the general lack of appetite that most lenders have for investment portfolios.As much as it may seem counter-intuitive, banks become uneasy with a residential investor who owns more than 15 - 20 properties and they tend to place a 'cap' on the maximum amount of exposure they have with one investor for residential mortgages - clearly more is not better in this case.However, in the commercial/ multi-family sandbox, having more properties is seen as an example of your expertise and that is considered an asset to a commercial lender.The key difference between the two 'sandboxes' can be summarized in this way: This difference in lending approach is even more appealing to a self-employed real estate investor who is using legitimate and prudent advice to lower his or her taxable income but is becoming increasingly frustrated by a lender's unwillingness to recognize that when trying to buy a residential investment property.Solution: Simply shift your focus to multi-family properties and the fact that you are self-employed is no longer an issue. As long as the property you are considering has good cash flow, is a good-quality building and is in a town with a low-vacancy ratio - you are likely to find getting the financing a lot less frustrating than if you were just trying to buy a single-family home.So why doesn't everyone just buy multi-family units?The barrier is the high cost of entry. This is a very legitimate issue for some. But for those who can find a way around this obstacle - either through the use of joint-venture partners or their own means, there are far fewer players on the playing field and a lot of potential.With all the talk in the markets these days about the limitations the banks and the government are putting on real estate investors, I'm still surprised that multi-family investments don't receive more attention.Keep that in mind the next time you have a hard time buying a single-family unit. You might be pleasantly surprised to see the solution is easier and more profitable than you thought.
  • Sean O'Shea, Managing Director | 28 Jul 2011, 12:00 AM Agree 0
    Peter: We agree; but also consider your confused American neighbors to the South. While the US government has proven incapable of making a deal......we are different!!
    We are a Los Angeles-based Net Lease Boutique which has specizlized over the years in commercial 'Credit Tenant' properties which have long term leases and the Coprporate Guarantee of many of the US' finest performing companies.

    The Net Lease structure requires that the Tenant is responsible for all management and opertation expenses; therefore, you have a predictable, stable and secure income stream. Three other Candaian investors have selected us to represnt their acqusition plans in the Us....How can we add value for your readers and clients?
  • abroaduni | 12 Dec 2011, 01:38 PM Agree 0
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  • Lawrence Kobescak | 14 Feb 2012, 05:44 AM Agree 0
    Great points. As a real estate investor and a commercial mortgage broker those are hurdles to overcome. Also CMHC is a lot easier to deal with on the residential side and sometimes that's difficult.
  • evergreen | 28 Jun 2012, 01:08 PM Agree 0
    Wow!!! Very nice and useful info,you have shared here regarding investing in real estate.Today,real estate is the most profitable business,if you invest less,then you will get high profit in return back even with less risk as well.So,your post would be proved very helpful for investors.

    Keep Sharing!!!
  • divy | 04 Oct 2012, 11:39 PM Agree 0
    This is so true.I have now shifted my focus in the past year and a half and totally agree with you.I do notice that some of my residential investors are ready to move into the multi-unit sector.Looking forward to a superb year ahead.Keep me posted if you come across some properties.
  • preeti22 | 17 Sep 2013, 01:22 PM Agree 0
    Houses prices are increasing day by day.So investing in commercial properties must.
  • josephhinds | 24 Sep 2013, 02:04 PM Agree 0
    Nowadays the rates of real estate has been grown compare to last few years.
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