“The wise young man of today invests his money in Real Estate”- the age-old quote by Andrew Carnegie holds true to this day as well.
Developing a Commercial Real Estate Portfolio is considered a profitable investment for many. A balanced portfolio with cash flow properties as well as the capital growth properties can prove quite helpful in attaining the financial goals of many investors.
Your real estate portfolio will be a collection of different investment assets based on current and past real estate deals like rental properties, rehabs or REITs i.e. Real Estate Investment Trusts.
It is also very likely that every portfolio will look different depending on some underlying factors considered while taking up the deals.
Some of the factors you should consider while investing in Real Estate are objective, time horizon, and risk tolerance. The portfolio should also have the provisions for the payments of the Commercial Real Estate loans.
Cash Flow Properties
These are the rental properties you have invested in either yourself or after consulting the commercial mortgage brokers.
These are the properties that earn you the monthly rental income to cover up the mortgage interests on account of the Commercial Real Estate loans that have been resorted to for the purchases. The aim is to make some profits after paying the expenses.
Capital Growth Properties
Some properties are invested in for the capital growth benefits. With a growth of at least 8% per annum, the properties should double in seven to eight years.
But there are also some costs attached to these properties while holding them for the growth in value. Your commercial mortgage broker Phoenix can help you in sorting the attached expenses of the properties.
Building the Commercial Real Estate Portfolio for Cash Flows
It is never too late to start building the Commercial Real Estate portfolio for cash flows i.e. the rental properties portfolio.
The young can start saving for the down payment for their first purchase and go for the Commercial Real Estate loans.
In case you are nearing your retirement, it is advisable to start the conversion of your low yielding assets to a rental real estate and go for higher monthly earnings.
Your commercial mortgage broker Miami can help you in the conversion processes. With multiple rental properties generating positive cash flows in your portfolio, you really will not have to worry about your retirement.
Factors to be considered before investing in the rental properties:
Location: Real Estate is all about location. You will not be able to rent out a property in an isolated area or even in the area with no proper facilities.
So look out for one in the green belt area with all the proper facilities to ensure a comfortable living.
Rent-ability:
Rent-ability is also a factor to be considered along with a good location. A property in a nice location but with many available rentals will not fetch you good returns.
But you can raise the rentals in case there are only a few spaces available. This will give you better returns and cash flows. You will also be able to dictate the terms and conditions in this case.
Expenses:
You cannot ignore the expenses factor when you are looking for an investment in the rental properties.
You can enjoy the positive cash flows only when your rentals exceed the taxes, interests being serviced for the commercial real estate loans and other property related expenses.
Value Appreciation:
These properties are considered for the monthly cash flows associated with them.
Still one can also look for the rental properties with likely appreciation in value. The appreciated value of the property will help you in building up the equity.
And investments in proper equities in owned properties can grow your portfolio. You may look up to the services of your commercial mortgage broker for the purpose as well.
There are other factors that should also be considered like the age of the property, expected repairs, annual maintenances and improvements required to be done, etc.
Step by step guide to the acquisition process and portfolio building
As mentioned earlier, try to plan and save for the down payment of your first acquisition early. And once done with that, you can focus on the rental properties and their values.
Study the market
Knowing the rental market is important. Have a definite market area and a budgeted price in mind. Locate the market area for your investment.
Look for available opportunities for investment in areas other than what you have planned. This will help you in comparing the possible properties and in further analysis and decision making.
Look out for the properties that fall in the price range planned by you. You may also visit the courthouse for the purpose of getting information on areas where houses are selling for cash.
You may also come across some experienced investors here who can advise you on the proper places and prices for the investment.
Evaluate the properties
A Comparative Market Analysis (CMA) needs to be carried out before concluding on a particular property. You may learn the analysis from the real estate agents.
Well, take the investors’ cue, try to bargain and buy at below market value. By doing so, you are locking an immediate profit on the property at the closing table itself.
This will further help you in giving more profitable cash flows as the interest payments will be lower in the commercial real estate loans.
Analyze the expected rentals
Once you are through with the valuation and purchase price of the selected property, you should start working on the monthly receipts and payments associated with it.
Get a look at the rentals of similar properties in the same and neighboring localities. Also, acquire knowledge on the terms and conditions put up by the property owners with respect to rentals.
Look out for any incentives that the owners give. This will clear you of what to expect for the monthly rentals from your investment property.
Pen down the attached expenses
Now, we are talking about the general expenses attached to the purchase of the rental property. Putting down the expenses together will help you in getting to the purchase price. Take up the budgeted repairs, real estate taxes, insurances, etc that are applied to every property in the area into consideration.
Do not consider the actual repairs cost that would be required for the older properties. We are talking about repairs in general.
Negotiate the deal
You need to be very careful in negotiating the deal as will also be a part of the long-term profits. The rental properties are for long-term and will tend to give you losses when sold off in a short period of time. Getting a good deal could be in the following cases:
- Owners selling in urgency: Look out for owners in the media who are selling off their properties in distress. There could be a financial emergency with them leading to immediate cash requirements. They will prefer selling the property at lower than the current market value you attract buyers. You can bank on this and buy at good prices.
- Opportunities at pre-foreclosure: pre-foreclosures are good opportunities for the investors to get the properties at a discounted amount i.e. lower than the market value. Many realty based websites have a separate section for the purpose.
- Wholesalers and fix – flip investors: Be in touch with good wholesalers and fix-flip investors. Real Estate wholesalers will understand your investment needs and will be able to provide you with below current price properties that are also ready to move in. Fix and flip investors buy the properties at very low prices, get the hard money lenders to put in capital and renovate them to sell them. The rental property investors are their prospective buyers. So being in touch with such people could actually give you good deals.
Add properties to your portfolio
Your confidence in dealing with the rental property investment will definitely go up once you complete the first one.
Now you can go to the second property and then add more and more to your portfolio. Your mortgages will also come down with time and good rentals.
Now could be the time to leverage with the equities. But be cautious while working on it and do not overextend. Many will still remember the 2007 crash when many investors went bankrupt due to the over-leveraging has done by them.
Recap
Building up the Real Estate Property Portfolio for maintaining cash flows is a sure way to give you that monthly income to enable you to lead a happy retirement life.
But it also requires you to be vigilant and carry out constant corrections in your course all along. Spending more time on the market research and contacts with the right people can give you good deals.
Adapting and evolving over time are the keys to build up the so-called near perfect portfolio that will restrict you from falling into serious financial difficulties as well.
