Here Is Where The Money Is At In Real Estate

Hello to everyone:
I have been doing this a very long time, and I have done it all for the most part except develop real estate.

You will never find my company on the internet, never find anything about me, good, bad or indifferent, yet I continue to buy properties on a almost weekly basis.

I have been critisized here by some for telling it like it is and it's all good.

If you really think residential real estate will make you rich by itself, it won't. Being rich is about how much you keep from what your efforts successfully undertake.

If you buy properties where you took out a loan, you will have what is called equity, and there are alot of investors who have properties that have delivered alot of equity, however, equity is a number on paper.

One of the greatest residential property investors of the last twenty years, Ron Legrand, said it best. He said, " Try buying groceries or paying a electric bill with equity, it will never happen ". Now the argument can be made that you can actually pull equity out of a property, and yes you can, however, the simplest way is through a home equity loan or a refinance and yes there are other ways, but they are through complex strategies.

The real money with real estate is in what is referred to as "residential commercial" and commercial properties. What is residential commercial?

Residential commercial is apartment communities and apartment buildings. These are apartment properties of 5 units or more. Some call apartment buildings, multi family. This is not accurate. If you have a triplex for example, you have a multi family property.

Lets say you found a three unit building, known in some markets as a triplex or a three flat, and you go to borrow funds from a lender, you will soon find that you are qualifying for the loan, based upon your credit standing, the amount of down payment you have, length of time on the job, etc.

The reason for this is that these properties are analyzed as a residential investment property and it is you who must qualify for the loan.

Lenders consider anything under 5 units a residential investment. This is why when you look at their loan programs and term sheets, you will see the term 1-4. This means that anything under 5 units, hence the 1-4 term is qualified as a residential investment.

When you begin working with properties that are 5 units and above, the property is considered commercial and it is a different ball game.

Commercial properties are evaluated differently. They are valued using the income and expenses, mainly the NOI, which is the Net Operating income.

Why is this? because a commercial lender knows that it will be the property and it's cash flow or Net operating income that will repay the loan, and that the money will not come from your pocket or resources.

The reason that this is where the real money is in real estate is as follows. If you own a 20 unit building, and it is fully occupied, you have 20 checks per month coming to you. Now if 2 units become vacant, you still have 18 checks coming to you, certainly enough income to make debt service and expenses.

Now lets say you have a single family home that your renting out or leasing out, you have one check coming in. Now lets say your tenant moves out, you have zero income, yet you have mortgage payments, water, electric, taxes. Lets take the mortgage payment only. Lets say that the mortgage payment is $700.00 a month. If you don't get another tenant in the property almost immediately, you have to make that payment from your own personal resources, and if the property is damaged and needs repairs, you may not be able to have a tenant in the property right away.

With commercial properties, very few if any lender will base their lending decision on the borrowers personal credit or experience, because you will be taking a loan as a entity, meaning a LLC or a Corporation and as such, you just are not the determining factor for a loan, the property and it's cash flow or NOI is the determining factor.

Of course, there are factors such as the appraised value, however, from a qualifying stand point, you simply don't matter.

Almost anyone can go out and buy apartment buildings, self storage, and other asset classes, anywhere in the country, small town to big city, on a regular basis and have very few challenges to ownership.

If I go out tomorrow and buy a property worth $2,000,000.00, borrowing $1,000,000.00, then I have added $1,000,000.00 to my net worth. That is one deal and only one deal. Lets say I do that four more times, I will have added $4,000,000.00 to my networth.

Now ask yourself this, how many single family deals would you have to do, and I mean actually close on, to add these numbers to your networth?

Now don't get me wrong, you can go out and make money in single family homes, but the risks are greater and the time frame to actually build wealth take much longer time frames.

Ok, now it is enivetible that someone will come here and say, commercial is hard to get into, alot to learn.

My reply to that will be that it takes no more time that reading one of Deans books and learning the strategies needed.

Another advantage to commercial properties is that you are dealing with professional investors and business people, who understand creative financing and dealmaking and there is no dealing with homeowners who have a emotional attachment to a property.

I wanted to take some time today to just post something difference here.