Transition to Small Commercial

Turn your residential investments into Cash Flow Monsters!

Introduction:

So you’re a residential guy or gal, you love the opportunity that you see in foreclosed properties, short sales, pre-foreclosure bailouts, and the list goes on and on! But there’s a problem with your business model, if your business plan only involves residential property the banks are going to force the issue with you.

As many of you have experienced recently, there is a limit on the number of financed properties you can have. Right now that limit is four properties but it will be expanded back to 10 properties soon. The problem is it will take you no time at all to amass 10 properties. Even using a ‘partner’ strategy, getting to 20 homes is a breeze. Most savvy investor can do that inside of a couple of years, but then what?

The problem is not with you, it’s with leveraging residential real estate as a business. When considering real estate as an investment there are two main factors to focus on. One is capital gain; we’ll call this factor income in the future. The other factor to consider is the cap rate. Think of the cap rate as a return on the investment, that’s money now, as in INCOME!

The bottom line is that you can’t capitalize income in residential properties at rates of return anywhere near what you would receive in commercial property investments. Ergo, the banks want to force you to leverage the millions they want to lend you into one or two cash flowing commercial properties instead of 20 piddly little residential investments.

This document was not written to discourage you from owning residential investments, it’s merely an information piece to help educate you on the extreme differences between residential investments and commercial. So if you’re ready, let’s get started.

Residential Investments as a Business?:

Residential real estate as a business has made many people wealthy and it can make you wealthy as well. But that’s not the question is it? The question is how wealthy and how long will it take to get there? Many people new to investing go out and buy a couple of rental properties and are shocked at the amount of time and energy it takes.

Here’s the thing you have to understand about real estate in general and residential investing specifically. All real estate investing is capital intensive. Whether that means you put a lot of cash in up front or you get in with a little cash and leave your gains in the property over time. Either way, one day you wake up and you realize you have a lot of wealth but it’s tied up in the property you own. Equity rich and cash poor!

With residential real estate you have a low barrier to entry but to make real money you have to immediately input capital or build it up over time. This makes residential real estate investing very similar to investing in an annuity. With annuities you invest a certain amount of capital and you commit to the investment for a long period of time, usually 10 years or more. At the end of the period the annuity can be redeemed for the principal amount and usually a large capital gain.

The same thing happens with residential real estate. When you buy the property, you use a large down payment. Over the years an investor makes payments to you. If you are lucky you can cash flow a couple hundred bucks a month. After 10-15 years the loan has been paid down and the property has appreciated and you realize a large capital gain! Bingo, finally some REAL income!

But that’s the problem with residential real estate. It takes a while. You have to wait for the annuity to mature …so to speak. In the meantime you’re still slogging away at the 9-5 and cutting grass and fixing water heaters on the weekend. But hey, that’s life, and you’re better off than if you didn’t invest at all, right?

Maybe, let’s look at an alternative plan….

Small Commercial Real Estate:

Everyone knows what commercial real estate is but whenever I say ‘Small’ Commercial Real Estate I get some pretty questionable looks. So what is small commercial real estate? It’s a hybrid of sorts. It’s the transition point from residential real estate to commercial real estate.

If you want to make big money with your real estate investment business and you want to quit your 9-5, you have to transition your business to a business that cash flows! When I say cash flow, I’m talking big cash. Remember in the introduction when I talked about cap rates? That’s the return on the investment, well in commercial real estate you have to create substantial return or the banks will not loan you money. But that’s a good thing!

Before I get ahead of myself, let’s explore the difference between residential and small commercial. Residential properties are always homes. They may be single family detached, condominium or townhouse. Even multi unit homes like duplex, triplex and quads are residential investments.

Small commercial is not that much different. When I think of small commercial I think of that house on the side of a busy road that is or once was zoned residential but now it can be used as a great office space for a small law firm, CPA or hair salon. I think of 6-12 unit apartment buildings, one to three bay retail shops, convenience stored converted to used car lots and small banks that are converted into a dentist office. These properties act like residential investments but they provide far more cash flow and their values increase even more rapidly.

When dealing with these types of properties you are dealing on a business to business style relationship but you still have the personal interaction that you would if you rented a residential property. Small commercial real estate is the best of both worlds, residential and commercial. And it’s the best way to transition from Residential to Commercial and turn your languishing residential investment business into a Cash Flow Monster!

Create Your Hedge Fund!:

When I think of creating a Cash Flow Monster by helping real estate investors to transition from residential into commercial using the small commercial transition strategy, it’s kind of like getting them into a hedge fund. Think about it….

Hedge funds are a great thing for those wealthy individuals that can afford to invest a small amount of ‘risk’ capital to boost their returns. They invest about 10% of their wealth and generate returns that can boost your overall portfolio from a paltry 4.5-6% per year to 12, 15 or 20% if you are in the right fund!

Hey, if you loose money theirs good news as well. The loss is active not passive. It can count against any taxes owed on income from other sources. It’s almost a win, win right?

So how can we investors create a windfall Hedge Fund like return for ourselves? It’s easy, invest in small commercial properties. Small commercial property is less risky than hedge fund investing, but it gives us many of the same market and tax advantages. When we make money, we have money to pay taxes. But! if one of our investments looses a little money, we can count that loss against all the other winners! Beautiful.

With commercial property you get positive income streams, depreciation deductions on your taxes and, if you’ve invested properly, you get to enjoy the benefits of capital appreciation tied to the properties value growth. Talk about a hedge against downturns, inflation and possible stock market losses.

By investing in just a few small commercial properties you can create additional cash flows and tax deductions at the same time. Investing in a small office building, a 6-12 unit apartment building or a small retail strip center with 1-4 retails spaces can be a great way to diversify income and support your residential real estate portfolio.

Making a few small commercial investments today could be like creating your own mini-hedge fund for your small business. It could also be the catalyst to transition you into the world of commercial real estate investing where the real Cash Flow Monsters are found!

Meet the Author:

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use advanced investing techniques to obtain greater wealth through real estate investing. For more information on residential and small commercial loans please contact Mr. Gross on his direct line at 770-350-7373 or via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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