| Most people in Northern CA started investing in | | | | tenants is very high compared to commercial |
| real estate by buying their own homes. And most | | | | tenants. As a landlord, this gives you more |
| have made money as real estate in Northern CA | | | | unneeded migraine headaches and stress. |
| has continued to appreciate in value. So when | | | | 5. Management: It's much easier to manage a |
| they move up, they decide to rent out their first | | | | 10-tenant shopping center than 10 individual homes |
| homes. And then they acquire a few more | | | | in 10 different places. As a matter of fact, if you |
| homes. They know they have negative cash flow | | | | own 10 residential rentals your tenants most likely |
| but make a profit because of appreciation. This is | | | | have worn you down and we are exhausted. |
| the typical story how most real estate investors | | | | They often move out in the summer just around |
| invest in residential properties. So far luck has | | | | the time you want to take off for vacation. Yes, |
| been on their side. | | | | it's a fact that residential properties are very |
| As the interest rates have gone up gradually in | | | | management intensive because of high turn over |
| the last 12-24 months while the rents in the Bay | | | | rate. If you have to hire a property manager, it |
| Area remain very much flat, the negative cash | | | | also costs more in terms of percentage of the |
| flow gap is widening. The risk for investing in | | | | rent to manage residential properties. Besides, it |
| residential properties is increasing. The same old | | | | probably is a full time job just to manage these |
| formula of investing may not work anymore. In | | | | 10 property managers! |
| the best case, investors may still make money | | | | 6. Income Tax Returns: it's much easier to keep |
| but not as much in term of percentage since the | | | | track of records for income tax purposes for a |
| value of real estate is pretty high already. In the | | | | 10-unit shopping center than 10 separate |
| worst case, investors may lose money as | | | | residential rentals in several states. You just need |
| residential real estate may remain flat or even | | | | to have one file for the shopping center while you |
| decline in value. Is there a solution for real estate | | | | will need 10 folders for 10 residential rentals. The |
| investors in Northern CA? Of course, these | | | | task becomes more challenging as the IRS |
| investors can use the same old formula in a new | | | | requires you to keep records for several years. |
| area that has potential for appreciation. So the | | | | Your out-of-state income tax return is also |
| key is to find this new area. They just have to | | | | thinner for a 10-unit shopping center than 10 |
| talk to someone who knows this new area. It | | | | residential rentals. |
| could be Bakersfield or Sacramento or Fresno. | | | | 7. Tax Write-offs: commercial properties offer |
| Alternatively, investors can put money in | | | | the same tax write-offs, 1031 exchange as |
| commercial properties: retail strips, shopping | | | | residential rentals. |
| centers, medical office buildings. Let's just explore | | | | 8. Credit Scores Impact: most people don't know |
| this paradigm shift to see if it makes investment | | | | that once they have about 10 residential |
| sense. | | | | mortgages, their credit scores will start going |
| 1. Income: commercial properties generate 50 to | | | | down. The credit bureau reasons that credit risk is |
| 200% more rental income compared to residential | | | | higher the more money you borrow and 9-10 |
| properties in the Bay Area. In addition, there is no | | | | mortgages seem to be the threshold. On the |
| rent control for commercial properties. So | | | | other hand, commercial mortgages have no |
| landlords can charge your tenants as much as the | | | | negative impact on your credit scores as these |
| market permits. | | | | mortgages are not reported to the 3 credit |
| 2. Leases: in general commercial real estate leases | | | | bureaus. |
| are more favorable to landlord compared to | | | | 9. Pride of Ownership: most commercial properties |
| residential leases. Besides the base rent, tenants | | | | are referred to by name and not by their |
| also have to pay landlord for property taxes, | | | | addresses, for example Lion Plaza, or Valley Fair |
| insurance and all maintenance expenses. These | | | | Shopping Center. They could be trophy properties |
| leases are called Triple Net or NNN leases. | | | | that offer enormous pride of ownership. You get |
| Because of this type of lease, commercial | | | | lots of respect when you tell people you own a |
| properties are better maintained than residential | | | | certain shopping center they know. |
| properties. Besides, the NNN leases also take | | | | 10. Investment size: commercial properties often |
| away a lot of risks from the landlord as | | | | require substantial amount of money so it's not |
| maintenance costs are unpredictable. On the other | | | | meant for someone with a modest amount of |
| hand, landlords tend to defer maintenance on | | | | money. |
| residential properties to reduce the cost. | | | | So if you want to work hard for your money or |
| Consequently, the deferred maintenance will have | | | | bet on appreciation then invest in residential. If |
| negative impact on the value of the properties. | | | | you want to work smart, go after commercial |
| 3. Better Tenants: tenants for commercial | | | | properties. Commercial real estate investment is a |
| properties are financially stronger. They may be | | | | more prudent way to invest in real estate if you |
| Walmart or Home Depot with billions of dollars in | | | | have more equity for down payment. Each month |
| the bank. They are less likely to nickel and dime | | | | you have strong positive cash flow so you don't |
| with you. In addition, they also guarantee the | | | | need to rely on just appreciation to make money. |
| lease with their assets. If for some unforeseen | | | | So if you have not invested in commercial real |
| reasons they have to vacate the property, they | | | | estate, you now know why you are not among |
| continue to pay the rent or find another tenant to | | | | the elite group of real estate investors. You |
| sublease it. They are also motivated keep your | | | | probably wonder where you should go from here |
| property in good condition to attract their | | | | if you want to explore this possibility further. In |
| customers to their stores. While majority of | | | | the coming issues, these topics will be discussedo |
| residential tenants are good, some think once | | | | Which commercial property should you invest?o |
| they pay the rent they have a license to trash | | | | Where should you invest in commercial real |
| your properties and then disappear in thin air with | | | | estate?o How to pick and choose a good |
| no forwarding address! | | | | commercial propertyo What you should know |
| 4. Long term lease: commercial tenants are less | | | | before hiring a property management company |
| likely to move. They often sign 5-10 year leases. | | | | If you cannot wait for those articles, you can sign |
| Tenants like Walgreens, and Walmart sometimes | | | | up for a free seminar about Commercial Real |
| sign 20-50 year leases. In contrast, residential | | | | Estate Investment at Transmercial. San Jose Real |
| leases are short term. They could move out to a | | | | Estate Investor Club (phone number |
| new place a mile away to get a $25 rent relief! | | | | 408-264-3198) occasionally offers a similar |
| It's a fact that the turn over rate for residential | | | | seminar for a small fee. |