Commercial vs Residential Investments Properties

I wanted to bring up something for anyone serious about their real estate business.

Neal Weichel will be speaking next week on the state of the market, and the event will be held right here in the conference center in Suite 305 in our office building. RE/MAX is sponsoring the event, and lunch will be served. It is next Wednesday, June 17th, at 12 noon. Please let me know if you are planning to attend. I told the leadership at RE/MAX I would help get the word out, so I’m sharing this with everyone. Again, it is open to all real estate agents!

I was also talking with a friend last night after a Synergy Investor Group meeting, and he was shocked by the differences in value and structure between buying an apartment building and a single-family investment property. It turned into a long discussion, and I’m sharing it here because many people don’t compare the two side by side.

I prefer apples-to-apples comparisons.

Today every commercial property I am seeing needs about 35% down to get decent financing. On the other hand, you can often buy a single-family investment property with around 15% down.

So, let's use simple math.

If a client buys a single-family investment property for $1 million, they may have a PITI payment of around $5,525, including taxes and insurance. They may also have roughly $300 in property management fees, plus additional expenses as things come up.

That property may rent for around $5,500 per month, so the investor could easily be losing around $500 per month after management and a few minor repairs. Even if they are paying down about $600 per month in principal, that investment starts slowly and gets better over time.

Comparing that to an apartment building. If a client or group buys a $10 million apartment building, they are likely going to need around 35% down in this market. The lender will also want to see the property’s cash flow from the start. In many cases, that means the building needs to cash flow by 20%, or roughly $8,000 per month, and they will pay off about $6000 in principal monthly. All other expenses were accounted for before calculating the loan amount, so you would actually net 8K per month after all other normal expenses.

So why do so many people start with single-family residences? Because most people cannot afford to start by buying an apartment building.

There are also more moving parts with apartments. More tenants. More repairs. More management issues. But that is also why you hire a good property manager who knows what they are doing. Mismanagement of investment properties is a big issue. We see people undercharge rent, fail to take care of their properties, ignore maintenance, and create long-term problems that could have been avoided.

When it comes to single-family investments, you may see a higher back-end return when you eventually sell. Residential properties can have bigger peaks and valleys, especially here in California, and rents are obviously going to continue to rise over time.

With commercial properties or apartment buildings, the rise in value is usually steadier. You may not see the same dramatic peaks that you can sometimes see in residential real estate, but you also may not see the same valleys.

Commercial property values are typically based on location, cap rate, income, and interest rates. Interest rates can have a major effect on value because they directly impact what investors are willing and able to pay.

I’m bringing this up because it is important.

A lot of people want to invest in real estate, but they do not always understand the difference between buying a single-family rental and buying an apartment building. Both can be great investments, but they are very different animals.

Single-family rentals are often easier to get into, but they may start slower from a cash-flow standpoint. Apartment buildings may require more money down and more management, but if purchased correctly, they can provide stronger cash flow from the beginning.

The key is understanding the numbers before you buy.

Real estate can be one of the best long-term investments out there, but only when you know what you are buying, how it is financed, how it cash flows, and what your long-term plan is. 

Interest Rates

A little better today! Wait, Trump just said we are making progress, and we will not be bombing the crap out of Iran tonight! Interest rates just got a lot better! 

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the 5s and now low 6’s
• Conventional (≤ $832,750): low to mid 6s
• High-balance: mid to high 6s
• Jumbo: Mid to high 6s
• Bridge Loans 7.75-7.99

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
• DSCR loans (15% down)
• Bridge loans (~7.99%)
• Buydowns (3/2/1, 2/1, 1/0)
• Private Money loans – Hard Money
• Construction Loans
• 203K loans
• Fix and Flip Loans

Rates subject to change without notice.

Condo Update
Good news:
Cornerstone – FHA approved – YAY!

Bad news:

• Tres Robles III –   Critical repairs – deferred Maintenance
• Warner Center Condos – Litigation – Non Minor, Insurance Coverage
• Princessa Estates  – Outstanding Critical repairs 18121 Erik Court – Could affect the whole complex

We love your Non-Warrantable Condo loans!!

Need help checking a condo? Call me, and we can look it up in real time.
Also:
Full California "naughty list" available here:
https://mikemeena.com/non-warrantable-condos/

Let's Connect
If you or your clients, friends, or family need guidance, I'm here.
📞 661-291-2222 (Direct)
📞 661-714-6258 (Cell)
📞 661-260-2970 ext. 2222 (Office)

📧 Mike@AugustaFinancial.com

Sincerely,