If you upgraded from houses to commercial real estate investing, what life changes would you make? Do you currently own rental houses, and would you like to learn how to trade up from residential to commercial real estate? In this post I will give you 5 reasons why you should upgrade to the more stable income of commercial real estate investing as well as 5 how-to steps to make it happen.
Over 20 years ago, I upgraded from investing in single family homes to commercial real estate investing. Immediately, two things happened to me. First, I was able to go from working as a full-time engineer and single parent to part-time engineering work and raising my son. I was able to spend more time with him and that was awesome!
I was also able to get a glimpse of financial freedom. One day, I was sitting in the barbershop and my barber asked me how I would define financial freedom. I thought about it for a second and I realized that, for me, financial freedom is when I can go down to the barbershop at 11 o'clock in the morning any day of the week. Meaning that I wasn't held down by a job. I didn't have to deal with the corporate craziness throughout the day and I didn't have a W2 paycheck to deal with. To me that was financial freedom and that's what I achieved.
The Intimidation Factor
You may be intimidated to upgrade from houses to commercial real estate. Don’t let intimidation dictate your destiny and stop you from playing a much bigger game that you ought to be playing. Let me share with you four life events that were intimidating for me:
- My first day of kindergarten
- Leaving for college
- Investing in commercial real estate at a young age
- Asking my wife-to-be out on our first date
I share this with you because these four events were terrifying for me, but if I didn't overcome the fear and go through them, I wouldn't be where I am today. The same applies to you. Some of you may have your own intimidation factors that you need to overcome so that you can live a bigger life.
Overcoming Your Intimidation Factors
How do we deal with your intimidation factors, which turn into fear that stops you? The answer is; fear dissipates with knowledge. Our job at our company is to give students knowledge so that they can make knowledge-based decisions. You overcome the intimidation factor by gaining knowledge with a coach or mentor, so you can make the knowledge-based decisions that lead you to a life a financial freedom.
5 Reasons to Upgrade Houses to Commercial Real Estate
1. The Cashflow is More Stable
So many of my students owned single-family rentals before they enrolled in our program. They came to us for mentorship because investing in rental houses didn't enable them to leave their job. The cashflow was too low and erratic. With commercial real estate, the cashflow is stable and much higher than a single-family home.
2. Single-Family Home Rentals Don’t Provide Enough Income for Retirement
I know a lot of wealthy people and most of them achieved wealth through commercial real estate. They may have started with single family homes, but what enabled them to retire is commercial real estate. This is what I've witnessed over the last 25 years.
3. You Can Force the Appreciation
With commercial real estate, we can force the value upward by simply raising the rents and raising the net operating income. You can't do that with houses. With a single-family home, if you were to raise the rents, the value doesn't go up. This is because the value of the home is determined by what other properties are selling for in your neighborhood.
In commercial real estate, the value of a property is largely determined by the income generated at the property. Therefore, the higher the net operating income on your commercial property, the higher the value. So, if you're good at managing your property, raising the rents and maintaining expenses, you can increase your wealth.
4. People Need a Place to Sleep
Most of the deals in our company are small, medium and large apartment buildings. It is the most popular asset today and has been since I started over 20 years ago. I don't know how much longer it's going to last, but it's good today and it probably will be good tomorrow. With millennials not wanting to buy homes and seniors moving into smaller spaces, the need for apartments is greater than ever. All these trends are causing our apartment business to continue to boom.
5. One Good Deal is All it May Take
You have heard me say it before. One good commercial deal is all it may take to give you financial freedom.
I have a video on how one of our students took his two single family home rentals, sold them and traded up into a 34-unit apartment building. If you watch this video, you can see in detail the process he went through and what the net effect was on his cashflow and equity.
5 Steps to Upgrade from Houses to Commercial Investing
At the beginning of this post I asked you what life changes you would make once you upgraded from houses to commercial real estate. What would those be? This is your why. And if the why is powerful and meaningful, then the how to is not so difficult.
1. Get Educated
You need to get coaching. For some of you, the rental that you’re considering selling or pulling money out of to do a commercial real estate deal is your life savings. You need to be very careful with that, especially if you're older. You may only have one shot, so don't do it by yourself. Get educated and get help. Once you get educated and get an advisor, you can start to make knowledge-based decisions. This will help you dissipate some of the fear that you have.
2. Calculate Your Money
Figure out how much of a down payment you have. If you were to sell your home or refinance it, how much do you have for a down payment? If you can pull out $250,000, then you could buy something north of $1 million in commercial property.
If you were to sell your home, you don't want to pay capital gains taxes. A strategy to defer the tax in this transaction is with a 1031 Exchange. It's an IRS tax code that allows you to sell your single-family home and take all the profits into your next commercial property. If the value is greater, you can defer all the taxes and pay no capital gains taxes. I have a video called the 1031 Exchange Step-by-Step Case Study. You can watch it and learn more on this topic.
3. Choose One Commercial Asset Type
Meaning that if you want to invest in apartments, study apartments. If you want to invest in mobile home parks, focus on mobile home parks. If you want to invest in office buildings, become an expert investing in office buildings. Whatever you choose, choose one. As I’ve mentioned in previous posts, I don't know anyone who's extremely good at investing in apartments and an expert at investing in retail.
Of course, you can have varied investment properties. However, to be an expert and to be well known in that category, you need to focus on one, especially if you're a beginner. I have an acronym for FOCUS: Follow One Course Until Successful. I'm a person who believes in the power of focus.
4. Build Your Team
You need to get educated in order to make knowledge-based decisions. Who can help you with that? You need to build a solid team of advisors, agents, lenders, property managers, attorneys, and contractors. Teamwork makes the dream work.
5. Take Knowledge-based Action
After you have completed steps one through four, the fifth step is to take knowledge-based action. There is no higher form of learning than jumping into something and getting started, once you have one through four. Again, don't do it by yourself. Get help and get educated.
What does it mean to take knowledge-based action? As scary as it sounds, it means you need to make offers. That's where you're going to learn. Making offers forces you into the game. Before you make an offer, you've analyzed it with your team, ran the numbers and checked out the market. You did all those things because you have completed steps one through four. I'm not throwing you into the fire with nothing. I'm throwing you into the fire with one through four must-do action items.