“The Perfect Investment” by Paul Moore is a deep dive into the world of commercial real estate. More specifically, giant (100+ doors) multi-family housing that you can buy via syndications, partnerships, and limited liability corporations.
You will need to be an accredited investor for this scale of investing. According to Investopedia, you will need to earn $200,000/year for the last two years ($300,000 for married couples) or have $1 million net worth without including your primary residence.
There are many advantages of commercial multi-family investing, one of which is enormous tax benefits. Many high net worth individuals begin to invest in multi-family housing to shelter their money from taxes.
Multi-family investing targets generational wealth, not short-term gains. This is not a place to go for speculation and capital gains. Commercial property is for creating long-term income and tax strategies. With that, let’s dive into my five takeaways.
1) The cash requirements to get started in multi-family housing are huge. Sometimes the investment can be upwards of $10 million. You may need to bring in 25% or $2.5 million. On top of that, you will have to show another $2.5 million reserves. That is why you need to be an accredited investor to partake in large commercial multi-family housing.
2) There is typically one broker in a commercial transaction, not two. The broker can talk to both sides and initial the bidding process.
3) Most commercial property is offered in an auction-style setting. There is no set price before the bidding begins. The bidding is silent—to prevent one-upping one another.
4) Banks value commercial property on income and capitalization rates, not comparable properties. Therefore it is possible to raise the value of your property by decreasing expenses and increasing revenue.
5) The economies of scale favor large multi-family properties. It may cost the same to hire an on-site property manager at a 100-unit complex and a 200-unit complex. You get twice the rental income for the same management fee.
Raising the value of a commercial property is a great way to increase returns. If you can lower management costs, better regulate utility bills, add better washer machines in each room, etc., your expenses will lower.
Similarly, you now have higher monthly revenue by increasing income by adding VIP parking, swimming pools, upgrading rooms, etc. With lower expenses and higher income, your property now has more net operating income or profit.
Dividing the profit (NOI) by capitalization rate derives value. So, by taking the time to maximize cash flow, you are increasing the property’s value. You can then perform a cash-out refinance with a higher property value, extracting tax-free cash.
Most commercial multi-family real estate requires an operator to handle the process because it can take a while. We want to set ourselves up as partners who invest passively into the venture. However, it is crucial to know the process and have a background in real estate.
This book is an excellent introduction to the world of commercial multi-family real estate. I am a few years off from being an accredited investor, but now I know some real estate ventures that may be waiting for me.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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