This article discusses the advantages of commercial real estate (including
apartment houses) compared to single family homes.
Commercial Real Estate Compared to Single Family
By Raymond Pedersen
Compared to single-family houses, you can build wealth with investment properties
with less search time. Even in high-cost areas, a $5 million or $10 million
portfolio of houses would (or at least should) include at least 15 to 20
properties. In lower-priced areas, a portfolio of this amount might include 50
properties. To buy that many houses would require several thousand hours to find
houses, look at houses, evaluate neighborhoods, negotiate purchase contracts, and
apply for loans. With income properties, you can work up to a $5 million or $10
million portfolio with as few as four to eight acquisitions. Even if each deal
takes three to four times as long to complete as one single-family purchase, you
still save search time.
As you move up to a $20 million, $30 million, or $50 million portfolio of
properties (should you plan to grow that wealthy), a comparable sum devoted to
single family houses would prove impossible to acquire and manage. If you want a
life (not a job), investment properties provide more return for each hour spent in
property acquisitions and negotiations. If you own 15 or 20 houses, you own 15 or
20 roofs, electrical and plumbing systems, and yards to oversee. If you own two or
three investment properties instead, you reduce the number of components that will,
at some point, need attention. Although maintaining an investment property can cost
more per building, it costs less per unit, in terms of both dollars and time.
If you choose, you can also own net lease investment properties. Net lease office
buildings, shopping centers, and free-standing retail stores shift responsibility
(in varying degrees, depending on specific lease terms) for maintenance, repairs,
property taxes, and insurance to the tenants. You can operate multifamily apartment
buildings under a master lease (likewise for office and retail). With a master
lease, one master lessee (tenant) pays you and assumes responsibility for leasing
out individual units (spaces) and paying expenses. As another alternative, employ
an on-site manager who attends to day-to-day concerns that arise. Compensate your
on-site manager(s) with a nominal amount of rent reduction. On-site people can
perform some maintenance and repairs, address most tenant problems or concerns, and
prepare and lease vacancies as they occur. To build wealth avoid paying taxes. For
owners of investment properties, the Internal Revenue Code offers a generous
advantage. As you acquire larger and larger properties, the law permits you to
pyramid your wealth-building tax free through a Section 1031 tax deferred exchange.
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