Commercial or Residential? Real Trends for Real Investors

he real estate market consists of constantly fluctuating up-and-down cycles, so continual education is necessary for the savvy investor who wants to know where, or what, to buy next in order to maximize their investment. The average real estate investor has considerable difficulty keeping up with the many changes in lending and market conditions from year to-year and even month-to-month. In the past decade, many real estate investors made huge profits from short term investments such as fixing and flipping houses or as a simple result of the housing boom. When housing prices increased, fueled by a strong economy and low interest rates (along with an increase in risky lending practices), many new investors were able to pull out the equity in their current homes and purchase new homes. Unfortunately, some of the new homes now held as investment property were purchased using these risky loans. With the residential housing market headed towards a downturn, many of these investors do not have the skill or professional guidance to know where and how to invest in the future.

Commercial vs. Residential

The commercial investment market, however, does not reflect this downturn. In fact, buying by investors interested in long-term income has increased. Mr. Stephen Blank from Urban Land Institute stated in an recent article: “I think it’s a clear mandate from people that you’re going to make money the old fashioned way.” (Commercial Real Estate Cycle Peaks and Will Pull Back in 2007. October 2006). In other words, the market will return to normal income producing investments. Short-term investments will no longer be as lucrative and appreciation will slow. The huge profits from the short term “flips” of the past few years will decrease. Investors will no longer be able to ignore the numbers; each potential investment property will need to be analyzed for the long term so the investor can know their return on investment.

Significantly, for the next few years, cap rates are expected to increase. Cap rate, short for capitalization rate, describes how the investment property performs against similar properties in the same area. There is expected to be a surge in the number of renters due to high foreclosure rates and the fall in condo construction. From 2005-2006, there was a rise in vacancies in multifamily properties because of a massive increase of inventory. This increase was a result of a large number of apartments being converted to condominiums, along with new condo construction. Already in 2007, rentals have increased, as the market is moving towards people waiting to buy homes while prices continue to fall. Other upcoming trends for commercial real estate are for warehouses, storage facilities, and office building, which are expected to perform better than previous years.

The residential outlook is much different because many buyers felt that a rebound would occur sooner, some speculated as soon as 2008. Instead, the worst forecast numbers have doubled, surprising even some market analysts. The inventory of homes for sale is grossly elevated, leaving far too many homes on the market unsold and many newly constructed homes vacant. Real estate investors who expected to turn a quick profit and did not foresee the market slowdown own much of this new construction. In a recent article, Chris Isidore, Senior Writer for CNNMoney.com stated “The pace of new home sales are expected to fall to 860,000 this year essentially flat from the estimate of a month ago, but down 18% from 2006 sales”.

Lending Industry

In my article, “Lending Trends 2007,” Tricomm alerted our clients to recent changes in the lending industry. The article focused on how the 100% residential loans were defeated and the tightening up of lenders’ fists with real estate investors. The consulting branch of our firm, Tricomm Worldwide Signature, has directed its Research & Development Department to look for sellers and seller’s agents that are willing to use more creative seller financing terms as an alternative to our clients seeking conventional lending.

We are seeing large amounts of properties being sold, including commercial real estate, using seller financing. In recent months, we have helped our clients purchase seller financed apartment complexes with little money out of pocket. This creative solution will assist the client in growing and establishing a long-term real estate investment business. The same strategies are used to help real estate investors who own residential property unload their property to investors or new homeowners who are unable to qualify for a traditional loan.

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