Real Estate - Commercial Investing in the Downtown Minneapolis Condo Market
According to a recent study in The Economist, residential property investment in developed countries amounted to $48 trillion, while commercial real estate investment (CREI) was 'only' $14 trillion. Though the number may be smaller, CREI is much more complex.
Real estate, unlike stocks or other investments, is always local — property is always somewhere, somewhere specific likethe Downtown Minneapolis Condo market. The investor may be far away, but the property has a location that forms part of the Downtown Minneapolis Condo real estate market.
That affects how it's appraised, bought, used and sold. Unlike residential property — even though one in four homes are bought by investors — commercial property in the Downtown Minneapolis Condo area is usually intended to be used for a business purpose.
It may be a multi-dwelling apartment complex used as residences by others, but to the investor it's a commercial enterprise. As often, the commercial property is a multi-tenant commercial building on land zoned for that purpose. That introduces different considerations for valuing, financing, leasing, maintaining and a host of other tasks.
The commercial investor has, usually, to invest a larger amount — requiring superior credit and incurring greater risk — and to estimate capitalization rate (cap rate) and Gross Rent Multiplier (GRM).
The cap rate is calculated by dividing a property's annual net operating income by its purchase price. Historically, good investments had a 10% cap rate, but the last few years has seen that decline to 8% corresponding to a greater risk and lower expected return. The GRM is arrived at by dividing the purchase price by the property's monthly gross operating income. These, along with consideration of assessed vs. appraised value, and comparables, total income and replacement costs form the hard-fact base for estimating the worth of a deal.
Commercial properties are at greater risk of unpredictable changes in general economic conditions. A building that enjoyed a 100% occupancy rate can quickly become only half full because of factors far outside the local market. Events in Asia or elsewhere around the globe can turn business conditions for some upside down overnight, whether the tenants are located in California or Barcelona.
Commercial property investment requires increased knowledge of law, maintenance and finance. Zoning, leasing regulations, and other legal issues are more complex than for residential property. Where properties are rented, rather than just bought and sold — often the case with CREI — owners usually have to consider large electrical, air-conditioning and security systems, along with fire suppression, telephone and Internet facilities. Even plumbing is more complicated in commercial structures. Mortgages are more complicated and insurance is more costly.
The exception is the triple-net lease. In this arrangement the tenant is responsible for all the expense and arrangements for maintenance and repair as well as insurance.
But not to be gloomy, there are great potential rewards from CREI. The risks are greater, but often the return is as well — especially during good economic times. And the satisfaction of being part of sustaining and helping grow the dreams of other entrepreneurs is a great bonus for the commercial real estate investor.
There is a lot of free information available to you about buying, selling or investing in Downtown Minneapolis Condos or Minneapolis Lofts. For complete information about the Downtown Minneapolis Condo market including current condos lofts for sale, values, and more please visit the most complete website online www.LivingInDowntownMinneapolis.com dedicated to everything Downtown Minneapolis Condos. Contact Mike Weiland & Elke Stephan of The Weiland Group of Keller Williams with any of your real estate or mortgage related questions by filling out the form below.
P.S. Free weekly list of Downtown Minneapolis Condos including private listings and foreclosures in the most popular locations call the 24 Hour Recorded Information Hotline Now for details...1-888-391-9039 Ext. 126 or visit www.LivingInDowntownMinneapolis.com.
