Commercial Real Estate Investing: Five Ways to Make Money

Fundamentally, there are about five different ways to make money investing in commercial real estate. Each one should be considered a tool in every investor?s commercial real estate investment toolbox:

Strategy #1?Equity Buildup: Most people are familiar with the concept of increasing the equity in a property. Equity build-up is one of the key ways to make money in commercial real estate. It can be done four ways:

One is to initially buy the property below market value. This gives you immediate equity buildup. To do this successfully, it?s important to have done your ?due diligence? on your property, understand your buyer?s needs, as well be a skilled at negotiating.

The next way to build up equity is through appreciation of the property. This can easily be done if you are keeping the property in good repair and making sure that when you purchase the property, it is in an area that is growing. It?s value is bound to appreciate over time.

The third way to buildup equity is by paying down debt. The key to this strategy is to always strive to get the lowest interest rate possible on your mortgage or other debt instrument.

The fourth way to create equity is when it?s time to sell, invest the effort to sell at above market value. Again, knowing your prospective buyer, having access to critical information, and being skilled at negotiating can give you an immediate boost in equity.

Strategy #2?Depreciation: At tax time every year, you can receive an after-tax profit boost because the calculated depreciation is taken is taken as operational expense directly against your profits. There is one caveat however: You can depreciate the cost of the buildings, but not the cost of the land.

Strategy #3?Collect Rents: Getting the property to carry itself is the goal. But don?t stop there. You want the rents to not only cover the mortgage and ongoing maintenance and any major repairs – you also want the extra cashflow to perhaps pay down the debt to increase equity or fund another investment.

Strategy #4?Offer Attractive Financing: When it is time to sell the property, you can often negotiate a better deal for yourself when you offer attractive financing or more convenient terms to the potential buyer. For instance, a prospective buyer may be willing to pay a higher overall price if they don?t have to pay as much cash upfront.

Strategy #5?Add Significant Value to the Property: This is one of the most valuable ways to make money. When you add significant value to a property, you can often get a big boost in profits. Adding value can be done several different ways:

First, look at making strategic improvements. Making repairs is obvious, but also look for strategic improvements to make in the property. By strategic, we mean to concentrate only on those items that will raise the value by multiples of what they cost you.

Then, analyze whether there?s an opportunity to convert a higher and better use. When there is a higher and better use for the property, it can be worth substantially more. For instance, if you own raw land in the path of progress, you could get it converted to commercial zoning.

There is an old saying ?Buy by the yard, sell by the inch.? Applied to commercial real estate, it means breaking up a property can often increase the value. For example, you can buy raw land, turn it into a subdivision, and sell off the lots to independent developers to build on.

In summary, use this quick ?checklist? as a way to jumpstart your commercial real estate money-making creativity. It will give you some additional ways to make money you may not have thought of before.

Here?s the key takeaway: When investing in commercial property, a savvy investor will always factor in as many possible ways to make money into the investment as possible. Because that?s the name of the game?to make as much money in as many ways as you can, with the least out-of-pocket investment.

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