It’s Based on Cash Flow, not Comps
If you’ve ever bought a house, you know how it works. The value of the house is almost always based on comparable sales. Comparable sales--or “comps,” as they are called--are homes similar in location, square footage, number of bedrooms and bathrooms, lot size, and type of construction.
Imagine you purchase real estate that is worth $300,000. Its value is based on the comps--which means that the house next door likely sold for around $295,000, the one across the street for $304,000, and the one down the street for $299,000. So in that neighborhood, your property is worth $300,000.
The property has a tenant who pays $1,100/month. But he is leaving, so you put a new tenant in that pays you $1,300/month. Did the house go up in value? No, it’s still worth $300,000 regardless of what the tenant pays you. Why? Because its value is based on comparable sales.
How It Works in Commercial
Now let’s imagine you purchase a commercial building that is worth $1 million. It has a retail tenant who pays rent of $7,500/month. But this tenant is also leaving. And you know that the building has been under-rented--that’s why you bought it. So you bring in a better retail tenant who is going to pay you $9,000/month.
Did the commercial building just go up in value? You bet it did. Why? Because the value of commercial property is based on its cash flow, not on comparable sales. The higher the rent--and the higher the quality of the tenant--the more the building is worth.
In this scenario, you just replaced a retail tenant paying $7,500/month with one paying $1,500 more. Want to know how much your building is worth now? It jumped from $1 million up to $1.2 million! That’s right, you’ve just earned yourself $200,000 in equity.
And now you’ve got options. You can:
- Keep the building (and the nice monthly checks it’s bringing you)
- Refinance, and pull up to $200,000 out, or
- Sell the building and take your profits!
Decisions, decisions!
Cash Flow vs. Comps
As you can see, commercial and residential use two different methods for valuing property. With residential, it doesn’t matter what your tenant pays you--it simply won’t affect the value. Your rental property could be vacant, and that wouldn’t affect its worth. It would still be based on comps.
On the other hand, the potential of a commercial property can be as limitless as your imagination. Because the value is based on income, you boost the value of the real estate every time you boost the income (rent) you’re receiving from the building. By scouting for commercial properties that are either under-rented or have inferior tenants, you can find potential gold mines.
Resources
Commercial Real Estate Investing
Trump University’s Commercial Real Estate 101
The Power of Section 8 Housing
How would you like to own rental property where all or most of the monthly rent comes to you by check from the government? If that idea appeals to you, welcome to Section 8 housing!
Section 8 is a program setup by the U.S. Department of Housing and Urban Development (HUD) to provide safe and sanitary housing to low-income individuals or families, the elderly, disabled, or disadvantaged in the private market. By issuing Section 8 housing vouchers, HUD assists tenants by paying the majority of their rent to you (the landlord). In other words, you get a guaranteed check form HUD by the third of each month.
Residential or Commercial
You can take advantage of Section 8 whether you prefer to invest in residential or commercial real estate. In fact, Section 8 housing can be single-family houses, apartments, condominiums, or duplexes. Many property owners elect to become Section 8 landlords because it provides them with dependable cash flow. And the city already has a list of approved tenants, so you don’t even need to advertise your unit(s).
Better Quality Tenants
Research indicates that Section 8 tenants tend to:
- Be better than average
- Often remain in their unit(s) for several years, and
- Are motivated to pay you their portion of the rent each month.
Sounds unusual, doesn’t it? Why is this?
Well, in order to receive Section 8 benefits, individuals must undergo an application process through their local Public Housing Authority (PHA) office. There is generally a lengthy waiting process and in some cases it can take up to one year or more to receive Section 8 approval. Once approval is obtained, PHA places applicants on a waiting list--a list of people just waiting for a property like yours! (It’s important to note that you never have to get involved in the process of establishing the eligibility of tenants. This has already been determined before the tenant calls you!)
Participants in HUD's Section 8 program must be re-certified each year. And no tenant wants to lose their Section 8 status. This benefits you as the landlord. Not only will you have fewer hassles, but your tenant(s) has a motivation to pay you the rent on time or risk losing his/her eligibility!
Many Types of Neighborhoods
Ill-informed landlords believe that Section 8 property must be located in subsidized housing projects. Although some investors do go this route, this is simply not true. Remember: The program is geared toward low income people, but the participants can choose ANY housing that meets the requirements of the program. So if you own properties in middle-low to low income areas (not war zones!), the Section 8 program just might be your ticket to wealth!
Section 8 Housing can provide landlords with guaranteed rental income and long-term, quality tenants.
