Commercial Real Estate Investment Strategies in Toronto and the GTA
Investing in commercial real estate can have some real benefits to many investors
Commercial Real Estate investing (think apartment buildings, strip malls, townhouse complexes etc.) has quite a few differences vs residential investing.
Around financing, there are things like larger down payments, more expensive inspections (including environmental assessments), mortgage broker fees, slightly higher mortgage rates, property managers. Many new investors figure there's a lot of money in larger commercial investments just because they are larger than residential investments.
Now, this may be the case, but there are a few things to think about.
The down payment required is going to be 25%. So if you're looking at a $4,000,000 building you need to pony up $1,000,000 to purchase it. Or on a smaller scale, you for a $1,000,000 six-plex in the outskirts of the Greater Toronto Area you need $250,000. With $250,000 you can acquire over $2,000,000 in residential investments with the newly minted mortgage programs for investors. So you can definitely "leverage up" with residential easier than with commercial.
Investing in commercial real estate may be more "passive" in nature. Lie on the beach while the cheque role in right? Well, I can tell you that there's nothing that is truly passive in real estate.
Commercial buildings with property management may be more passive than residential, but they're definitely not 100% hands-free. And if you treat them like that your property manager will likely be making more money from the venture than you do. The expected capitalization rate in the Greater Toronto area when investing in commercial real estate is around 8%.
Another thing to be aware of, but a point that is regularly overlooked, is the valuations. Canadian commercial investment properties are valued according to the revenue/income that they generate. Residential investment properties are typically valued according to comparable properties on the street. So, if you are renting out a single-family home, and the other homes in the area appreciate your property typically appreciates along with it. Recently that's been a very healthy rate.
The downside of course is that if the market falls for homes on your street then your investment property goes down with the rest (remember, think long term and don't let the short thinking masses who are often distracted by shiny objects get to you). Investing in commercial real estate usually doesn't have this issue, because again, the value of commercial investment properties are more closely tied to the rent they generate and the future potential of the property, (i.e.., re-zoning, re-developing, assembling neighbouring properties etc.) and because that fluctuates less the value of the properties fluctuates less. So, when you are looking to build wealth investing in commercial real estate has its place, but it's not the silver bullet you may think it is.
The most wealthy investors will look at commercial investing the same way we look at residential investing. Find a deal, lock it up, profit from it.
Canadian commercial real estate "deals" are properties that are mismanaged, can be acquired for less than market value because the rents are low, and then turned around quickly by raising rents with a better management team. Investing in commercial real estate has the same basic fundamentals of any types of investments.