Although there are many different types of commercial real estate Portland is home to, I personally only focus on apartments and manufactured home parks, because that is where PEOPLE LIVE. In today’s topsy turvy economy and real estate market, I want to own the types of real estate that have the demand of something that remains relatively constant, that being “a place to live and sleep”. The demand for office, retail, industrial, warehouse space, etc. can and will go up and down. However, people always need a place to sleep. They also need a place to “put their stuff,” consequently many people also feel that “self-storage facilities” are a good investment too. I personally have not invested in this class of commercial real estate, however I know others that have done it successfully.
That being said there are definitely ways to buy commercial ‘residential’ real estate that can be profitable and provide a monthly cash-flow.
The key is to understand the income and expenses of a piece of Portland commercial real estate. These two factors determine the Net Operating Income, or “NOI”. NOI is merely the net cash-flow of the property after all expenses, as if you owned it free and clear. That’s right, free and clear. Then there is the consideration of Capitalization Rate, or “Cap Rate,” which is an industry standard term that measures the NOI as a percentage of a given purchase or sale price. Let’s look at that in a bit more detail.
Cap Rate in Commercial Real Estate Portland
Let’s use an example for clarity. Say the property has a YEARLY NOI of $125,000, and the purchase price is $1,125,000. The math looks like this:
Annual NOI / Purchase Price = Cap Rate, so…
$125,000/$1,250,000 = 10% cap rate
Here’s an easy way to look at this. If you buy commercial real estate Portland at the above 10% Cap, and you borrow money at 6% interest rate in order to purchase the property, you will have a positive cash flow of approximately 4% of the purchase price. This is a very broad stroke explanation as it does not take into account the typical need to raise money for the down payment, costs of purchase and “necessary capital improvements.”
The dollar amount of necessary capital improvements to a property are often referred to in the industry as “CAPX”. Savvy, experienced investors interested in purchasing a property will typically ask for the CAPX as part of their analysis of the deal.
Anyway, similar to investing in single family homes, there are many ways to purchase commercial residential buildings without the use of banks that can substantially improve the profitability and cash flow of commercial real estate Portland. The same creative financing techniques can and are used in purchasing in this arena.
Once again, similar to single family homes, it is critical to consider ALL expenses prior to purchasing multi-family property; there are recurring monthly expenses, as well as one-time expenses, such as ‘costs of acquisition’ and CAPX as previously mentioned.
Of course there are also ways to increase the income side of the equation. Here are a few:
- Better management
- Property expansion
- Enhanced financing
Let’s look at these in a bit more detail.
Better management can lead to lower expenses, less vacancies, or shorter vacancies. For example, changing and marketing to a different tenant profile may lead to an increase in rents, or a decrease in vacancies and repairs.
From the property expansion side, you might be able to add to the total number of units. You might charge for parking spaces or meter each unit independently, so that tenants pay for utilities rather than the owner.
You can also enhance and add to amenities inside the units and out, such as upgraded appliances, faucets and fixtures, or laundry facilities, or vending machines. Any combination of these improvements can increase the gross income your property brings in each month.
Your financing can play a huge role in how much you come out of pocket for, and how much you take home from, your commercial real estate. Portland local, regional, and national banks typically require you to put 20%-25% of the purchase price of the property as down payment.
You don’t have to take that out of your own pocket. You can partner with others who do have the cash for the down payment. You can have the seller “carry the note” or provide seller financing with better terms and less rigid qualification than the bank. Or you can form a limited partnership or LLC to take on multiple partners.
The bottom line is that there are practically limitless strategies to acquire and profit from multi-family properties. If you’re an investor in commercial real estate, Portland provides you a rich array of opportunities to build your empire, income, and lifestyle as quickly as you can take action.
Commercial Real Estate Portland
How to Invest in Real Estate Portland
Portland, OR 97225