The Residential market is cyclical. It goes up and goes down and right now is the best time to buy investment housing due to the low prices and high inventory. The only problem is that residential lending is not what it used to be making it difficult to buy multiple homes. FNMA has increased the amount of homes one individual can own to 10, but after that your options become severely limited. Commercial lending on the other hand is still readily available. Regardless of where you live across the Nation, when the residential market is at its all time low Commercial is red hot.
The mortgage meltdown affects certain aspects of commercial real estate but not all… some properties are recession proof! So what types of Commercial properties are recession proof and why?
Apartments:
It’s natural to gravitate towards multi family Apartments when you first start out in commercial real estate. It’s a concept everyone understands “houses in a box.” When people loose their homes they need a place to live, the next place they go to is apartments.
Self Storage:
So what’s better than apartments with all that income from those tenants in one place? Self Storage, think about it it’s like having an apartment without the people, no toilets, no trash and no tenants to occupy the space just their stuff. When people loose their homes they transition into apartments and if you’ve ever lived in an apartment you know the closet space is limited and the storage space is even less.
Assisted Living facilities:
The next recession proof property type is Assisted Living facilities. It’s nothing more than giving assistance for people in need and most common the elderly. We all know the baby boomers are right upon us and the demand for assisted living is and always will be here.
Senior Living Facilities:
Are a lot like assisted living but much easier to manage. When people get older they either end up in assisted living as we just covered or they look to have a relaxed lifestyle and choose to occupy space in a senior living facility. This is a fifty five plus senior living facility with active seniors who want the done for you lifestyle.
Mobile Home Parks:
While not as sexy as the other types of property types (most people envision mobile home parks to be in bad areas with management stealing from you), people who loose their home in a recession and they cannot afford to move into an apartment will occupy a mobile home in a mobile home park. It costs much less than a home or apartment and because of that reason alone, it’s classified as a recession proof commercial property.
Why is Commercial Real Estate the all time wealth builder?
The reason is simple… cash flowing properties. There are four reasons to keep cash flowing properties and each one has its own separate benefit.
1. Cash Flow
2. Appreciation
3. Depreciation
4. Cash Out
Most investors purchase commercial properties for one main reason other than Cash Flow and its Appreciation. Unlike residential property, commercial property goes up in value much quicker and when the rents increase, the NOI (net operating income) goes up, when the NOI goes up, the value goes through the roof. Next, good old “Uncle Sam” will allow you to right off a portion of the property each year. This is a right off for wear and tear known as Depreciation. Cash out is a huge wealth builder. When you fill vacancies on a commercial property and keep it at market occupancy for just 180 days, this is called seasoning. Once you meet lender requirements for season, then you can do a Cash Out refinance using your new NOI.
Here’s the wealth explosion; you can pocket the equity in the property and not pay taxes on that money until you sell! That is unless you use a 1031 tax deferred exchange and roll it into another asset without having to pay capital gains ever ;-)
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