Hey there, 👋!

In this issue, we talk about:

• The Current Market: What do high interest rates mean right now?

• Commercial vs. Residential: Discover which type of investment fits your style.

• Beyond The Down Payment: Hidden Costs In Real Estate

What do high interest rates mean right now?

Interest rates are a key factor in the real estate market and they're on the move. Right now, we're seeing a rise in rates, which means borrowing costs are going up.

But what does that actually mean for you, the investor?

High interest rates increase the cost of borrowing money. If you're looking to finance a property with a mortgage, it means you'll be paying more in interest over the life of the loan.

This could potentially reduce your return on investment (ROI) and make some properties less financially viable.

For those looking to buy, higher interest rates might slow down the real estate market. Some buyers might decide to hold off on purchasing, hoping for rates to drop. This could potentially lead to less competition and more negotiating power for those who choose to stay in the game.

On the flip side, if you're in a position to rent out properties, high interest rates might actually be good news.

If mortgages are more expensive, more people might choose to rent rather than buy, increasing demand for rental properties and potentially allowing you to charge higher rents.

Commercial vs Residential

There are a lot of differences between commercial and residential real estate. Let’s dive in.

Residential Real Estate Investing: 

This is the sector of properties designed for living spaces. It includes various property types, such as single-family homes, townhomes, duplexes, and multi-family homes with up to four units.

Appreciation, along with rental income, is the primary money-making strategy here. The residential market is generally more familiar to most people and offers lower entry costs, making it a popular choice for individual investors.

Commercial Real Estate Investing: 

This segment comprises properties that are used for business activities. It encompasses office spaces, retail centers, warehouses, and multi-family properties with five or more units.

The primary income source for commercial properties is lease agreements with businesses.

The potential for higher returns and longer lease agreements makes commercial real estate an attractive option for some investors, despite its higher complexity and initial investment requirement.

Now, let's explore the main differences.

The size and complexity of operations set commercial and residential real estate apart.

Commercial properties generally involve larger investments, more complicated lease agreements, and require more management resources. Average retail lease might be for 5+ years. You’re also underwriting a tenant as a business – so you can look at their financials and sometimes propose a % of sales in addition to a lower rent payment.

One way is “tenant improvements”. For example – if you own an office or retail building and you have a vacant space, you may need to put some money into a “build out” custom to a tenant.

If a boutique coffee shop wants to come in and is requesting a buildout for 1500 square foot space at $50/square foot, you’re looking at a cash outlay of $75k.

Meanwhile, residential properties are simpler, more predictable, and more closely linked to the general housing market, making them a more comfortable starting point for many investors.

You have generally annual leases and renovations aren’t as expensive as commercial tenant improvements.

So, which path should you choose for your investment journey?

The answer lies in your financial goals, risk tolerance, and the level of expertise you possess. If you're just getting your feet wet in the real estate investment world, residential properties might be your best starting point.

Beyond The Down Payment: Hidden Costs In Real Estate

Real estate is a very capital intensive business. When you’re purchasing a property, there are other costs to consider.

Closing Costs: These are the fees and expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction. They can range from 2-5% of the purchase price and include costs such as loan origination fees, attorney fees, appraisal fees, and more.

Maintenance and Repairs: Whether it's a leaky faucet or a damaged roof, maintenance and repair costs are an inevitable part of owning real estate. While these costs can vary widely based on the age and condition of the property, a common rule of thumb is to set aside 1% of the property value each year for maintenance.

Property Taxes: Property taxes can be a significant cost of owning real estate, particularly in high-tax areas. These are typically paid annually or semi-annually and can fluctuate based on changes in assessed property value and tax rates.

Insurance: Homeowner's insurance is essential to protect your investment from unforeseen circumstances like fire, theft, or natural disasters. In certain areas, you may also need to consider additional policies such as flood or earthquake insurance.

HOA Fees: If your property is part of a homeowners association (HOA), you'll need to pay HOA fees. These fees cover the maintenance and improvement of shared spaces and can vary greatly based on the amenities offered and the location of the property.

Property Management Fees: If you decide to hire a property manager to handle the day-to-day operations of your investment property, you'll need to pay property management fees. These typically range from 8-12% of the monthly rental revenue.

I hope you’ve enjoyed this edition of the newsletter 🙂 

If you want any topic covered, just respond to this email. Thanks for reading, happy investing!

-Mo