I’m often asked by prospective investors and partners if we ever get involved in residential real estate deals. While I know many successful home builders, rehabbers, and residential landlords, my answer is always the same:
While I have been involved in successful residential deals in the past, these days our firm solely focuses on commercial for five simple reasons:
1. Cash Flow Underwriting – A commercial deal is always evaluated on a net operating income and cash flow basis. Homes are sold to a discerning and volatile supply and demand based market.
2. Less Competition – Larger deals mean less mom and pop investors.
3. Financing And Capital Placement – In commercial financing, the underlying deal is always looked at first, your personal financial statement second. Additionally non-recourse financing is more prevalent in the commercial space.
4. Government Regulation – The government wants to make sure unscrupulous investors don’t take advantage of John Q Public. This means regulation after regulation after regulation This may protect the public, but it’s a nightmare for investors.
5. Economies of Scale – Larger assets, bigger deals, greater potential for profit. Additionally due to the size of commercial transactions, many functions like property management can be outsourced economically.
At the end of the day, we are value add, value oriented investors. I prefer operating on valuations based off of income streams, not the color and drape palate of Suzy home-buyer and the overall market.