Today we’re going to do a very basic analysis around the question: should you buy your own place, or should you invest in a commercial property? I’ll also going to update you on what I have been up to for the last couple of months, and how are my projects going.
Should you buy your own home, or rent and put the down payment in an investment property?
A friend of mine was asking me if she should buy her own house, or if she should invest in commercial properties and how much money should she save as a down payment. First, let’s start with the disclaimers: I am not providing any financial advice, this is my personal opinion based on the things that I have learned, you should always do your own homework and ask a professional for advice. Here’s my personal opinion on the question around buying a home to live in, or not buying it and putting that money towards an investment property.
I’ll be using numbers that I am living in today in this very extreme side of the world – San Francisco. But this can be applied to any property, in any city, I’m just going to use what I am familiar with as an example, and you guys can do your own calculations depending on where you live today.
Here we go: If I were to buy a one bedroom apartment in San Francisco, I would be paying around $1.2M and I would have to put 20% down, so I would be putting $240,000 as a down payment and my mortgage would be $960,000, the interest rate could be around 4% in today’s market, that’s $960,000 at 4%. My monthly payment would be $4,500 per month plus property taxes of $1,000 per month (1% of the property value in California), and we have another $1,000/month in HOA fees (Home Owners Association). My total payment would be $6,500 per month if I were to own my one bedroom condo. On the other hand, I can be a tenant and rent that one bedroom apartment in today’s market for $4,500 per month. That’s a $2,000 difference – $4,500 if I am renting from someone vs $6,500 if I am the owner of that apartment. On top of that, if I am the owner, I just put $240,000 as a down payment, so I’m not making any money on that $240,000.
Now, let’s say you’d take that $240,000 to invest in a commercial property, and we are going to round this up to make things very simple: let’s say that you are making a 10% return every single year on that $240,000, which is very acceptable for real estate investing. At $240,000 that you were putting as a down payment, you’re instead getting a basic return of 10% every single year. That’s $24,000 that you’re making every year, plus, as a renter, I am saving $2,000 from the $6,500 that I would be paying if I was a homeowner or a condo owner in this case. That’s another $24,000 that I am saving by being a renter every single year, and another 10% on my $240,000 which is another $24,000 that I’m making every year in my commercial real estate investment. That’s a total of $48,000 every single year, that’s almost half a million dollars over ten years.
Again, these are all very basic numbers. I am assuming that both properties will appreciate over time, we’re keeping this calculation very simple, just so you can wrap your head around owning versus renting, and renting plus investing your cash in a property. The difference in this example is $48,000 per year. You can invest $240,000 in a property, you can partner up with people, you can join someone who is raising money from multiple investors to buy a property and operate that property with a group of people. There are all kinds of ways that you can invest a smaller amount of money if you cannot purchase an entire property by yourself. I hope this gives you some clarity on should you rent and invest that money in a commercial property versus should you buy and tie up your money on your own residents and not make any money out of that $240,000 down payment.
How much should you save to buy a home, and to buy a commercial property?
If you are going to own your own house, you typically should put a 20% down payment, there are all kinds of loans that you can get to nowadays, you could probably only have a 10% down payment, and sometimes even less depending on the type of loan that you find. For commercial properties you can do a couple of things: you can join someone who has found a property and is looking for money from investors, and typically the minimum amount to invest is around $25,000, in this case you would just buy a percentage of that property, which is great because you don’t have to do anything besides giving them your money, and you will be getting quarterly checks in your bank account (of course, only if the property is making money). When the deal is completely done, normally around three to five years down the road, and the operator exits the property, you also get a check for a percentage of how much the property made and increased in value.
You can also invest all by yourself, or with family and friends, and ideally you would want to have around 30% down payment for a commercial property. This number can also change depending on the property income and the type of loan that you get. This is a very standard number: 20% down for your own home, 30% down for a commercial investment, or you can join a syndication where you are investing with quite a few people and you buy a small part of that property.
Update on where I am in my real estate journey
I have been very interested in self storage recently. Why self storage? Because I personally think, along with many other people, that something is about to pop in the economy. Self storage is a somewhat “recession resistant” asset class. Asset class is the type of investment, if you invest in retail properties, the asset class that you invest in is retail, if you invest in apartments, the asset class that you invest in is multifamily. The self storage asset class is something that has been very interesting to me, and I reached out to an incredible woman who has been investing in self-storage for several years, I asked her “How can I work with you? You are awesome.” She said that I could just pay her! So I have been having calls with her every week, and we are looking at quite a few properties, I hope to be making an offer very soon on. I am looking in a few different markets because I have learned that the state of California is very difficult (to put it mildly), and we can manage properties in a different state very easily if you have the right team in place. Therefore, I have become very comfortable with that idea, and I’m looking at quite a few different cities that have good demographics: good employment, population growth, property value growth, etc. With her help, we are narrowing down to a few super interesting properties and I will keep you posted as it progresses.
Another project that I’m working on is my Landmark project. Some of you may be familiar with Landmark, which is very similar to Tony Robbins. It’s a self-improvement course that I prefer many times over Tony Robbins because when I took Tony Robbins’s Unleash the Power Within (UPW) seven years ago, it was wonderful. It was wonderful for two weeks and then I forgot everything after that. I took Landmark about a year ago. The first course is called the Landmark Forum, and thankfully they have little courses that you can take after, in order to build your muscle. You cannot go to a course and just expect to change forever over a weekend. You actually have to practice changing and you have to become a better person over time, in order to get used to that new self. I have been taking Landmark courses ever since I took the very first course, and the one that I am taking now, we actually create a project from scratch, so I decided to merge my real estate goals with something that I deeply care about: health and wellness.
My other project besides the Self Storage project is a retail center very similar to the Ferry Building in San Francisco, if you’re familiar with it. We are different in that we are going to have only healthy, organic, nontoxic tenants along with holistic tenants. Some examples are: an organic salad bar and organic smoothie place, a butcher that only sells grass fed meat, an organic coffee shop, and on the holistic side we’re going to have a meditation practitioner, Yoga teachers, chiropractors, homeopaths, etc. The goal is for the community to have everything that they want for their bodies and their minds in one place. I have no idea how this is going to come about but I’m working on it, it will happen. We are currently in the process of looking for the perfect property around Silicon Valley, and this will likely be somewhere in San Francisco, but we are open to expanding to different cities. Another reason why this came about is: a lot of people are scared of investing in retail, right? We have no idea where it’s going. By having a retail center where we can have these kinds of tenants in one place, we will attract the right customer for the tenants. The tenants will be more than happy to sign leases in this holistic center because they know that all of their neighbors are also serving the same customer. With my sales background, I always think “how can people come to me and want my product instead of me going to them?”. By having tenants that are only holistic and healthy, everyone in the community that is interested in this will be going to our building, and they are our tenant’s target customers.
We want to create an application process where we are going to be handpicking who is going to be joining this community as a tenant. The reason why we want to do that is because also we want to attract the best tenants. They will be the highest rated people so that our community will appreciate the quality of the products and services that they’re getting there, and they will also come back for more. The feedback has been great so far! “Oh my gosh, I would spend all day in a place like that”, “Please do this in my neighborhood”, “I want to live next to this place”. I have already spoken with quite a few smaller tenants. They sound very interested in joining this center. The only thing I haven’t done yet is spoken with national tenants because we have not narrowed down on the actual property and we want to have some tenants there first in order to come to the national tenants.
Why are national tenants important?
If you are doing a retail project, the reason they are important is because they give you security, they have good credit, therefore they will likely stay in business for a long time. This makes our building a whole lot safer to survive over time versus only having smaller mom and pop stores where they might be in business only for the last five years and something may happen that they might not make it. Some tenants that we could potentially approach are Sweetgreen, a popular salad place that has expanded to multiple cities, Bar Method, which also is available in several cities.
Another reason why should have national tenants is… let’s pick Jack in the Box, for example. If you have Jack in the Box paying you $100,000 per year in rent, your property will be worth $2.2 million at a 4.5% Cap rate. However, if you have a mom and pop shop paying the same amount ($100,000), the value of your property is going to be $1.5M instead of $2.2M because they don’t have the credit worthiness of that national tenant. If you do not have a national tenant, your cap rates will probably be around six and a half percent, which brings us to a property value of $1.5M, that’s a $700,000 difference by simply getting a national tenant in your property.
Those are the two main projects that I’m working on, I cannot wait to see them come to life. At this moment I have no idea how this will happen financially, but I know that it will happen. One of the things that you learn with Landmark, or at least with this specific course that I’m taking, is how to make bold requests, how to delegate, how to become a leader. I know that it will happen, I just don’t have all the answers right now. This reminds me of Jack Canfield talking in the movie The Secret. Jack Canfield is one of the authors and creators of Chicken Soup for the Soul. When he was being interviewed for The Secret movie, he was telling us “When you are going after your goals and your dreams, it’s like a car driving at night, you don’t need to see the entire road in order to know that you’re going to get there. You just need to see as much as your headlights can see. Everything else will come into place.” This is how I feel right now, I know it will happen, I know it will be an amazing project that we’re going to expand to multiple cities, and I cannot wait to share this with the community.
Reach out to me on Linkedin and ask me any questions or make specific requests. I will continue to keep you updated on my progress on these properties, and lessons learned.