so, this is my very ver very first blog post ever ever ever

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I can hear the comments now?  With the real estate market tanking and interest rates starting to creap up, why would you want to own your commercial real estate where your business is located?  Vacancy rates are up and there are more than one experts predicting a possible bubble burst.  But, have you looked at the numbers?

There are a number of reasons you should own the commercial real estate where you are located.  First, you’re paying a monthly rent with an annual increase of at least 3% per year.  In most cases, your monthly mortgage payment would be approximately the same as your monthly rent payment.  Why not pay yourself instead of paying someone else and build an equity nest egg for retirement?  Secondly, does your rent contract have an automatic renewal, or does the landlord have the right to not renew it?  That leaves you in a position of having to find another commercial real estate building that is close to your current location.  Depending on your line of business, studies can predict how many customers or patient you lose by moving your business.  It can be from 2% to 20% depending on the distance you’ll be moving.

How about improvements to the building?  Does your current landlord have pride of ownership like you would if you own the building.  More than likely he doesn’t.  Most landlords who are not occupants of the building are owning simply as an investment and they don’t want to have to put any money in the building.  If you owned your own building, you would keep it clean and up to date.  That attracts customers.

You also get good tax deductions by owning your building.  You can write off closing costs, depreciate the building, write off the interest payments and also have your business pay rent to your entity that owns the building.  Your tax accountant will be very happy.

Finally, there are currently excellent loans available to commercial real estate investors.  With the right loan, you can have great tax deductions and pay yourself rent instead of putting money into someone else’s wallet.

June Statistics on the Kirkland housing market were recently published by the Northwest Multiple Listing Service. 

There were fewer new listings in June of 2009 over June of 2008.  There were 105 vs. 130.  This tells me that sellers are waiting for the market to recover over the next few years before they decide to sell.  However, the supply side effect really doesn’t come into play (meaning lower supply = higher prices), because of the downward push on prices from distressed and foreclosed real estate in Kirkland.  This still means it’s a good time to buy in Kirkland.

The average price of a house sold in Kirkland has gone down from June of 2008 to June of 2009 by approximately 7%.   The average home sold went from $1.172 million to $1.086 million.  Now, don’t panic.  This statistic is misleading.  It simply says houses SOLD in June of 2009 were valued 7% lower than houses sold in June of 2008.  Not that the average value of a Kirkland home is 7%.  The values of Kirkland homes have stayed pretty solid over the rest of the United States and Washington state overall.  The depreciation in values is somewhere between 3% and 4%.

If you are considering selling your Kirkland home, or relocating to Kirkland, you’ll be interested to know that the average days on market went up from 99 days in June of 2008 to 120 days in June of 2009.  Obviously the credit crunch getting financing is an obstacle that’s causing the number of buyers to go down.  This decreases the demand on houses, even though housing prices are down, thus causing houses to stay on the market a bit longer.   The average days on market for all of Washington state is somewhere around 150 days.  So, the Kirkland real estate market is in better shape than the rest of the market.

Remember when you were in college and you had $100 to make it through the rest of the quarter with 45 days still left?   Remember you would get creative in coming up with 10 recipes on how to cook Top Ramen that you would buy 10 packs for a $1.  (I just aged myself).  Top Ramen on toast.  Top Ramen with the hot water, Top Ramen without the hot water., etc.,  Well, the situation may be similar, if not worse, for some of your tenants in your commercial real estate buildings.  Many of them are on the brink of going out of business.  So when the going gets tough, you need to revert back to your college mode and get creative to help save your tenants.

Commercial Real Estate Tenants can be tough to come by these days.  With the vacancy rates down and businesses going under, it’s getting even uglier.  One thing you might consider is helping your tenants do a little financial analysis.  A quick look at their profit and loss statement may disclose that their rent is significantly hurting them.  What’s that?  It’s not your problem?  It may not be yet, but it will be when your tenant closes his doors and goes bankrupt.  In Kirkland, WA I have seen more and more vacant commercial real estate in the downtown area.

One solution is to look at your own rent roll and see if you can help some of your tenants while still staying cash flow positive on your commercial real estate.  If you can afford to reduce the rent, you may approach your tenant and propose a temporary rent reduction while the economy gets back to normal.  If they accept, you may have saved your tenants business.  Or, worse case, you collect a little more rent for a few more months and the business goes under anyways.  Either way, you can in good conscience say you did your part in helping them through this tough time.

If you have proper skills, you may also volunteer to help them analyze their business and/or promote their business.  If you have a large building with multiple tenants, you may be able to provide contact information or set up a co-op marketing strategy that will assist your tenants in drumming up new business.

Keeping tenants is one of your ultimate goals as a landlord of your commercial real estate.  The more you can do to help keep them in business, the more you are helping your commercial real estate stay occupied.

In today’s economy, does it make sense to invest in residential or commercial real estate?  Or, maybe keep out of the real estate market all together.  If you subscribe to many economic “experts” they believe that in some markets, we’ve hit the bottom and are starting to move back to a normalized market.   In the commercial real estate market, some experts are predicting the bubble has yet to burst.  They are predicting the commercial real estate market will start to have a downturn within the next 12 months.  So, based on “expert” opinion, what’s an investor to do?

The first thing you need to do is take a look at your market.  If you’re in Phoenix, any city in Florida, or Detroit, you may want to take your excess cash and put it in a coffee can and bury it in your back yard for a few years.  These markets have been hit the hardest and I wouldn’t expect a big turnaround anytime soon in either commercial or residential real estate.  That being said, of course you wouldn’t pass up on a nice, fully leased commercial property in a prime spot at 50% of its’ previous value with a $20,000 per month cash flow.  However, if you’re looking for appreciation, you may look elsewhere. 

Some markets, like Dallas, Austin and San Antonio, TX, Seattle, WA, etc., are all decent markets that have not had the 40% – 50% swings that the other markets have had.   I would consider them somewhat normalized.  Typical valuations and analysis used would apply in these markets.

If you are looking for an investment and trying to decide on a piece of commercial real estate, or a piece of residential real estate, here are a few things to consider.  Do you like managing tenants?  Are you okay with tenant turnover?  Are you looking for appreciation vs. cash flow?  What’s your risk tolerance?  What’s your tax situation?  What’s your exit strategy?

For commercial property, you may face longer periods of vacancy.  However, once you have a tenant, they are typically in place for 5 to 10 years.  A residential tenant is most likely to move every 2 to 3 years.  They are also more likely to cause damage and you’ll have to recarpet, paint, etc.,  You will get fewer complaints from neighbors on a commercial property vs. a residential investment.  Commercial property also have leases that are called “Triple Net”.  That is, the tenant pays for the property taxes, insurance and maintenance.  In residential, you pay these expenses yourself.   You will typically have better appreciation on a residential property.  There may be cases where a commercial property appreciates just as much as residential.  Commercial property typically has better cash flow.  Residential property can typically be sold within 60 to 90 days.  Commercial property can take between 12 to 24 months. 

So, the answer on residential vs. commercial depends on your sistuation.  If you enjoy appreciation vs. cash flow and have the time to manage properties, residential real estate may be the vehicle you’d like to choose.  If you are looking for cash flow and a better tax situation, then commercial property may be the route for you.  Either way and in any market, due diligence and sound analysis are fundamental for a winning investment.  Remember, you make money on the buy, not on the sell.

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