Malte Mueller/Getty ImagesSummary List Placement
The real estate market is red-hot at the moment.
Housing prices are at an all-time high as the Federal Reserve keeps interest rates near zero and hedge funds buy up swaths of homes, paying top-dollar. The trend has put first-time homebuyers — as well as real-estate investors — in a difficult spot, as deals get more difficult to find.
This is why Feras Moussa thinks investing in commercial real estate is the best course of action these days. Moussa, the founder of Disrupt Equity, a real-estate investment firm, focuses on commercial properties himself.
Prices of commercial properties just recently recovered to pre-pandemic levels, according to investment advising firm Green Street. They trail the growth of home prices, which are up 16% since last August alone, according to Redfin.
But Moussa said there was another reason why better returns can be found in commercial real estate: more opportunity for forced appreciation. Forced appreciation is the work an investor can put into the property to improve it and make it more valuable.
He used an example of adding covered parking to a large apartment building, which is considered a commercial property.
"Let's say we install covered parking and we charge $50 a month," Moussa told Insider. "$50x12 — so one tenant, they're paying about $600 a year for covered parking. Let's say it's a 5-cap market. So by doing something like that I've actually added $12,000 in value to my property."
He added: "You can't do that in houses whenever you buy your own property."
The term "5-cap market" refers to the capitalization rate. The capitalization rate is the amount of time it takes to earn money back on an investment. Properties sell for different capitalization rates in different markets. In a 5-cap market, properties would typically sell for a price that would equate to five years of income generation to make back the investment.
So, as Moussa said, one such parking spot generating $600 a year adds $12,000 of value to the property.
Moussa recently forced appreciation with a 200-plus unit apartment building in Georgia, though it wasn't by adding income-generating features to the property. Moussa's firm bought the property in 2019 for $14.2 million and sold it this year for $26.3 million, according to copies of a title document and purchase and sale agreement viewed by Insider.
To add value to the property, Moussa said he and his team built a playground outside of the building to make it more appealing for families, and they upgraded the interiors of the units.
Disrupt EquityThe easiest way to break into commercial real estate investing
Moussa may be biased because this is his line of work, but he said the easiest way to invest in commercial real estate is by way of syndication.
Syndication is when an investor gives their money to an expert, who then finds deals and shares eventual profits with investors. So, investors are promised a certain return on their investment — say, for example, 7% — but also take a cut of any profits. In Disrupt Equity's case, they give investors 70% of profits and keep 30%.
Syndication takes the leg work and need for expertise out of the equation for a new investor, Moussa said.
"Presumably you have someone that is an expert to help avoid the mistakes that people make, and you learn a whole lot syndicating and participating in a deal," Moussa said.
"For an investor, you're not having to go through the headache of trying to find a deal like we are," he continued. "So that's where, in a hot market, an operator that's dedicated, full-time every day — literally I spend hours everyday on the phone with brokers — I can source a deal more likely than someone looking for a house."
Moussa said typically, larger investors work with Disrupt Equity, investing large sums, like $25,000 or $50,000. But there are firms offering opportunities for syndication at all price points. Investors can also pool their money to make a larger sum.
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