The term ‘Commercial Real Estate’ refers to properties that are not residential. Any real estate can be considered as a commercial real estate, provided any one of the following criteria is met:
- It generates revenue
- It is rented out
- It is for investments
- It falls into any other category other than private residence
Understanding the fundamental nature of commercial real estate is vital since there are different rules that apply to residential versus commercial real estate. The tax rules may differ for a personal property and a commercial property, and in the event of bankruptcy, the latter ones may be treated differently. Similarly, qualifying for a personal mortgage may also be different as compared to qualifying for a commercial mortgage. This is because the approval of a personal mortgage would solely depend on your income, whereas, the approval of a commercial mortgage will more likely depend on the income generated by the property.
The Difference between Commercial and Residential Real Estate Investments ( Commercial v/s Residential )
Mentioned below are numerous distinguishing factors between commercial and residential real estate investment:
- Down Payment
Generally, commercial property investment is comparatively expensive as compared to residential property investment. However, given the benefits and the higher returns that you get from commercial property investment, the extra expenses may well be worth paying for!
Taxes charged on a property are based on its valuation. A commercial property may be valued higher than a residential property and thus, may generate higher amount of taxes. Nonetheless, yields from a commercial investment tend to be better than a residential investment. The main reasons behind the higher yields could be higher returns and fewer turnovers of the tenants.
- Lease Term
The lease term of a commercial property is usually higher than the least term of a residential property. Commercial property lease period is normally at least 3 years in length, whereas, the lease period of a residential building is mostly of 1 year in length.
- Diversifying Risk
A residential investment is less risky as compared to a commercial investment, as the latter can be affected by the changes in the economy. However, by diversifying risk and investing in different properties having different characteristics, any losses resulting due to the changes in the economy can be offset by the overall higher profits.
- Property Maintenance
Under a commercial property investment agreement, the tenant is responsible for all the maintenance and repair costs that may be required during the course of their tenancy.This can be offset by engaging in NNN leases. In a residential property investment agreement, the landlord will be responsible to pay for the repairs that may need to be carried out in the house
Types of Commercial Real Estate Investments
Within commercial real estate there are different property types that one can make an investment in. It is vital to have knowledge of the various benefits and drawbacks associated with the different types of commercial investment. Once you have a know-how of the different types of commercial investment, you can match one with your individual interest and goals.
Some of the major types of commercial real estate investments are mentioned below:
- Apartment Buildings
Apartment buildings are swiftly available and various banks or financial institutions are always keen to offer loans against such properties. Furthermore, apartment buildings can also be a good source of cash flow. Investments in these buildings act as a start for majority of the investors.
- Office Space and Warehouses
Along with this type of commercial real estate, triple net and long-term leases are also used. The key here, however, is to locate office buildings that are in desirable areas and have low vacancy rates.
- Retail Outlets
Similar to the office properties, the retail outlets are also leased out on the basis of triple net, long term leases. If you are an investor, the return you get will not decrease over time even if the expenses or taxes increase. In fact, your returns will go up if the rents increase over time.
- Nursing Homes
Nursing homes and other health care facilities can prove to be an excellent source of investment. This is because the demand for these services is ever-increasing and so, the financing for such properties is also readily available.
Investment in hotel or resorts can prove to be profitable only for those who have sufficient experience of investing in properties. For this reason, investment in hotels should not be undertaken by beginners. Usually, it is advised that these types of investments should be managed by a professional company only.
- Land Development
This type of investment can be both exciting and potentially profitable. Land development is when you take a piece of land that does not have any property built on it and then you improve it yourself. However, this requires sufficient experience as it can be risky.
Ways to Get Your Money Back
Investment in real estate, whether commercial or residential, generates income in the form of rental payments. Such payments are a regular return on your investments. These can be similar to both the income producing assets and the non-income producing assets.
- Income-producing assets are those that get regular paychecks or a regular return on the investment.
- Non-income producing assets are those that may not get regular pay checks, but still have the potential for an upside in the property value thereby helping you to make solid returns.
In order to capitalize on the profit or earnings from income-producing assets, it is vital to have a know-how of the ways in which the costs can be minimized while maximizing the revenue earned from such assets. At iFunding, our team has experience working on over $3B of transactions in numerous roles. We have a deep understanding of the needs of our clients and customers. Sign up today to get access to pre-vetted deals on our platform.