Commercial Real Estate: What’s Different?
Investing in real estate can be a beneficial source of income, especially if you do it right. But if you’re looking into this avenue, you may be struggling to decide on what type of property to invest in. Which real estate property is right for you? Is there a difference?
Residential vs. Commercial
Residential real estate encompasses all single family dwellings as well as one to four-unit rental residences. For example, condos, duplexes, and quadruplexes are considered residential properties. Residential properties are typically occupied by families or individuals.
A commercial property is any property with five or more units. This includes hotels, retail spaces, office suites, industrial properties, and special purpose buildings. Commercial properties are typically leased by businesses or corporations.
Income Potential & Associated Costs
The income potential and return is far more appealing with a commercial property than with a residential property. According to the National Council of Real Estate Investment Fiduciaries (CFREIF) Property Index, the annual average return on a commercial investment property is around 12.7 percent.
Commercial properties upfront are more expensive than those of their residential counterparts. The average person likely doesn’t have enough saved up for the necessary sizable down payment it may require.
Commercial loan rates are higher than residential loans because they’re considered riskier investments. Because of this, it may not be the right fit for some investors. Additionally, commercial loans have a shorter term than most residential properties (typically five to 20 years, as opposed to a 30-year residential loan).
Qualifying for a commercial loan can have some tight restrictions. These loans usually require that an investor has a business plan and firm credit score (in addition to some other criteria.) Restrictions are tighter on commercial loans because these lenders want to ensure that maintenance and utilities will be paid, and that they will be profitable and have a good source of cash flow generated.
Disadvantages of Commercial Properties
While there is the added benefit to make more money with a commercial real estate investment, it should be noted that there are several variables that could directly affect your income potential such as:
- Tighter zoning restrictions– making it harder to secure building permits and other necessary permits.
- With the growing attraction of online marketplaces, investors may find it more difficult to attract the right tenants in some markets.
- In times of economic distress, commercial real estate is affected more severely than residential properties, making it harder to attract long term, reliable, and stable tenants.
In contrast to residential real estate, commercial real estate is directly impacted by how much revenue it generates. In a nutshell, the property is considered more valuable based on its cash flow. For investors, this means getting the right businesses or companies to lease your space.
Leasing is another major difference in residential and commercial properties. Generally, residential leases can range from six to 12 months. However when it comes to commercial property, it can range between five and 10 years. This leasing option can be both a benefit and a disadvantage at the same time (depending on the type of tenants occupying your property).
Choosing the Right Type of Property
Purchasing real estate is a great way to invest your money and make a solid source of income.
Determining what type of property you want to invest in is all dependent on you and your comfort zone. By closely examining the advantages and disadvantages of commercial real estate, you can move forward with your investment. No matter what you choose to do, let Northern Title help you with your closing work. We’ve been in the business for over thirty years and can help ensure you have a smooth process. Contact us today at one of our offices nearest you.