Many people start out investing in residential real estate simply because they’re more accustomed to buying homes, but commercial real estate can be a great way to balance your portfolio. There are different rules and terms in the commercial market that you should be familiar with before dipping your toes into buying commercial properties.
Here are some differences between commercial and residential real estate investments according to Dani Babb from Entrepreneur Press.
1. Commercial real estate is valued differently. The income that a piece of commercial real estate produces is directly related to its usable square footage. This isn’t always the case with residential.
2. Commercial property helps diversify risk. For example, if you own an apartment building and you lose one of your 10 tenants, you only lose one-tenth of the income for that property, instead of the entire rent as you would if you lost a tenant in a single-family house.
3. Cash flow is often greater with commercial real estate. If you lease or rent a multi-unit commercial property, you have more tenants to generate income than you do with a single-family dwelling.
4. Commercial real estate leases are generally muchlonger. This helps with the stability of your cash flow.
5. Commercial property is valued differently by the bank. You’ll need to find a bank that works with commercial real estate (most major lenders do), and it’ll want a higher down payment than for residential property.
If you are considering investing in commercial real estate make sure you do your homework. Find out what the vacancy rates were with the previous owners. Another suggestion would be to speak with storefront managers and find out what the like (or don’t like) about doing business in that area.
Once you take the time to understand the ins and outs of commercial real estate investing, it can be extremely rewarding both financially and personally!