It is common for investors to start their portfolio with residential property. Commercial investment is not a natural consideration for the every day person because they are conditioned to buying homes. They grew up in the family home, have purchased their own family home, and it is simply a case of mental conditioning.
Commercial real estate can be a great way to balance your portfolio and is definitely worth consideration. The rules for commercial property and residential property are different, and it is a good idea to educate yourself on the differences so that you can make an informed decision on the future of your asset.
The following are the differences between commercial and residential real estate investments.
- Commercial real estate is valued differently. The income that a piece of commercial real estate produces is directly related to its usable floor space. This isn't always the case with residential.
- 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.
- Cash flow is often greater with commercial real estate. The yield is often higher per square metre and on an initial investment basis than it is in residential. 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.
- Commercial real estate leases are generally much longer. This helps with the stability of your cash flow.
- Commercial property is valued by the bank differently. You'll need to find a bank that works with commercial real estate (most major lenders do), and the lender will want a higher deposit than for residential property--usually 30 percent or more.
Doing Your Homework
As with any investment, the importance of understanding the market, the potential and the yield cannot be stressed enough. Find out what the vacancy rates were with the previous owners. Talk to storefront managers, employees of the current floor space, even customers of the business and find out what they like--and don't--about doing business there.
With the current tenant - Are they planning to renew their leases? What did they like about former management? Is business thriving? Are any residential properties being built in the area? Is the site properly zoned? Are there larger companies that will be direct competition to the tenant moving into the area? Is the population's median income atleast at the national average, and are people maintaining their income levels? How are the current store owners doing financially? Have they been behind on rent before? Be sure to ask to see the sellers' cash flow statements, too.
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. So, what are you waiting for? Call your Homburg Commercial Specialist today.