Investing in real estate is one of many ways you can generate residual revenue or net income and fast-track your progress toward financial freedom. Whether you’re making your first real estate deal or looking to diversify your portfolio, you need to understand how commercial real estate investing differs from residential real estate investing. Below we outline some of the top differences.
Residential real estate covers fewer types of properties: single-family homes, condos, duplexes, quadruplexes, and vacation homes. On the other hand, commercial real estate covers a broader range of property types, from dwelling spaces such as multifamily (at least five) units and apartment buildings, and business-focused spaces such as retail areas, office or industrial buildings, shopping complexes, warehouses, raw land, and mixed-use buildings.
Types of clients
If you are investing in residential properties, most or all of your clients are either individuals looking to buy or rent a place to live in, or those looking for a second home either as a vacation place or an investment. Meanwhile, in commercial properties, you will be dealing with managers, business owners, and corporations. Because they have a name and image to protect, commercial tenants may put in more effort to maintain the property, make timely payments, and respect regulations.
Potential Income and Expenses
Compared to residential occupants, commercial tenants often have longer leases, from 1 year to more than 10 years. This provides commercial investors multiple and relatively more stable rental income. Should one tenant leave, rents from other lessees can still cover loan payments and other monthly expenses.
Another difference between residential and commercial real estate are the levels of responsibility of the landlord. In residential real estate, landlords are responsible for paying property taxes, insurance, and maintenance costs. In commercial real estate, investors may enter into different lease options with tenants. In single-net and double-net leases for instance, tenants are responsible for settling property taxes. In addition to covering real estate tax, triple-net leases make it the tenant’s duty to cover insurance and maintenance costs.
On the flip side, commercial real estate may cost more to manage and maintain. For more complex properties, you may need a property manager and staff to help run your business and quickly resolve issues during office hours. While you may be able to handle some tasks yourself, doing so entails opportunity costs. If you’re looking at commercial real estate investing as a secondary income source, then you need to outsource the administrative work so you can focus on your primary occupation.
When determining whether a residential real estate is a good investment, investors may take a sales comparison approach by checking the selling price of similar homes in the neighborhood. They can also look at the value of the building and the land, otherwise known as the cost approach.
Commercial real estate investors often use a third method, the income capitalization approach, to determine the property’s viability. Investors look at the property’s selling price, potential earnings, and operating expenses. To check potential earnings, you can ask the property seller for an income statement.
Commercial real estate investing typically require much higher initial investments and loan payments. While you can pay off residential properties for 30 years, commercial property loans need to be settled within a shorter time frame. These often also have balloon payments, wherein loan balances need to be paid after a number of years.
If you are interested in investing in commercial real estate but are hesitant to take on the financial risks and responsibility, explore the possibility of passively investing in commercial real estate companies. This allows you to partner with professional investors who know the market better than you do. Moreover, it lets you diversify your portfolio while requiring less time and energy investment, and limits your exposure to possible financial losses.
I grew up poor in a small town in New York, but I always had a burning desire inside of me to become wealthy and help get my family out of poverty. After years of working really hard and trying many different things, I discovered real estate investing and how to create passive income and real wealth. Today, my passive income is six figures a month giving me time freedom and financial freedom to enjoy life!
I’ve built a $100+ million dollar real estate portfolio with property in six states and now I want to show you how real estate investing can help make your financial dreams come true. I don’t have anything to sell, but if you are like I am and you hunger for financial freedom and more time, I can show you how to do that with real estate investing.