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Residential vs Commercial Property

Residential properties refer to buildings where we live in. They can be single-family homes, multi-family apartments, townhouses, condominiums, manufactured homes, and/or co-ops.

Commercial properties refer to buildings or land intended for commercial usage to generate a profit, either from capital gain or rental income. This includes office buildings, industrial property, medical centers, hotels, malls, retail stores, shopping centers, farm land, warehouses, and industrial properties. Commercial properties are commonly broken up into three categories: Retail, Office, and Industrial.

Many people start out investing in residential property simply because they're more accustomed to buying homes, but commercial real estate can be a great way to balance your portfolio. You just need to get educated on the different rules and terms in the commercial market

Purchasing a property to enjoy rental income can prove to be one of the most important assets of an investor's portfolio, but what kind of property is best for you? Most investors will tell you commercial properties are the best real estate to invest in because of their unique advantages.

Following are the differences between commercial and residential property investments.

  • Commercial property is valued differently. The income that a piece of commercial property produces is directly related to its usable square footage. This isn't always the case with residential property.
  • Commercial property helps diversify risk. For example, if you own a 5 storey shop lot and you lose one of your 5 tenants, you only lose about 20% 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 property. The yield is often higher per square foot 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 property 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 banks do), and it'll want a higher down payment than for residential property--usually 20 percent or more.

Making the right choice in choosing your type of property investment:

¡¡è         Commercial real estate is easy to find. However, making the right choice needs careful research if your investment is to yield good returns.

¡¡è         Look carefully at the location and demographics of the area. For instance, the importance and strategic nature of highways has been found to have had a huge impact on the value of industrial land across the country over the past few years.

¡¡è         Location is a factor that can vary over time. Improved transport links can boost the value of property by making it more accessible to potential tenants and users. Not all improvements, however, are necessarily beneficial. For example, a new shopping centre may enhance an area, but value of high end residential properties nearby may experience a dip in value due to the possible pollution caused by it.

¡¡è         It is essential for the investor to keep a constant eye on any changes that might affect a location's attractions.

¡¡è         Consider carefully the vacancy risk: How long are the lease terms for the current tenants, and is it possible that some tenants will not exercise their option to extend the term of the lease when it comes up for renewal? Initially the return on investment might be very good, but if the leases expire shortly after your purchase and the tenants don¡¯t exercise their offered renewal option, then the equation could change dramatically, meaning that you could experience an extended vacancy period before a new tenant is found.

¡¡è         Leverage is important: Buying a building which only allow one tenant may be riskier than buying a shopping centre which can house many tenants. For instance, a single tenant such as a government department or large national corporation is likely to have invested in both the location and the corporate signature, and therefore will offer more stability.

¡¡è         Investor should still be mindful that when single tenant vacates, the investor has 100 per cent vacancy and therefore get no income from their investment property, whereas if the property is a multi-tenanted property, the impact on cash flow would be reduced.

¡¡è         The financial strength of the tenant is a key factor in considering investment in a particular property. Upward-only rent reviews are of no use if the tenant defaults. The tenant's ability to pay the rent should be taken into account when acquiring, valuing and letting a property.

Do your investment homework.
Investing in properties is not just a matter of making purchases, sit back and collect rents until the lease expires. With any investment, commercial properties requires due diligence so that you will continually maximize on its investment potential.

It is vital to obtain advice and seek the help of industry experts, such as commercial agents and read up books on commercial property investments or attend seminars or workshops to guide you through the process. This investment could go a long way to help reduce risks on your investments and would certainly be beneficial in the long run.

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. However, attending seminars and workshops are simply not enough to be able to achieve guaranteed success. They are merely pointers in a particular direction to aid you in making the right choices in your investment. It does take time and experience to build your knowledge and expertise in real estate investment.  

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