Although many people start their real estate investment journey with residential properties, investing in commercial real estate can really balance out your portfolio and pad your pockets. Mind you there is no overnight success in any investment, investing in commercial real estate can definitely bring your investment portfolio to the next level.
Although there are differences between investing in commercial real estate and residential, you are going to have to understand the different rules and terms, we aren’t talking apples-and-bananas here, it may be time to make the leap and pad that portfolio with a few commercial properties. The following are the differences between commercial and residential real estate investments.
Investing in Commercial Real Estate: It's Not Residential
Property Valued Differently
For commercial real estate, it’s all about square footage. Unlike a residential property, commercial real estate value is directly related to the usable square footage.
Valued by Bank Differently
First thing first, you need to find a bank that deals with commercial real estate investment. Although most major lenders do, you need to make sure yours does. These banks also are going to want a larger down payment than they would for a residential property, usually 30% or more.
Diversify Risk
When you have a residential property you can be up a river without a paddle if your tenant chooses to jump ship. If it’s a one-family residential property, you have one person to depend on to pay the bills and fill the spot, if that tenant leaves your entire rent is gone. With a commercial property there are inherently more tenants. To make this really simple let’s say you own a 10 tenant apartment building and you lose a tenant, you have lost 1/10 of your income. While you try and fill the recent vacancy you are still getting income from your other 9 tenants.
Greater Cash Flow
“The juice is worth the squeeze”
For commercial real estate there is often a greater income. The yield per square foot and on initial investment is often much higher than that of residential real estate. Whoever said, “More money, more problems” was not dealing with real estate.
Longer Lease Term
With residential real estate the average lease term is 12 months, just when you start getting comfortable with the relationship its almost time to start looking for another. For commercial real estate, especially when the business is a tenant, the lease term is much longer than a year. Longer lease terms help with the stability of your investment cash flow. Also, with longer lease terms there is less of a chance of multiple, simultaneous vacancies.
One of the strengths of S & D Realty is our ability to evaluate real estate in terms of highest and best use, feasibility and investment performance. For more information on investing in commercial real estate don’t hesitate to give us a call at 1-516-248-6905. We look forward to hearing from you!
