For those who wish to increase their incomes, property investing is a great opportunity. However, residential and commercial property investing are very different. If you’re interested in diversifying your portfolio, here are some commercial real estate investing basics you should know:
- Commercial real estate is valued differently than residential. The square footage of a commercial building directly correlates to the amount of income it produces. Evaluating the price of a commercial lease is dependent on both usable and rentable spaces. Usable space includes the tenants’ office space, storage, private restrooms, etc. In other words, any space a business occupies and uses for business. Rentable space includes hallways, stairways, lobbies, or other shared spaces within the building. Tenants all use these spaces, and oftentimes pay a pro-rata share depending on how much space they lease within the building.
- A single-family home has a higher risk of income loss, because if they decide to leave and you don’t have another tenant lined up, you will lose the entire income of the property. Whereas, commercial properties that hold multiple tenants have a much lower risk of income loss. If one of ten tenants leaves the property, then your income has only decreased by 10%.
- Commercial property investing generates more cash flow than residential. As said previously, the amount of profit yielded often relates directly to the amount of square footage. If you have multiple tenants, there is much more space for businesses, and more
- Commercial real estate leases are generally longer than renting out apartments or homes to families. This way, you have a more stable cash flow. Instead of finding new tenants every year to replace the old ones, you can almost guarantee that a business will remain in your space for at least a couple years to make the most of their space.
- You’ll need to find a bank that works with commercial real estate, because commercial property is valued at a different rate. Hard money loans for real estate investors require a larger down payment than those for residential real estate, averaging at about 30%, to better secure the loan you’re asking for.
There are many beneficial reasons to invest in commercial real estate, but without knowing these things, you may be left in the dark and unable to generate as much income as you once thought. Be sure to talk with a financial planner and bank lender to ensure that this investment will work for you.