As investments, residential and commercial properties have a few things in common, but that’s where the similarities stop. Many residential investors long for the day they become a big enough “player” to step up into the commercial game. We don’t blame anyone for having big dreams, just keep in mind that this is a vastly different endeavor, with an increased risk for gain and loss.
The truth is you have to think differently when approaching a commercial property deal. You’re no longer the boy or girl next door who scraped up enough cash to buy a residential property and rent it out. To be successful in commercial investing, you’ve got to think like an insider. A player, if you will.
Jason Hartman reminds you that commercial properties are different in three basic ways.
1. Valuing commercial property is different from residential: The income you can expect to receive as a commercial property landlord is directly related to the usable square footage in the building.
2. Bigger cash flow: One of the reasons investors become interested in commercial property is the larger cash flow. It’s the same idea as with residential properties. Multi-family units bring in more than single-family. Imagine that same concept applied to a mall with a hundred stores or a high-rise office building.
3. Longer leases: Where residential investors are used to working with tenants who sign a one year lease, commercial tenants expect to be able to lock down 5, 10, or maybe even 25 years of use. It makes sense. If you’re the owner of a major grocery store chain and preparing to invest millions in starting your business, you don’t want to have to worry about a fickle landlord tossing you out in the second year.
Lastly, commercial investors should be prepared to come up with a 30 percent down payment in order to secure a loan. On properties easily valued in the millions, this can turn out to be substantial chunk of change.
Just remember, you’re playing with the big boys now. (Image: Flickr | Vatsek)