What is Commercial Real Estate?
If you are looking to buy or sell property that will be used to produce income, you’re probably dealing with commercial real estate. Surprised? You’re not alone. Commercial real estate has its own language and acronyms to learn and sometimes definitions are not as simple as they seem. It may appear that buying or developing, say, an elderly housing community or an apartment building is not “commercial” because of the way most people interpret the word. We hear "commercial" and think it represents only big business and industry. You hear commercial and you may picture a warehouse. But it really encompasses so much more.
As a general rule of thumb, if your lender requires a commercial real estate mortgage for the property you are considering, then the property is considered commercial. A multi-family (residential apartment) building that contains 1-4 units is considered a residential property and would require a residential mortgage. However, the same building with five separate residential units or more would require a commercial mortgage, and is therefore characterized as a commercial property.
In a nutshell, this is a vast real estate category that covers just about everything except buying or selling your personal residential home. It includes:
- Office buildings
- Retail properties
- Shopping centers
- Warehouses and manufacturing facilities
- Apartment complexes
- Mixed use - for example; a downtown property with store fronts located on the first floor and residential units above
- And land that is vacant and has potential to be developed into commercial use
Does Commercial Real Estate Really Differ from Residential Real Estate?
You may have already bought and sold a home, so you understand how a real estate transaction typically progresses. However, commercial properties are different in several ways when it comes to buying and selling them. Different rules may apply.
- Your loan, for example, will probably not be simply based on your income and credit worthiness, but also on the income expected to be generated from the property.
- Often there are different tax rules for your commercial real estate
- Commercial property may be under different repayment obligations if you were ever to file bankruptcy
- Due diligence/inspection period
Why You Need a Commercial Real Estate Agent and Advisor
Investing in commercial real estate is just that – an investment! Since it differs from residential properties in rules, regulations, and lending criteria to qualify, it pays to be advised by someone who knows these transactions well – including all the unique little challenges that may occur.
Your investment strategy for commercial real estate can be simple.
- You determine there’s a demand for a specific commercial property in a given area.
- You seek professional comprehensive services from an experienced commercial real estate Advisor to locate the best possible properties for consideration.
- You narrow down your choices to the one that makes the most sense in terms of generating a return on investment (ROI)
- You negotiate on price, with the help of your experienced real estate Advisor, to achieve the lowest possible price.
- You close, investing in the property to make money by leasing it and charging tenants rent and/or by appreciation in the value of the property over time. Essentially you will make money when it’s time to sell.
Treat a commercial real estate investment like it’s one of the biggest investment you will ever make – it probably is! Seek the advice and guidance of an experienced commercial real estate Advisor, one who specializes in the unique demands and needs of this type of investment.
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