Real estate is starting to look attractive again for the first time in a long while. As a result, prices are rising (albeit slowly), and we’re seeing a few deals that get headlines almost every day.
Suppose you’re thinking about your next move into the real estate market or even planning on selling your current place. In that case, it’s crucial that you understand the difference between buying commercial and residential real estate.
Commercial vs. Residential Properties
First off, the fundamental difference between buying residential and commercial real estate is what you’re buying. When it comes to residential, you’re buying someone’s home — their shelter and escape from the challenges of daily life. For those who choose to buy commercial, the properties are primarily empty spaces that need to be filled with tenants.
Now that we’ve gotten the fundamentals out of the way, let’s look at some of the unique ways both property types differ when purchasing them.
1. Location
When buying commercial real estate, you’ll need to pay a premium for the location that you want. For example, if you’re looking for a warehouse or industrial space, you might find it easier to buy in an urban rather than a rural town.
Finding the perfect space is not always possible, but there are plenty of options to choose from. For example, large cities like New York and San Francisco have more properties than smaller towns do.
2. Upfront Investment Cost
Commercial real estate is typically more expensive than residential properties because of the upfront investment required to purchase them. Unlike residential buildings, purchasing commercial real estate is a more direct form of business, so there’s always the question of how well—and quickly—you can return a profit on your estate.
You’re likely to do much better focusing on more highbrow areas, especially if you target high-potential options like the lucrative commercial real estate for sale in Staten Island, NY, presently, or the highly sought-after real estate in the heart of downtown Seattle, Washington.
However, you should still plan for possible long waiting periods before you see any return on your investment because it takes time for people to see what your space offers them or how much they could afford to pay for it.
3. Building Type
Commercial real estate can be classified into office, retail, and industrial. These types are defined by the type of activity that takes place in the building. For example, office buildings typically contain business spaces, while retail and industrial buildings, like warehouses, tend to be much larger.
You’ll also notice they tend to have more parking spaces and additional amenities that might not be available in suburban estates.
4. Size
While you can find many commercial and residential real estate of any size, there are some key differences between the two types of property. For instance, you may find smaller apartment buildings with one or two bedrooms on the market, whereas larger houses and townhouses might be available for rent.
Although bigger commercial buildings will often be more expensive, they can cost relatively more when smaller too. For example, while an older house built in the 1920s might only cost $20K per square foot, a modern condo building built in 2016 could cost more than $100K per square foot.
5. Ownership Type
Another common difference between buying residential and commercial real estate is that residential property can often be bought outright (or with no money down). In contrast, commercial property generally requires at least some cash down.
Although there are exceptions, most people who buy commercial real estate will use a loan from their lender to make the purchase. When buying residential property, this doesn’t always work out that way — often, it requires no money down and simply requires payment over time (typically with a 20-year mortgage). If you’re going the commercial route, partnering with reputable real estate brokers is something to consider before diving in.
6. Rent or Sale
When you buy residential real estate, you typically pay monthly rent for the privilege of living in your home. This payment is usually a fixed amount per month, regardless of whether you own the property outright or your landlord owns it.
When you buy commercial real estate, however, you can also choose to sell your business and purchase a new one at the end of each year. If that’s not your intention, then the deal will be structured as a lease agreement instead.
7. Taxes and Insurance
The other question that comes up when comparing commercial properties is whether they come with taxes and insurance included in their price. In the case of residential properties, these items are often not part of the price; however, in the case of commercial property, they often are included in the price.
8. Tenants and Leases
If you’re buying a residential property, it’s unlikely that you’ll have to deal with tenants and leases. However, if you’re buying a commercial property, you will most likely have to deal with tenants and leases.
Commercial leases can also last for years and sometimes even decades, but residential leases are generally shorter in duration. Traditionally, residential lease terms were one year or less, while commercial leases are usually longer.
9. Property Management
Property management can also be very different when buying residential vs. commercial. For instance, if you buy a home for yourself and your family, you probably won’t worry about managing your own property or paying for it.
On the other hand, if someone else wants to buy your commercial building and manage it for their business needs, this can be an issue because of liability issues and other legalities that accompany owning rental properties.
10. Lenders
Commercial properties often require more financing than residential properties, so lenders will want to see that you have a track record of being able to pay back loans. If you’re buying commercial real estate, your lender will likely be a bank or an entity that offers the financing.
There are also a few lenders that specialize in commercial property loans. Your lender will have various options for financing your purchase, including traditional mortgages and extended payment plans.
Conclusion
To sum up, you should treat commercial real estate as a business. Keep your investment in mind, always try to turn a profit when selling, and research the local trends or the industry at large before placing your bets.
