Thursday, February 13, 2014

A Guide to Buying Commercial Property

We hear this often from investors: "What's the smarter move? Residential or commercial financial investment property?" It should come as no surprise that there isn't a one-word answer to this question. You'll reach your best option-- the one that maximizes your opportunities for success-- by working through a decision procedure that includes some "worldwide" issues, some regional and some that are entirely individual.


Let's start with some terminology. For the functions of our discussion, we'll specify as residential any home that acquires all or nearly all of its earnings from home units. Single-family homes, multi-families, apartment buildings, condo units, co-ops are all residential.

For commercial property, we'll utilize a common amateur's meaning: property that derives its income from non-residential sources, such as workplaces, retail area and industrial renters.

Why do I say that this is the amateur's definition? Since appraisers and lenders would think about big apartment buildings to be commercial financial investment home considering that they are bought and sold strictly for their ability to produce earnings and not as a potential personal home for the owner/investor. Nevertheless, it will suit our conversation much better to treat all apartment buildings as residential properties.

Worldwide Issues

What are the global concerns that should affect your choice to get residential or commercial home? The state of the U.S. economy definitely tops the list. If you think we are in or are on the brink of a recession, then it makes good sense to be careful pertaining to commercial property. You will have to rely on companies to occupy your commercial area, and if they're having a hard time to make it through or just deferring their plans to expand, then rental rates could soften and demand for area decrease. Changing a lost occupant-- specifically one lost all of a sudden because of a weak economy-- can take longer than it may in normal economic times. When the economy and employment are strong, of course, you are most likely to see the reverse. Service businesses require more space, retailers open more stores, and distributors need more warehouses.

An additional issue is the cost and accessibility of financing. Interest rates are constantly important to investors, but there is one scenario that may strike you as counter-intuitive. When home loans are easily offered and home loan rates drop, it's not unusual to see a boost in house vacancies, making apartment buildings less preferable as investments. The reason? Low home loan rates and simple credit frequently indicate that individuals can possess a house at a monthly expense that is the same-- or less, after taxes-- than leasing. So part of your prospective occupant pool could be lost to home ownership.

Regional Issues

In the real world, each of these worldwide problems has a "nevertheless" attached. You have to stay on top of your neighborhood market because that market may negate the national trend. For example, extremely limiting zoning policies can mean that commercial space is always in short supply in a certain place, recession regardless of. And the cost of single-family homes in your neighborhood might be so high that there will constantly be a strong need for rentals. Think internationally however act in your area.

Individual Issues

You might get a property and afterwards insulate yourself from it by turning over every facet of its operation to a management business. But if you've never ever operated a property yourself, how would you understand if the management firm is doing an acceptable job? Most investors start as hands-on managers and your possibilities of success will be greater if you choose a type of property that you're comfortable with.

So, at the individual level, will residential or commercial fit you much better?

Unless you were raised in the woods by wolves, there is a great possibility that you've invested most of your life in a residential dwelling unit: a single-family residence, a condo or a house. You have a first-hand understanding of the rights, obligations and suitable habits of a residential occupant. If you were an occupant, you most likely also know something about the roles and responsibilities of both renter and proprietor. It is for this reason that newbie financiers often favor buying a small residential structure. You might not know the fine points of leasing and land-lording, but you comprehend the basic guideline. This recognizes and comfortable territory.

Naturally, some amateur investors pertain to realty with a background in business and possibly as a commercial renter. If that description fits you, then becoming a commercial property owner might be a simple shift. You already have firsthand understanding of exactly how commercial lease deals come together, and what those involved usually anticipate of each other.