Many people confuse commercial real estate with residential real estate but, these two have major differences. Commercial real estate deals with the buying and selling of properties meant for business purposes. These properties may be office buildings, retail properties, medical buildings, manufacturing facilities, apartment complexes, warehouses, etc.
Residential real estate deals with the buying and selling of private homes such as townhouses, condos, mansions, and even castles. What is so interesting about the commercial real estate sector? Read on to find out.
There is Less Risk in Commercial Real Estate
If you choose to invest in commercial real estate, you’ll be going for a less risky option as compared to residential real estate. For instance, if you choose to invest in a residential single-family home worth $300,000 and it goes vacant, you’ll be in the hook for the whole mortgage.
Mortgage payments and maintenance tasks are now your out of pocket responsibilities. You’ll be looking at heavy negative cash flow. But if you take the $300,000 and invest in commercial real estate with several units, even if one unit goes vacant you’ll still bring in money from the other units. You’ll be getting slightly less positive cash flow but not a negative cash flow.
In the real estate sector, you’ll see that most people focus a lot on residential properties. For example, you will come across signs indicating that there are people looking to buy houses.
But, you will never come across people who have put signs indicating that they want to buy warehouses, office buildings, or retail properties. Therefore, there is more competition in the residential than in the commercial sector. You can take advantage of this less competition and earn bigger profits. If you’re not sure about it, you can always talk to commercial real estate professionals and they’ll advise you accordingly.
In Commercial Real Estate, You Can Increase Value at Will
In this sector, there is something known as “forced” appreciation. This term means making improvements that will increase your income and minimize expenses. Remember that the more income your property brings in, the more it’s worth. But in residential real estate, properties are valued based on other similar properties in the area.
If a 3 bedroom house in your area goes for $150,000, then yours will most likely be valued at the same price. The income a residential property brings and any additional features don’t matter that much when it comes to its value. It all comes down to “market comps.”
These are some of the interesting facts about commercial real estate. Before you invest in this sector, take your time to research and figure out of you have what it takes to be successful.