Commercial real estate (CRE) is different from residential real estate. When most people think of buying a home, they think of finding the right house in the right neighborhood and making an offer. With CRE, it’s not that simple. There are extra factors to consider, and the process can be complex.
CRE Is Typically Bought and Sold as an Investment
Most people think of real estate as residential while overlooking CRE. While both types of real estate can be bought and sold for a profit, they are quite different. For instance, while people who purchase residential real estate often intend to live in it, the purpose of investing in CRE is to generate income. This income can come from renting out the space to tenants or from the appreciation of the property’s value.
CRE is usually financed with commercial loans rather than traditional mortgages. These loans typically attract higher interest rates and require a larger down payment than residential loans. As a result, buying CRE is a more complicated and risky endeavor than purchasing a home. However, if done successfully, it can also be much more profitable.
The Focus Is on the Bottom Line, Maximizing Profit for the Company
A significant difference between residential and commercial real estate is the focus of the purchase. When buying a home, individuals are focused on finding a property that meets their personal needs and wants. They may be looking for a certain number of bedrooms or bathrooms or enjoy a home with a big backyard. They will be considering decor-related issues like bed frame dimensions, mattress dimensions, and buying a medium-firm mattress.
In contrast, when companies buy real estate, they are focused on finding a property that will help them maximize profits. This means that they are looking for a centrally-located property with a high traffic flow large enough to accommodate the needs of organizations.
Properties Are Often Leased to Tenants, Rather Than Occupied by the Company Itself
With CRE, the company will typically lease the space to tenants rather than occupy it directly. As a result, it’s essential to consider the local economy and the availability of potential lessees when evaluating a commercial property.
Commercial leases tend to be longer than residential ones, so you’ll need to factor in the potential for a long-term vacancy when considering your investment. But if you do your homework and choose wisely, buying commercial real estate can be an intelligent way to build your portfolio.
There Is a Lot of Paperwork and Legal Red Tape to Go Through When Making a CRE Purchase
There is significantly more paperwork and red tape in purchasing in the commercial realm. This is due primarily to businesses being subject to a greater degree of government regulation than individuals. Buyers sometimes need to jump through many hoops to finalize a CRE transaction. However, working with an experienced broker can help streamline the process and make it as smooth as possible.
Commercial Properties Tend to Cost More
Another key difference is that commercial properties tend to be much larger and more expensive than their residential counterparts. Therefore, buyers must have deep pockets to enter the CRE market. But for those who do, the rewards can be significant. Commercial real estate can provide an excellent income and appreciation over time.
Location, Location, Location! CRE Deals Are All About Finding the Right Property in the Right Market
The adage “location, location, location” is just as valid for corporate properties as residential ones. The difference is that in the world of CRE, the focus is on finding properties that will be profitable. That means being in the correct market and finding the right type of property to meet the needs of the business.
A company seeking to expand its operations may seek a warehouse in an industrial park. A company looking to open a retail store would want to be in a high-traffic area with good visibility. Regardless of the type of business, the goal is always to find a property to help the company succeed.
Do your homework to understand the local market before making any decisions. What types of businesses do well in the area? What is the vacancy rate? What is the average rent on similar properties? Researching these elements will give you a better idea of whether or not a particular location is right for your business.
Also, consider the type of property you need. As mentioned above, businesses have different needs regarding real estate. Make sure to choose a property that will suit the specific needs of your business.
Time to Consider CRE
CRE can be an excellent investment for those prepared to do their homework and navigate the process. While there are some critical differences between CRE and residential transactions, the rewards of CRE can be well worth it for those who are up for the challenge.
Ready to enter the CRE market? Read How to Navigate the Commercial Real Estate Buying Process.