Commercial real estate is classified as property assets primarily used for business purposes. It is frequently referred to as investment or income property. The main product types that comprise commercial real estate are office, industrial and retail properties. The businesses that occupy commercial real estate usually lease the space. An investor usually owns the building and collects rent from each business that operates in the premises.
Residential real estate on the other hand, is property used for living purposes. Examples of residential real estate include undeveloped land, houses, condominiums and town homes. The fundamental difference between commercial and residential real estate is the fact that all commercial properties are potentially income producing while most residential properties are occupied by their owners.
A benefit of investing in commercial property is that it is usually characterised by longer leasing covenants than residential property; this could be 3, 5 or even 10 year leases usually with annual increases and the added benefit of the tenant meeting other cost like land tax , repair and maintenance costs. Residential real estate tenancy periods are usually shorter and there can be a turn over every six to 12 months or even shorter. Under residential properties, the landlords are liable for paying rates, such as council, water and body corporate.
While commercial real estate offers potential for high capital growth, the high return from commercial property investment is not without risks. Historically, commercial property has been far less predictable than residential property markets, with the potential for longer vacancy periods and poor resale for some specialised assets, influenced significantly by economic factors such as unemployment and consumer confidence. Commercial properties are sensitive to economic conditions; when the economy is strong, businesses flourish and demand for commercial properties generally rises. But when there’s an economic downturn, demand for commercial premises usually falls.
Commercial real estate investment, typically involves much higher start-up costs than residential real estate investment because developing commercial properties costs much higher in initial investments costs especially for services equipment’s. An investor will usually need help in financing commercial property development; this could be from loans, mortgage or venture capitalists. Investment in the commercial market can sometimes be difficult due to stricter lending conditions, which may require buyers to have a minimum 30 to 50% deposit. Banks can be difficult when giving commercial property loans given the high amount of risks associated with commercial properties. However, commercial properties, if developed and managed or sold smartly, can generate significant revenue or sale profits.
Irrespective of the real estate investment you chose to undertake, what you should remember is that whether commercial or residential property, location is key. The type of property you develop should be strategically located, paying particular attention to zoning restrictions that govern the site’s potential highest and best use. Furthermore, consider the development potential of both the site and the building in instances where the current use ceases to be viable.