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Differences in commercial and residential real estate

On Behalf of | Oct 20, 2015 | Commercial Real Estate, HOA

Kansas residents who want to make the switch from investing in residential real estate to investing in commercial real estate should keep in mind that there are a number of differences between the two. Many real estate investors begin by investing in the residential side of the market, so making the switch can be done, but investors need to be mindful of a few key points.

One of the major differences is that investors should be knowledgeable about the industry connected to the real estate. In other words, they need to know about the restaurant or retail or hospitality industry if they intend to purchase a building intended for those purposes.

Unlike residential property, commercial property is valued based on predicted cash flow. Residential real estate investors also need to learn a different set of profit and loss formulas as well as understanding concepts such as cap rates and loan to value ratios.

Commercial investors should be patient with the market rather than rushing to buy property simply because they have the money and should hold on to some of their residential real estate. They should also look at the long-term future of the property they are considering.

Commercial real estate can be a complex area, and both experienced and inexperienced investors may wish to seek legal counsel. In addition to assisting with contracts, an attorney may be able to deal with aspects such as zoning and taxes. Investors may have complicated development plans for a property, and an attorney may also be able to assist with construction negotiations. For example, an investor may wish to renovate a long-vacant property for restaurant use. It may be necessary to get zoning permission and to deal with various contractors regarding the needed renovations.