When it comes to buying real estate, the process is split into two different spheres. The first centers on purchasing personal property and the other centers on purchasing commercial properties. Personal property refers to residential venues such as houses and condominiums. Commercial real estate deals with the properties that are businesses such as restaurants, apartment complexes, and any other viable professional entity. This different scope of these forms of real estate creates a number of differences in the buying of the property. The following are five of the most pronounced differences.
One major difference is the fact that when you buy a commercial property, the equity of the business is added into the real estate price. In other words, when you purchase a restaurant, in addition to the value of the ground and property, the restaurant itself factors into the sale. Of course, the responsibilities and costs of running a restaurant are added to the mix as well. As such, investing in commercial property comes with more complexities than investing in residential real estate.
This leads us to our next point. A commercial property comes with the ability to generate large amounts of cash flow. If you purchase an auto body shop, you will be earning the profits of the shop. Other than being able to rent out the property, personal property does not come will much cash flow potential. This is not necessarily a bad thing, but it is an accurate assessment and observation.
Of course, you do not have to operate a commercial property yourself. You could simply rent it out to a business proprietor. Actually, you could rent commercial property out as “office space” meaning virtually any type of business can be operated in the property. The same property could be used for both running a martial arts business or an accounting firm!
And one of the most significant differences is that the rent you charge can be based on the profits of the business such as rent plus 8% of the profits. Yes, you could even write such a rule into the rental agreement. So, if a business’ profits explode, you would be guaranteed 8% of the earnings. When a business becomes hot, that 8% could be enormous. Obviously, this 8% would not factor into a personal rental agreement.
It is also a little easier to deal with commercial property tenants than it is to deal with tenants at a personal residence. This is because commercial businesses are exactly that – a business. They do not come with the myriad of personal problems that house renters could present a landlord. This is not to say that all commercial property renters are easier to deal with. Nor is it to infer that most personal property renters are a source of trouble. It is just an honest assessment that the number of “trouble” calls to a landlord of a commercial property will be significantly less in number and frequency.
There are many more differences between the two but these five cover the main ones. If there was a similarity between them, it would be that both ventures have the ability to deliver huge revenues under the right circumstances.
Tags: commercial real etate
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