Investors with experience in residential real estate often consider jumping into commercial for higher potential returns or to diversify their portfolio. Doing so can be lucrative, however, there are several important considerations to bear in mind that a South Florida commercial real estate attorney can explain in more detail to you.
As experienced investors will tell you, residential and commercial real estate investments are dramatically different. Many investors start with residential real estate because of the complexities associated with commercial real estate and its higher initial costs. Commercial real estate can be very profitable for those who understand it well, but it can also carry higher risks and more complications.
In the context of this article, the term residential real estate refers to properties intended for non-business use that are bought, sold and rented such as single family homes, small multifamily complexes, condos and luxury homes. Commercial real estate refers to buying, selling and leasing retail and office buildings, malls, industrial buildings, and similar properties that are intended for business use.
A number of factors influence commercial property valuations
In many cases, residential real estate is easier to start out with for newer investors. It is usually relatively simple to figure out repair costs, purchase and future sale costs, and potential rental income for a residential property.
In commercial real estate, a number of factors influence the value of a property, with the primary factor being its potential to produce income. Other factors include including the location, reliability of tenants, future demand for the property, lease length, economic cycles, demographic changes and many others.
Although these factors are present in residential real estate, they are more significant in commercial real estate. As a result, the value of a residential property is usually more straightforward to determine and is largely influenced by recent sales of similar residential properties in the area.
Cap rates are also used for preliminary valuations of commercial properties, and they vary significantly from one area to another. Professional advice from a South Florida commercial real estate lawyer and other real estate experts is usually necessary for an accurate valuation.
Several other considerations
This is just one example of the many differences between commercial and residential real estate investments. Other unique considerations include financing, startup costs, lease negotiations and maintenance, and more.
Mark Schecter is a knowledgeabl commercial real estate lawyer in South Florida who can answer any questions you have about commercial real estate investing no matter what your experience level is. Call Schecter Law today at (954)-779-7009 for a consultation.