Key Financial Facts To Consider Before Making The Move From Investing In Residential Real Estate To Commercial Real Estate

If you're interested in expanding your real estate portfolio to include commercial properties, it's important to be aware that there can be significant differences between your new endeavor and the residential properties you already own.  For instance, the cost of inspecting a commercial property is often higher than it is for residential investments. In addition, it's not unusual for the down payment on commercial real estate to be a bigger percentage of its overall cost than it would be for residential properties. Therefore, if it's time to expand your holdings to include commercial real estate, the information shared below will be quite useful.   

Prepare For The Increased Costs Of Inspecting A Commercial Property You're Interested In...Even If You Eventually Don't Invest In It  

If your previous experiences with purchasing real estate have been limited to residential property, you might be in for sticker shock when a commercial property that you might buy needs its inspection. Since that property's inspection is usually accessed before committing to its purchase, it should never be skipped. Unfortunately, if the inspection finds multiple or expensive issues that the existing owner is unwilling to repair, you could be out that sum of money, and it's best to plan for that possibility.   

It's important to note that there isn't just one standard fee that is always charged, as there are many variables that should be considered. For instance, the size of the property, the type of roof and even the existing landscaping can impact the cost of inspecting a commercial property. Separate fees may also accrue if you requested that the inspector perform research into the previous use, ownership, etc. of the property as part of the inspection.   

Commercial Property Means Bigger Investments... And Requires A Bigger Commitment From The Buyer  

One of the more shocking aspects of investing in commercial real estate is often the size of the down payment. It is fairly common for your initial investment into that type of property to be as much as 50% of its total cost. The good news is that you might be able to secure loans from a secondary funding source or by seeking partners in your new financial endeavor, which is often frowned upon for residential loans. When that 50% down payment is compared to the 2-4% initial deposit often advertised by some lenders, it can be more than a little overwhelming.  

However, it should be acknowledged that the lower down payment is frequently only available for loans on a primary, residential property. If you were seeking a loan for a property that you plan to rent out, the applicable down payment is likely to increase dramatically. That is because that investment property would then be considered commercial real estate, just like an apartment complex, business office or retail store.    

In conclusion, commercial real estate presents with the very real possibility of continuous, ongoing profits in the future. However, in order to do so, you need to be aware of the differences between residential and commercial real estate investments and how those differences can impact you financially, as explained above.