During the pandemic, many who owned their own home saw the previous drop in interest rates as an opportunity to purchase income producing real estate – especially with rents rising. For most, this meant purchasing another residential property that will be rented. More serious investors turned to commercial properties as the multi-family sector has also continued to be strong, along with certain additional sectors the commercial market.
First, what is the difference between rental properties and commercial properties? If you purchase another home to rent, this home is a rental property. Even if you purchase a duplex or a 3 to 4-unit residential property, these are considered rental properties. As a matter of fact, a great way to enter into the investment market is to purchase a multi-unit property such as a duplex and live in one of these properties. This would give you more favorable “owner-occupied” financing. FHA, Fannie Mae and Freddie Mac all allow the purchase of up to 4-unit properties and will finance larger loan amounts for these transactions.
On the other hand, if you are purchasing a building that has more than four units, you are starting to move into the commercial world. Consider a building with 50 units. This is an apartment building and is clearly a commercial transaction. However, commercial properties are not limited to apartments. Commercial properties can be offices, churches and hotels, as well as other types of structures such as warehouses. The growth of the warehouse sector has been strong as the retail sector has weakened due to on-line shopping. You have to distribute on-line orders from somewhere!
Should you consider becoming the owner of a commercial property? Ownership is a great business opportunity if you purchase the right property because the income may very well cover the costs while you build up equity through paying down the mortgage and long-term appreciation. A $5 million dollar property that appreciates only 5% per year could be worth $10 million dollars in under 15 years because of compounding. If the income pays off the mortgage during this time, the result would be a great nest egg for retirement.
Of course, finding the right property, financing that property and managing it are all of key importance. And a major factor in finding the right property involves using an experienced commercial real estate agent. The commercial business requires specialists who are highly trained because of the complexity of these transactions.
That agent will help you with the factors that are likely to make the transaction a success. There are a host of issues you will have to deal with; including location, expense coverage, parking, environmental factors and more. The agent will also help you set your goals for this transaction.
Financing is a major factor of the transaction. Commercial financing is a different animal as compared to residential transactions. The appraisals and loan packaging requirements are more complex, the down payments are larger and financing terms are different. For example, there are no “thirty-year fixed” commercial mortgages as the terms of these mortgages are much shorter. As you must find an experienced commercial agent, you must also find an experienced commercial loan officer.
Smaller commercial loans are harder to find as most banks have a minimum size for their commercial mortgages. However, this does not mean that you may not want to purchase a small office building or office condominium. If you own a business that would be the primary tenant, it makes sense for you not to build equity for someone else. Also, if you have significant equity in your home, you may be able to pull cash out to finance most of all of the unit.
Lastly, if you are not experienced or don’t have the time, you should not consider trying to manage the property by yourself. There are managerial companies that focus upon such properties and your agent or lender should help you with the recommendations. This is a very important investment decision and no element should be left to chance.
