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Commercial Property Growth vs Residential Property

We are now coming out of a residential property boom that lasted a few years. Many property investors invested in capital appreciation, while some banked on the appreciation for re-sale and/or re-financing.

Now the residential sector has been in a downturn for a while. Some investors are trying to enter the commercial market for the same reasons. Here is where some issues must be explained.

Commercial property does not appreciate just like residential property. Robert Kiyosaki keeps saying that if you hold a property long enough it will forgive you for the mistake you made in buying it. He says that because residential property appreciates over time even if it the residential market has a down turn. Have you ever heard the saying, “But property has grown X% over the last XYZ years”, fill in the blanks, they all say that. And that is true, but that is only true for residential property.

In commercial property, a property may be worth a negative figure. Yes, negative figure. I think I should repeat that. Commercial property may be worth NOTHING. That will never happen in residential, but in commercial it can.

Therefore, though investing in commercial property is great and can be the most profitable move you ever made, it could also end up the opposite if you don’t know what you are doing.

So unlike residential property, a commercial may never forgive you for buying it. That means you may end up with a great loss.

How can this happen? Well, unlike residential, in commercial it’s all about the business case.

Imagine buying a commercial property to open stores without knowing that the whole area is turning industrial, or that a massive shopping center has been approved for building next door and the purpose of the property that you buy is well, null and void. It won’t be needed at all. And add to that, that to make anything of this particular property you would need to re-purpose it completely, adding considerable cost that could well be double the price you paid in the first place. How long will it take to make out of this purchase? Would this be a smart purchase?

At one point in the Joburg CBD, there were properties that no one wanted to buy (still are some of those) because they don’t make financial sense at all. Actually, if they were to be imploded the land would be of more value than the property currently is worth with an existing structure. Something new would be of more value and to build that something new the old building must go completely.

So, to go into commercial property for capital growth is the wrong reason. Commercial property does not appreciate like residential and to finance such a purchase one must have a strong business case that includes profits.

This is where we have to mention the many properties that, in residential, some investors bought and are financing with shortfalls every year for the next 5 to 10 or even 15 years. After that they can sell for a profit. In commercial this would not work the same way.

If you want to enter the profitable commercial and industrial property investing sector you must first and foremost understand that it is not even remotely similar to residential property.

Get started in commercial property investing with the Commercial Property Investing for Beginners course.

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Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved.

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