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How to get started in commercial property investing from residential

This question is commonly asked by residential property investors and estate agents wanting to take advantage of the booming market for commercial property. Both property investors and real estate agents that no longer make profits in residential are interested in how to make the leap to commercial property.

To answer this question, it is very important to emphasize a few important things about commercial property.

First of all, commercial property investing is very different from residential property investing. So much so, that other than the brick and mortar everything else can’t be really compared.

Yes, both types of property offer an income and both carry expenses and some terms such as “Internal Rates of Return” and “Tenants” are the same. However, the major considerations required when purchasing or leasing a commercial property are not at all similar to those residential property investors are accustomed to.

Let start with a small example before we consider moving on to anything even remotely sophisticated.

Around a year ago I received a call from an estate agent offering me what he thought was a wonderful investment opportunity.

Of course as an investor you immediately want to hear the details.

The details were interesting. The property was under renovation and located in a prime area of the city. The seller was asking 3 million for the property with building containing about 300 sqm under roof.

So, we went on asking about the purpose of the property, the agent immediately and proudly said, it is a commercial concern.

“That’s great.” I said, “But what about tenants and leases?”

The agent carried on proudly saying that the building is being renovated, did not have any tenants for a long time and the old owner wants the new owner to choose their own tenants.

Ouch, now that is a little bit of a problem. See, this estate agent missed an important point about commercial property. The property may be greatly renovated and have great location and many other things, but no tenant, no lease equals = no money.

In commercial property investing the nature of the property and the location thereof may be very important, but even more important are the tenant leases. How many tenants, how much they pay, how long the leases are and how much time is remaining in the leases is a vital piece of information when considering a commercial property investment opportunity, especially when one would want to finance the purchase from a financial institution.

As a start in commercial property as opposed to residential, the brick and mortar, the appreciation of the property, the location, etc., are not as important as the business case of the purchase.

The business case has to be based on existing customers. To better understand, imagine yourself an investor investing money in a business that has no clients? Does that make sense? Not really.

Yes, there are cases of developments and re-purposing and many other options. But as a start when moving from residential to commercial this is the first change of mindset that has to happen to be able to understand the rest.

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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