What is commercial property?
Commercial property is a type of real estate that is suitable for use by businesses for their operations due to its size and/or zoning. Examples of commercial properties include retail space, office buildings, industrial warehouses, multi-family apartments, medical/office space, and land. Commercial properties can be either leased or purchased by businesses. In the case of leasing, the owner retains ownership of the commercial property while the lessee makes the rental payments. In the case of purchasing a commercial property, a business obtains title to the property and pays the full cost of the property upfront.
Types of commercial property
Retail space - Retail space is an ideal option for businesses that sell goods to the public such as grocery stores, retail shops, restaurants, and clothing stores. Retail space can range in size from a small storefront to a large shopping mall.
Office buildings - Office buildings are a good option for businesses that require a large amount of office space such as law firms, accounting companies, and real estate agencies. In addition to providing the necessary office space, office buildings can also be designed with amenities such as fitness centers, conference rooms, and yoga studios.
Industrial warehouses - Industrial warehouses are commonly used by manufacturing companies to house their production equipment and materials. In addition to providing the necessary space for production, industrial warehouses can also be outfitted with office space and other amenities such as loading docks and employee cafeterias to improve the work environment.
Multi-family apartments - Multi-family apartments are an ideal option for residential properties such as senior housing, student housing, vacation rental units, or single-family homes. In addition to providing the necessary residential space, multi-family apartments can also be designed with amenities such as swimming pools, fitness centers, and outdoor patios.
Medical/office space - Medical/office space is an ideal option for medical practices, law firms, accounting companies, and real estate agencies. Medical/office space can be designed with the necessary amenities such as a break room for employees and a reception area for patients.
Land - Land is a good option for businesses that plan to expand in the future. While not ideal for operating businesses, land can be used to build commercial properties such as retail spaces, office buildings, industrial warehouses, and multi-family apartments.
Benefits of commercial property
Higher Profit Potential - Commercial properties are typically large assets that are expected to generate a significant amount of profit. As a result, commercial properties provide business owners with the ability to earn a substantially higher profit than they would receive from a residential property.
Less Risky Investment - Commercial properties are expected to generate a substantial amount of rental income. As a result, commercial properties are typically very lucrative investments that carry a lower risk of losing money than residential properties.
Risks associated with commercial property
High Investment Cost - Commercial properties tend to have a significantly higher purchase price than residential properties. As a result, commercial properties have a higher upfront cost that business owners must factor into the investment. Longer Real Estate Cycle - Commercial properties are expected to have a longer rent collection period than residential properties due to the types of businesses typically occupying the space. As a result, commercial properties have a longer rent collection period that business owners must factor into the investment.
Tips for selecting the right commercial property
- Location: It is important to select a commercial property that is located in a desirable location to increase the amount of rental income that is generated. To select the right location, business owners can research the demographics of the area to determine how many people live nearby and how much they earn. - Zoning - Zoning is an important factor that business owners should consider when selecting a commercial property. In order to operate a particular type of business in a commercial property, it must be zoned for that particular type of business.
- Size and space: When selecting a commercial property, business owners should consider the amount of space that will be necessary for the type of business and the amount of space that will be required for the employees to work.
- Building features: In addition to the type of commercial property that is selected, business owners should also consider the building features that are available in the property. Certain building features such as high ceilings and large windows can significantly increase the amount of rental income that is generated.
Financing options for commercial property
- Commercial mortgage: Commercial mortgages are loans that are used to finance the purchase of commercial property. Commercial mortgages can be obtained from banks and other financial institutions and typically require an investment of 20% of the purchase price.
- Commercial lines of credit: Commercial lines of credit are sources of credit that can be used to finance a variety of business expenses such as inventory and marketing. Commercial lines of credit can be obtained from banks and other financial institutions and typically require an investment of 5% of the amount of the credit.
- Commercial real estate financing: Commercial real estate financing is a type of financing that can be used to fund the construction of new commercial property or convert an existing residential property into a commercial property. Commercial real estate financing is typically obtained through commercial real estate investment trusts (REITs) and commercial mortgage brokers.
