The Economist recently printed a study that indicated the investment in residential homes in developed countries far outnumbered commercial real estate investments.  It has been established that commercial investments amounted about $14 trillion dollars whereas residential investments had a much greater amount at about $48 trillion dollars.  The intricacy of commercial real estate investing is most likely the leading cause for these findings.

Contrary to real estate, investments in goods and stocks are not based on geographical area.  Real estate assumes a physical location and is [an elemental part] of the make-up of a specific area.  Even though the investor may not be native the building always is.

The way a property is bought and sold, and how it is used is affected by the its actual location.  For example, GTA real estate has been doing quite well despite the recent economic downturn. Commercial real estate is always bought to be used for a business purpose even though residential real estate can sometimes be used to run a business.

For example an investor may purchase a multi-unit building such as an apartment complex in the Burlington Real Estate market.  To the residents of that property it is their home but in reality it is a commercial investment.  The plot this building is built on is zoned specifically for that purpose.  This will dictate its value, appraisal, financing options that are available to the investor, as well as maintenance issues and other factors.

Unlike purchasing residential homes, buying a commercial building will usually demand that the investor come up with a much larger down payment and enjoy better credit as commercial investing can be a greater lending risk.  Commercial investing also necessitates the investor to take into account other important factors such as Gross Rent Multipliers and Capitalization rates.

Taking the building’s annual operating revenue and dividing it by the price paid will bring you the Capitalization or cap rate.  A cap rate of 10% or more has historically been deemed a good one however because of the market’s increased tolerance to risk and approved lower return in recent years, a cap rate of 8% is acceptable.  The Gross Rent Multiplier, or GRM, on the other hand is determined by dividing the property’s monthly operating income and dividing it by its acquisition price.  These two figures along with comparables, assessed versus appraised worth, replacement costs and other factors are utilized to estimate the real worth of a commercial property.

Commercial real estate investing also demands more knowledge of such elements as legal issues, zoning, maintenance, commercial lending and leasing regulations to name a few that are not involved in the normal residential real estate transactions.  Industrial sized heating and air conditioning, telephone and internet, sprinkler and security systems as well as electrical elements will be other factors to keep in mind when considering commercial investing.  These can make insurance and maintenance not only more complex but more costly as well.

But all is not doom and gloom when considering commercial real estate investing.  The willing investor who is not scared of risk can enjoy greater rewards.  Even in periods of slow economy an investor can find opportunities to grow their real estate portfolio in preparation of the stronger economy that is on the horizon.

Tags: commercial, Investing, real estate

This entry was posted on Friday, May 29th, 2009 at 9:36 am and is filed under Commercial Property. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.