Commercial property is real estate that is built to generate a profit. If you are interested in investing, owning this property could be profitable.
Before choosing a property to invest in, you need to make sure that it qualifies as commercial property. How many units are required to be considered a commercial space?
To be considered a commercial property, the property must have at least five or more units. These units can be business units or tenant units, depending on the type of property.
Are you interested in learning more about this type of property? If so, keep reading to learn more about the required number of units, what a commercial space is, the different types of commercial properties, and the benefits of owning this kind of property.
Number of Units to Qualify as Commercial Property
If you are interested in investing in property, it is important to first understand how many units are required to qualify as commercial property.
Commercial properties are properties that have at least five units. Anything less than that is considered to be residential property. The number of units the property has will dictate how the property is zoned.
Here is a breakdown of the zoning types, depending on the number of units:
- 5 Units or more: commercial property
- 4 Units: 4-plex
- 3 Units: triplex
- 2 Units: duplex
Once a property has been zoned as commercial, considerations are made for parking space, access requirements, and building safety. There are different requirements for business property in comparison to residential property.
Defining a Commercial Property
While residential properties are built to live in, the purpose of a business property is to generate an income. Apartment buildings with multiple residents, buildings with multiple shops, and even land that is generating income are considered commercial spaces.
Here are some of the differences between a residential property and a commercial property:
- Financing
- Property laws
- Property value
- Required experience
If you are thinking about investing in this type of property, it is critical that you understand these differences, especially if you do not have a lot of experience in managing this type of space.
Keep reading to learn more about the differences between commercial and residential property.
Financing
One of the first differences between residential property and business property is the way that the property is financed. When applying for a loan for a residential building, the buyer’s credit score, income, and credit history are the main considerations.
When applying for a property loan, lenders are more interested in the property’s cash flow, the buyer’s experience level, the location, and the type of property.
Lenders often consider commercial property loans to be less risky than residential loans. Because of this, property owners can take advantage of lower loan-to-value (LTV) rates.
Property Laws
When you own a commercial space, there are different laws that you need to abide by. Some of these laws include landlord/tenant laws, zoning laws, disclosure laws, contract laws, and insurance laws.
Commercial property owners also have to follow laws from their state and on a local level. If you are thinking about purchasing this type of property, it may be wise to seek legal guidance.
Property Value
While residential properties are valued in comparison to other homes by the square foot, commercial properties are not. They are more likely to be valued by their capitalization rate.
Capitalization rates are based on the rate of return over time. To determine a commercial space’s capitalization rate, the income, and the asset value are taken into consideration.
Required Experience
Because of the different factors above, running a commercial building with no experience is difficult. In many cases, you will not even qualify for financing unless you have commercial experience.
If you want to own a commercial space but do not have any experience, consider finding a mentor. It is important to be knowledgeable in property maintenance, tenant law, rent, and finance before you get started.
Different Types of Commercial Property
Now that you know what business property is, it is time to review the different types of commercial spaces. Because the property is defined as real estate that generates income, there are several different types of commercial properties.
Apartment Complex
One of the most common types of property are apartment complexes. Apartment complexes consist of units that are designated as residential units.
Most of the tenants will have a lease, which protects the property owner from losing income. Even if one tenant decides to leave the apartment complex, the owner will not have to worry because the other tenants are locked into a lease.
Office Building
Another common type of commercial building are office buildings. Office buildings typically come with a 3-5 year lease that different businesses can use.
While office buildings are a great investment, they can be riskier than apartment complexes. With an office building, there is likely to be fewer tenants taking up more space.
If one of the businesses were to leave quickly or go out of business, the property owner could lose money if they cannot find a new tenant right away.
Retail
Retail, commercial properties have multiple units available for retail shops. These could be large shopping malls or small urban centers. The lease on a retail unit is typically 3-5 years.
Industrial
Commercial properties that are designated for industrial purposes are usually either manufacturing products or storing products.
Here are some examples of different industrial, commercial properties:
- Data centers
- Manufacturing plants
- Warehouse
The lease length for industrial, commercial properties is longer than other types of commercial spaces. You can expect to find a lease for 5-10 years. This is a safer investment for the owner because the lease is so long.
Benefits of Owning Commercial Property
Are you thinking about investing in this type of property? Before you do, you should know the different benefits of jumping into the world of commercial real estate. Here are a few of the main advantages:
Potential Income
One of the best things about investing in this type of property is the income potential. Commercial properties have an average annual return of around 10%.
The exact amount will depend on the type of property, the location, and the condition of the property. Regardless, commercial space offers the potential to make money.
Asset Value
In addition to having high-income potential, you also have the value of the property. Most of the time, property increases in value over time. Because the property is in the public eye, the owner should try to make regular improvements to the property.
Any improvements that are made to the property will benefit the owner in the future. That is because they will help to increase the property value.
Tax Benefits
Another benefit to having this kind of property is the tax benefits. Qualifying for tax benefits can help save you money when taxes are due. Here are a few examples of tax benefits that a property owner may qualify for:
- Capital gains
- Depreciation expense
- Expenses not related to the mortgage
- Interest expense
- Post-sales tax
To know if your property qualifies for any of these benefits, it is best to talk to a tax consultant. They will be able to help determine the tax benefits that you may qualify for.
Should You Invest in Commercial Property?
Commercial property is real estate that is dedicated to earning income. To be considered a commercial space, the real estate must have at least five units. While this type of property is an excellent investment, it does require a specific knowledge base and dedication to be successful.
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Source:
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https://www.realcrowd.com/blog/2013/02/reasons-to-invest/
https://www.upcounsel.com/blog/5-laws-every-commercial-real-estate-owner-needs-to-know-about
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