You’ve heard the old saying that real estate is all about location, location, location, and it’s pretty much true regardless of the property type or owner. Location is definitely important when it comes to commercial real estate, but once you get past the universal truth that location is key, the differences between residential and commercial properties start to emerge.
Residential real estate is about your primary dwelling place. It’s about having a roof over your head for you and your family. Commercial real estate is quite different as it’s usually about producing income for your business. Issues related to commercial property including accessibility/parking, proximity to other businesses that create customer traffic, community demographics, zoning, visibility, and, of course, costs are all important for you to consider.
Where do you fit in?
Based on your needs, you may fit into one of two types of commercial property owners: users and investors. Users are typically business owners who need commercial real estate space to house their businesses. The property can provide a place for you to sell your products or services, and you can either buy or lease the commercial property space for your business.
Investors are a different breed. You may be looking for the commercial property itself to be your income generator. Investors buy commercial properties and lease them to others, eventually selling parts of their commercial property portfolio when it makes sense to do so. You may see real estate as a good investment alternative to some of the options available on Wall Street. Real estate is less volatile, a good long-term investment, and, in Texas, very consistent.
Commercial real estate provides two big advantages for you as an investor: income production and tax depreciation. Investors, typically on the advice of their accountant, will eventually sell a commercial property when its depreciation cycle is coming to an end, taking the profits from the sale and reinvesting in another property through a 1031 Exchange. This is why some large chains and franchises build new stores and retire others.
What’s the difference?
Commercial real estate has similarities to residential real estate but also some important distinctions. For example, financing the purchase of a commercial property is different from obtaining a home mortgage loan. Commercial real estate loans usually require at least a 20 percent down payment, are traditionally amortized over 20 years, and have a three- to five-year balloon, meaning they reset after three or five years with a new rate depending on the market.
If you are thinking about buying commercial property, whether for its direct use (from which to run a business) or as an investment, it’s important to hire a Texas REALTOR® experienced in commercial real estate. REALTORS® with the Certified Commercial Investment Member (CCIM) designation have undergone specialized training in commercial real estate.
Sharing the load
In Texas, a large share of state and local revenues – particularly those that fund public schools – comes from property taxes. In local communities, it’s advantageous to have a good mix of residential and commercial properties in order to have a broad tax base. That way, commercial property owners contribute, and individual homeowners aren’t overburdened with an unfair share of the tax load.
Whether you’re considering purchasing commercial property as a user or investor, you can see there is more to finding the right space than just location, location, location.
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