Property Guru Guide: Commercial

The definition of residential property is a distinct property that draws an income from houses, apartments, co-ops, and apartment buildings.

Commercial property is a term utilized for the description of property that's income is drawn from non-residential such as retail space, office buildings, industrial business tenants, and all other non- residential dwellings.

Property

The Advantages and the Disadvantages

Residential Advantages:

1. Large selection of tenants to rent to, and a great demand for rental housing.
2. High brink of income from consistent cash flow from multi-units and houses.
3. Residential property is relatively easy to finance, and can simulate home-financing.
4. residential property is commonly lower priced than property that is commercial.
5. Worst case scenario, you may dwell in a multi-family property and supervise tenants.

Residential Disadvantages

1. Management and maintenance is required consistently in residential property.
2. For a house that only has a single family inhabiting it, if no tenant pays or moves there is no income.
3. Repairs are more likely in residential property.
4. Harder to dispute a residential property tenant and there are boundaries that need to be adhered to.

Commercial Advantages:

1. Commercial properties offer long-term leases that provide consistent income and stability in the investment.

2. In commercial property management is not as demanding, because most leases state that is responsible for damage and repairs.

3. To fit up the space in commercial property the tenant can pay the landlord a flat rate fee and discount rent.

4. Commercial property owners flourish with steady incomes that increase as the value of the properties skyrocket.

Commercial Cons:

1. Commercial property loans are more difficult to obtain, because lenders require up front down payments that can be rather high as well as Adjusted rate loans can rise to unreasonable affordability.

2. Commercial spaces often are difficult to lease, and can sit empty for long periods of time; this is not positive for an investor who has limited funding. It also often takes attorneys to draw up the leases that commercial tenants must abide by.

3. Inexperienced individual's who want to invest in commercial property should be forewarned that it is not easy just to jump into, and can be overwhelming to a new property owner.

There is not a perfect answer on what property is right for a certain purpose or person, however whether it be commercial or residential an individual who is seeking this sort of investment need to consider all aspects of the venture. Ask yourself what you really want to accomplish and do not haste into making an ultimate commitment until you are well aware of every worst case scenario that can occur. Once you have really thought about it all you will recognize what option suits you best.

Real Estate Investing Tips - Residential Property Vs Commercial Property

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As a property investment company, which offers its clients a full estate agency service that is backed by professional advice and personal attention, we are often called upon to answer questions like ...

"What is my commercial property worth?"

Property

This is by no means an easy question to answer and to be perfectly honest it's only worth what someone is willing to pay. Having said this, we do however use a number of basic formulas so as to calculate the value of commercial property.

The first method

We will measure the land and determine the square meterage. We will then determine the market value per square meter which is dependent on the area in question. We then multiply the square meterage by the price per square meter. This will give us a rough indication of the value of the land. The price per square meter normally decreases as the size of the land increases. The price per square meter will also be affected by factors such as the proximity to road and rail networks as well as by shop frontage, foot traffic and so on ...

After we have evaluated the land, we will evaluate the improvements such as the height, size and general condition of the buildings. It is normally quiet simple to determine the replacement value of the facilities by keeping your finger on the local building costs. You can then compare the price of new build and marginally discount the price depending on the current state of the buildings. The ratio between the cost of new build and existing stock will vary depending on a number of economic factors. These factors are cyclical in nature but can be determined by an understanding of where in the property cycle we are at. (This will however unfortunately go beyond the scope of this article.) Finally, if you then add the value of the improvements to the value of the land, you will have the results of the first method.

The second method

This is more often than not the preferred method of evaluating what commercial property is worth. It is also favoured by the vast majority of property investors. Using this method, we will simply evaluate the rental yield that the property can produce. The rule is simple: the higher the rent, the higher the value of the property. What most investors do, when contemplating their acquisitions, is to divide the annual rent that they will receive by the purchase price that they will have to pay. They will then compare one property with the next and will usually settle on the one that offers them the higher yield.

They will however also take into account the strength of the tenancy agreements. If they are buying A-Grade office space with a Blue Chip tenant, a long term lease and favourable escalation clauses they will normally accept a lower yield as there is less risk to worry about. If however there are any concerns as to the integrity of the tenant, or if the lease is about to expire, then the potential risk increases. The only way to compensate for increased risk and potential void periods is to lower the purchase price and offer a higher yield.

The third method

This involves a healthy mix of the above two mentioned methods. Firstly we will evaluate the yields, this being the easiest method to compare apples with apples. We will then discount or add on to the value depending on the strength of the tenant and their lease agreement. Finally we will take a look at the value of the land and add to that the value of the improvements. That way, regardless of how the tenancy runs we will at least know that there is good value in the physical asset.

Having demonstrated to you the various methods of evaluating commercial property, please remember that at the end of the day, these methods and formulas only serve as a guideline. We always advise our clients that we can estimate the value but that only the market will determine the true selling price. Commercial property, like all property, is only worth what a willing buyer is prepared to pay for it!

Commercial Property - What Is My Commercial Property Worth?

This article was compiled by:
Bradley Hancock - Founding member of PPI

Portfolio Property Investments (PPI) is a web based property investment company that offers its clients expert advice on property market trends and specializes in putting together offshore property investment packages on behalf of their client database. It is also possible to subscribe to their monthly newsletter that is aimed at keeping their clients up to date and ahead of any developments in the global property markets. You will also find that they offer a number of useful property investment tools as well as an email notification system that one can register for and be the first to receive the latest property investment opportunities as and when they get listed.

Bradley can be contacted on the following:
Email: bradley@portfolio-property.com
Tel: ++27 72 0196192

Or visit their unique property investment website at:
http://www.portfolio-property.com/