Commercial Real Estate Basics

In residential real estate, pricing is determined by the seller. Comparables "comps" are analyzed for several variables including price per square foot, number of bedrooms, numbers of baths, how many garages attached or unattached, pool, central vacuum, location, lot size, view and other features. While the valuation of a single family home; is established by the sales of comparable homes in the same area. Commercial property is valued by the income it produces.



Commercial Real Estate’s value is based on numbers & calculations. Commercial property values are much less subjective and much more focused on the Income the property will produce and the cost you will have to pay to keep that income stream coming in. Investing in commercial property will often result in a greater cash flow and will often result in more income per square foot due to the commercial nature of the property. In addition, commercial property will generally have multiple tenants. This helps to spread the risk. With a residential property if the tenant defaults on their rent the owner is left with no income. With multi-tenant buildings, if one or a few tenants default on their payments, there will still be other income coming in from the other tenants.



With Commercial Real Estate, you aren’t buying a property as much as buying an actual business. You are buying both the Physical Property AND the Income Stream associated with the building. The income stream is a result of the desirability of the product and/or service that is housed in the property. The Income stream is also, called Cash Flow.

There are 4 Sources of Investment Returns:



· Cash Flow

· Appreciation

· Equity Growth

· Tax Benefits

When looking at commercial properties purely as an investment rather than as a partial-use property for your own business, the most important factor is supply and demand. The ideal property is located in an area where vacancy is low and the space available for new development is limited. Low supply and high demand means favorable rental rates as well as the hedge of a higher rate of appreciation. The strength of the local economy of the area will also affect the value of your purchase, so you will want to check employment rates though the Bureau of Labor Statistics along with other economic growth and strength measures.

Candy Bean, ChFC is actively involved in Commercial Real Estate Investing and the author of ProfitWithCommercialRealEstate.com .