What is Commercial Real Estate Investing?

Commercial real estate investing is when you purchase property like office buildings or large apartment buildings. The rule of thumb for delineating whether a building is a commercial or residential building is The number of units the building has. If the property has five or more units, then it is considered a commercial property.

Commercial real estate investing usually involves greater sums of money. You will need more money for the down payment and of course the price of the property will be more, as compared to residential real estate investing.

Down payments for commercial properties that I have been involved with required a down payment of 35%. Sometimes the down payment might be 25%. Other times, down payments may be as much as 40% of the purchase price. Commercial properties are definitely a little bit harder to get into in terms of initial money required.

On the other hand, commercial property loans can be a little easier to acquire. With commercial real estate investing, lending institutions determine the credit-worthiness of the property. Banks and lending institutions want to see that the property is a money-maker. Optimally, the property should be completely full. Zero vacancies is an excellent sign that the property is a money maker.

Lending institutions want to see the financials on the property. They want to see tax documents, projections for rents as well as current rents, expenses associated with the property, and good property management models. The "pro forma" is the financial statement that communicates much of this relevant information about the functioning of the property. It provides a balance sheet of the costs versus the income of the property.

Commercial real estate investing is a big step because it requires a greater financial investment as well as greater knowledge of how real estate works. But like anything else, taking the time to understand it and the courage to move forward will go a long way.

What is Residential Real Estate Investing?

Most REI programs also focus on residential REI, although they will usually also have some component of their program that discusses commercial real estate investing. Typically, residential REI is easier to acquire and what most people want. A single family residence (SFR) is what most people would like to buy. Some folks choose to live in a condominium complex and want to purchase a condo. The entire complex is considered a commercial property. Purchasing the entire complex would be an example of commercial real estate investing. Purchasing a single condo is an example of residential real estate investing.

SFR's and condos are examples of residential real estate. A house is an SFR and technically so is a condo or townhouse.

Other examples of residential property include apartment buildings that have no more than four units. Duplexes are apartment buildings that have two separate units to live in. Triplexes are apartment buildings that have three separate units to live in. Fourplexes are apartment buildings that have four separate living units.

To purchase any piece of residential real estate, the down payment will be anywhere from 0 to 20% down. Many loan programs and REI strategies discuss methods to purchase residential property. However, you can also use some of these strategies for commercial real estate investing as well once you get the hang of them.

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