There are two main types of real estate investments; residential real estate investments and commercial real estate investments. Residential real estate is the type of real estate that people traditionally think of when discussing the topic, such as single-family homes and duplexes. Commercial real estate, however, covers a broad range of real estate, such as office spaces and retail locations. Commercial real estate provides a great way for investors to maximize their leverage while controlling more property.
Commercial properties are valued differently than residential properties. When a lender assesses the value of a residential property, they use comparables, also referred to as comps, to arrive at their valuation. Comparables provide estimates for the value of a residential property by providing close references to that property.
Lenders use several methods when assessing the value of a commercial property. One of the main tools that a lender will use when they are determining the value of a commercial property is the property’s local capitalization rate. The capitalization rate, more commonly referred to as the cap rate, is a ratio that compares the property’s net operating income to the price that the property was purchased for. The cap rate allows the property to be valued based on the income that it is able to produce.
Lenders also take a property’s net operating income (NOI) into account when they are determining the value of a commercial property. A formula is used to determine the net operating income of a property. Ultimately, the net operating income provides an amount after expenses have been subtracted from the gross income of a commercial property.
Commercial Loan Types
There are a variety of commercial loans that are available for commercial real estate investors. Conventional commercial loans, construction loans, balloon loans, bridge loans, and seller financing are all types of loans that commercial real estate investors routinely use when making their investments.
Learning the ins and outs of commercial real estate takes time and experience. However, with patience and routine education, anyone can develop an in-depth understanding of commercial real estate. The best way for someone to learn commercial real estate is to immerse themselves in the field and surround themselves with people who are experienced and can provide invaluable lessons.