Commercial properties are a very difficult investment to work with and you should really tread into it very carefully. I will at least share what I’ve learned (some of it the hard way lol).
Apartments with 5 or more units are considered commercial.
It is VERY difficult to get funding for commercial properties. Because they are not usually financed by the government, they often want you to have an LTV of around 25% or even 40%. Their amortizations are also not 30 year fixes like residential properties. The amortizations they have run around 20 year or so. If you are analyzing a property, put that into your calculations. Interest rates are also much higher and can run up to 10%. Make sure you at least know what loan you can get and what the loan parameters are because if you are using residential loan rates for commercial, you will be in for a rude awakening.
Never never never go into an owner financed loan. If you can’t get funding through a commercial lender, don’t buy the property in the first place.
The value of a commercial property is determined by its income, net income, but do realize that you have to study the income/expenses statement really closely because numbers can be manipulated. There are three forms of appraisal methods, and for commercial, the banks will decide to lend to you using the income/net income method. However, most people try to sell you the property based on comparative value.
Even the vacancy rate can be tampered with, the owner may say that it is 100% occupied, but they may have made deals with the tenants to stay there for free or for a reduced rent.
Repairs, maintenances, and fees for a commercial property are much higher than a residential property and many of them do not show up on the expenses statement often because they are deemed “one-time” only expenses. Property taxes are also a big deal because most municipalities are not as eager to lower the assessment for you as compared to residential. Also, they will try to raise your assessments as often as they can.
For most commercial properties, you will need to hire a property manager. Believe me, you do not want to deal with the stuff yourself. It is more than a full time job.
Utility rates for commercial buildings are also higher than residential. Power, water, trash, sewer, these fees have been going up the past few years at an alarming rate.
There are more but I think this covers the basics. I’ll see if I can remember more (after a huge night of binge drinking).
