Comparing Commercial and Residential Real Estate

Comparing commercial real estate to residential real estate is like comparing apples to oranges. Both are from the same genre, but that is where the similarities end. The following are general descriptions of the two types of real estate:

  • Commercial real estate is business-focused. It involves property that is sold, leased, or used to achieve a predetermined business objective. It's used as an investment to achieve an anticipated rate of return on the funds invested.
  • Residential real estate revolves around the wants and needs of a homeowner and his family. It involves property purchased for individual use, most often to provide housing for families.

The selling process for commercial real estate hinges on numbers and return-on-investment calculations. Residential real estate is nowhere near so cut-and-dried because it's more of an emotional purchase. Many buyers make decisions based on the fact that the house just feels right to them. The key factor is the return on investment.

What is residential real estate?

Residential real estate is focused on personal use. For the most part, residential agent's represent the buyers or sellers of single family, primary homes. Within the residential real estate arena, agents also engage in the following specialties:

  • Selling secondary homes to people seeking a "home-away-from-home" to get away from it all. The second home market is one of the fastest-growing segments of the residential real estate arena. More than 21 percent of the sales in 2004 were second home purchases for use by the purchaser or for investment purposes.
  • Working exclusively for a builder of new homes, usually by serving as the on-site salesperson for a new home community. In this role, the agent sells only the builder's homes. If buyers need to sell an existing home outside of that community, usually another agent handles that sale.
  • Representing residential real estate investors who are looking to increase wealth through the ownership of homes, duplexes, triplexes, and fourplexes. Small-scale multiplexes are handled by residential rather than commercial agents for the following two reasons:

• Often the purchaser lives in one segment of the multiplex, creating a residence as well as an investment property.

• Usually a purchaser can buy up to a fourplex with a conventional mortgage.

    Residential agents rarely represent buyers or sellers of multiplexes with more than four dwelling units. Purchasers of larger complexes must qualify for and secure commercial real estate loans — which involve a more restrictive set of conditions, including higher interest rates, shorter amortization schedules, and considerably higher initial equity positions or down payments.

What is commercial real estate?

Commercial real estate centers on business or investment use of real estate.

In commercial real estate, you can buy, sell, lease as a lessor (the person who owns the property for lease), lease as a lessee (the person who's trying to lease the property for their use), syndicate, joint venture, develop, option, and invest in a wide range of commercial real estate categories, including retail, office, industrial, apartments, investments, and raw-land leasing.

Commercial real estate agents are usually familiar with many of the commercial real estate areas, but they generally specialize in one of the following areas or disciplines:

  • Representing tenants or lessees by finding, selecting, and negotiating new space for client businesses.
  • Representing building owners or lessors by working to lease out building space for the highest possible price and with the most favorable terms. Frequently a commercial agent represents one owner or even one building exclusively in order to ensure the building is leased to capacity.
  • Representing investors who want to buy and sell commercial property by finding opportunities that offer the lowest risk to the client, the best return on investment, and the best capitalization rate, which is the net operating income of the property divided by the sales price or value of the property.
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