People often do not recognize the difference between residential and commercial properties, while making an investment and therefore, tend to focus on just one type. The leasing businesses in the residential and commercial segments have completely different dynamics. Investing in commercial and residential property is a popular occupation for individuals across the country.
When investors seek out the commercial real estate, they typically rely on one of three methods to appraise the worth of the property and its potential for lucrative financial return. The “cost approach” to appraisal takes into account the material cost of the structure itself alongside the current value of the land. This differs greatly from the “sales comparison approach,” which uses the value of equitable neighboring properties as the primary determining factor for placing a valuation on the property in question. However, perhaps the most unique method for assessing the viability of commercial investment is the “income capitalization approach,” which takes into account the potential revenue the property is capable of generating alongside operating expenses and its current sale price.
Commercial investment involves far more than just purchasing a property, however. Investors must consider the myriad of peripheral expenses associated with the commercial property, including property managers, insurance and leasing strategies. While commercial investing may provide a significant boost in return compared to residential property, it also demands a far greater degree of attention to detail and logistical engagement.
If you are investing in residential property, you may be approaching your purchase as a “flip,” where you will purchase a home in need of repair and restore it before selling for a profit. Or the flip may be part of a rental strategy, where you lease a property to residential tenants. In either scenario, perhaps the most common method of appraisal is based on the sales comparison approach utilized by commercial investors. The price which homes are selling for or are being leased for in your area will likely act as the primary factor in determining whether or not a potential investment property is worth your money.
Depending upon the scope of your operations, residential investment will likely be a task manageable by yourself or a small group of associates. This is a departure from commercial real estate investing groups, which may employ a large staff in order to capture returns on numerous properties simultaneously.
Whether you’re working by yourself or have established a business organization, you will likely confront the issue of capital gains tax during your operations. If you hold an investment property for less than a year before selling it, you will be forced to pay standard income tax rates. If, however, you hold the property for more than a year before selling, you can qualify for long-term capital gains tax, which effectively reduces the taxation level by as much as 20 percent. This can be a significant perk for real estate investors who are dealing with a large number of properties and an equally large revenue stream.