The principles of investing in either a commercial or residential property are the same. However, you should be aware that these two major categories of property are valued differently as each has its specific qualities and different intentions. Depending on various factors such as type, location, and other aspects the value of the assets may vary. Thus, it’s highly vital that you perform a detailed commercial property valuation or residential real estate appraisal before buying or selling a property.
Several factors underline the disparity between residential and commercial real estate. They are:
- Cash flow
- Lease documents
- Finance options
- Knowledge of investor
Based on the above factors, let us understand why residential and commercial properties are not valued the same.
Residential properties are single family homes that are traditionally purchased by owners to reside. Normally, residential property valuation is accomplished using comparable sale methods and making adjustments for size, location, condition, number of bedrooms, and various other factors.
- Residential tenants or owners are available to buy/sell/rent the property, regardless of their financial condition as people need a place to live and rent in that is close to their work, family, friends, educational institution, etc.
- Investing in rental homes guarantees cash flow and rental income. If any tenant leaves, the owner can rent the property to someone new.
- In most cases, it is easier to sell a residential property owing to ever increasing demand of home buyers
- The value of a residential property is often calculated by comparing market prices of similar properties in the same area.
- A professional appraiser helps the buyer/seller to estimate the real value of a house.
- It is possible to buy a residential property with a small down payment and getting a bank loan for the rest of the value.
Commercial property is solely used for business purposes and is leased out to provide a workspace rather than a living space. When assessing commercial property valuation, the chief factor that the appraisal looks for is its income stream and other components such as:
- Rental yields (yield per square meter)
- Number of vacant properties in the vicinity
- Industry type
- Type of property
- Transport linkage
- Proximity to retail
- On-site parking
Here are some points that govern the valuation of a commercial property:
- Since most commercial tenants run their premises for business purposes, slow growth in the economy can result in loss of rental income or loss of businesses.
- Commercial properties tend to be more lucrative than residential properties because of steady returns and better cash flow.
- When it comes to financing options, residential and commercial properties loans have different bank loan options catering for each type of investment.
Although, this is a very simplistic version of what can be a very specialized and technical process, not to mention that the property valuation of both residential and commercial property will have several layers for deciding the final value. Hiring professional property valuation services that encompass both commercial property valuation and residential real estate appraisal can help reach the accurate value.