When it comes to real estate investment there are two differing facets: commercial and residential. In many ways, the acquisition of each is similar: both require an appraisal, a building inspection, and various legal costs and document preparations.
Perhaps the most prominent differences between commercial and residential real estate investment occur at the acquisition stage. Here, New York City real estate investment specialist and BCN Development CEO Craig Nassi outlines some of the key cost and procedural differences involved in making a residential investment versus investing in commercial property such as retail, office, or light industrial.
Varying Report Procedures
Investing commercially requires more paperwork and legal processes. For example, when making a commercial purchase that is not in cash, it is likely that you will be required to complete a phase one environmental report. Basically, the report is mandated in order to confirm that there are no outstanding problems with the ground surrounding the commercial site.
In short, the phase one report confirms to the bank that the site is clean from contamination and ready for commercial use. According to Craig Nassi, the initial report procedure generally costs between one and five-thousand dollars; if the results come back positive, a phase two report must be completed at an additional charge. When purchasing residential property, however, these reports are never required.
Legal Fees for Residential and Commercial
When borrowing funds for a commercial investment you will likely be required to pay an additional commitment fee, which is not standard with residential purchases. Essentially, the borrower is required to pay the bank a percentage of the loan’s total amount in order to simply move forward with the lending process. According to Craig Nassi, these payments range from a quarter percentage to one percent of the loan value and comes directly out of the investor’s pocket.
Meanwhile, residential investment does have its own legal fees. Investors will be required to hire and pay a lawyer to prepare documents on his behalf; in certain cases, the investor is also required to pay the bank’s lawyers. While this standard is universal among both residential and commercial investments, the cost is almost always higher for those investing in commercial real estate rather than residential.
Higher Initial Investment Means Higher Potential Return
Broadly speaking, it is initially more expensive to make a commercial real estate investment rather than one of a residential nature. Because of its higher price point, commercial investment generally requires a larger initial sum. In many cases, however, this larger initial investment yields a bigger return.
Whether a commercial or residential option best fits your investment desires will largely come down to how significant of an investment you are aiming to make. Those who are able and looking to invest in a larger-scale project may choose commercial options for their increased earning potential despite the bigger initial investment and risk. Meanwhile, Craig Nassi states that those looking for a smaller investment with more modest returns may turn to residential options.