Are Apartments Really Commercial Properties

Category: Finance, Real Estate.

Are Apartments Really Commercial Properties?

If you ask any banker, he ll tell you that anything over 4 units is considered a commercial property. By David Lindahl. If you ask any municipality regarding their trash pick up, you ll get the same answer, ditto with insurance companies but are apartments really commercial properties? Well, apartments over 4 units are commercial properties but there is one big difference between apartments and offices. When you think of commercial property, do you think of tall skyscrapers, office buildings and warehouses. and possible large apartment complexes? One space is occupied by residents and the other spaces are occupied by businesses. Did you know the 3 out of 4 businesses go out of business after the first year?

That s a big difference! Ninety percent are out of business by year five! People always need a roof over their head. If your renting to businesses, your turnover rate, chances are is going to be higher than a residential property and you should know that tenant turnover is your biggest expense in any multi- unit property. If they move out of your place, they are moving into someone else s( if you treat them with respect, they will stay longer! ) Businesses just disappear and when they break the lease, it s hard to get money out of a bankrupt company! If they lose a tenant, they ve lost 25% of the income.

A lot of commercial properties rely on 3 or 4 big tenants. If the property cost you$ 1, 000, 000 and you lose 25% of your occupancy, you could be at a breakeven point or worse. upside down. The main reason is that the pool of potential renters is not that big. Statistics show that it takes an average of six months to fill a commercial space. In contrast, with a residential property, there is a vast pool of potential renters and the turnaround is one or two months instead of six. There is one other thing you should consider, when you re attracting a commercial tenant for your property, you usually agree to do a" build- out" which means you change the space to make it conform to the business.

For the same million dollars, you could get a 20- 60 unit property( depending on where you invest) , if you had 20 units and lost one, you ve only lost 1/ 20th of your rent, you still have plenty of cash flow and more importantly, plenty of spend able income. This could cost you thousands of dollars. If more is needed, it s usually paid for from the previous tenants security deposit. With an apartment unit, the" make ready" usually consist of paint and carpet. Yes, apartments over four units are considered commercial properties but as you can see, they are in a class by themselves when you compare risk versus reward.

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