What Is Commercial Real Estate?

When I told my friends that I was now selling commercial real estate, a few of them asked the question, “What is commercial real estate?” Most people know what residential real estate is – the buying and selling of homes, but there are those who have some misunderstanding about what is included in the buying…

When I told my friends that I was now selling commercial real estate, a few of them asked the question, “What is commercial real estate?” Most people know what residential real estate is – the buying and selling of homes, but there are those who have some misunderstanding about what is included in the buying and selling of commercial properties.

For the sake of this article, I am going to see how Investopedia.com defines commercial real estate. Investopedia.com says that commercial property is “Property that is used solely for business purposes.” This means that the property is used as income producing; it is not to be used primarily as the buyer's resident. Some examples of commercial properties include: shopping centers, office buildings, retail buildings, multifamily properties (apartment buildings), vacant developable land, etc.

You may now be wondering why we separate out residential real estate from commercial real estate. The reason for this is, if the property is being purchased as an income producing property, then it is looked at differently than if it will be used as a personal resident. The reason for separation is because they each require some additional, specialized skills. For commercial real estate, an agent needs to be able to understand certain investment analyzes, such as NOI (Net Operating Income), ROI (Rate of Return), CAP Rate (Capitalization Rate), and also be able to determine if the investment is profitable or not. The investment is not only based on the price of the property, it also includes profitability, whether or not the projected income will be greater than the projected expenses and how long it will take to re-coup the investment.

Alright, I could hear the question, “Why do we need to know all this information about commercial real estate?” My answer to this question is; if you want to be that professional that the investor will look up to, then you need to be able to help him / her make the deal and feel good about the deal. Remember, without the deal, there is no payday. Additionally, you want that investor to come back to you when he / she wants to invest again and you also want them to provide you with referrals.

Usually, you do not see very many commercial properties being advertised in the MLS. Primarily, the MLS has residential properties and commercial properties are advertised on sites such as Loopnet.com and ShowCase.com.