During the recovery from the recession, many who owned their own home saw the previous drop in prices as an opportunity to purchase income producing real estate – especially with rents rising. For most, this meant purchasing another residential property that will be rented. More serious investors turned to commercial properties as both markets have continued to shine as the recovery has matured.
First, what is the difference between rental properties and commercial properties? If you purchase another home to rent, this home is a rental property. Even if you purchase a duplex or a 3 to 4-unit residential property, these are considered rental properties. As a matter of fact, a great way to enter into the investment market is to purchase a multi-unit property such as a duplex and live in one of these properties. This would give you more favorable “owner-occupied” financing. FHA, Fannie Mae and Freddie Mac all allow the purchase of up to 4-unit properties and will finance larger loan amounts for these transactions.
On the other hand, if you are purchasing a building that has more than four units, you are starting to move into the commercial world. Consider a building with 50 units. This is an apartment building and is clearly a commercial transaction. However, commercial properties are not limited to apartments. Commercial properties can be offices, churches and hotels, as well as other types of structures.
Should you consider becoming the owner of a commercial property? Ownership is a great business opportunity if you purchase the right property because the income may very well cover the costs while you build up equity through paying down the mortgage and long-term appreciation. A $5 million dollar property that appreciates only 5% per year could be worth $10 million dollars in under 15 years because of compounding. If the income pays off the mortgage during this time, the result would be a great nest egg for retirement.
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