When people in Los Angeles think about real estate investing, they often lump residential property investing with investing in non-residential properties. However, the two are quite different. Here is a look at the difference between investing in a single-family residence, or SFR, and a property featuring commercial leases.
Unlike investing in SFRs, investing in commercial properties focuses on acquiring, developing, leasing and operating a variety of types of property. These property types include apartments as well as retail, office, hospitality and industrial properties. Still other commercial property types include senior living, self-storage and student housing.
On the flip side, investing in an SFR usually consists of purchasing, leasing and operating a single-unit dwelling. An SFR’s value drivers include the value of the land, the structure’s value and the supply/demand premium, which is a reflection of submarket dynamics. Commercial real estate has these same value drivers, although it also has an additional one: net operating income, also known as NOI. NOI refers to revenue obtained from a property minus one’s operating expenses. This particular value driver is exceptionally large and thus can have a major impact on the value of an asset — especially in real estate markets featuring high rents.
Getting into real estate investing can certainly be exciting due to the great income potential that exists in the current market. However, investing in properties featuring commercial leases can especially be tricky. Fortunately, an attorney can provide aspiring investors with the guidance they need to successfully navigate the legal side of any real estate transaction in Los Angeles.