What’s the Difference between Residential and Commercial Real Estate?

Real estate is simply a property of land, a building, or land and the building on it, including the other resources in it. It has four major types. The two most common types are residential and commercial real estate.

Residential real estate is a property type that includes newly-constructed and renovated homes. These are properties that are either built or rented for residential purposes. This may differ in types in accordance with the neighborhood they belong to and the entity owning the property. Apartments and condominiums are considered residential real estate. They are both individual units in a certain building. The difference between them is that a condominium has facilities that are co-shared with other condo-unit owners, like pools, fitness centers, concierges, and more. Single-family and multi-family houses also belong in this list. Mobile homes, as well, are considered residential real estate even if they are movable on wheels. These, and a lot more, are residential real estate properties because they are acquired for non-business purposes.

On the other hand, commercial real estate (also known as investment or income properties) refers to properties intended to produce a profit. These may be structures or land properties that are either bought or rented for that said purpose. These include office buildings, industrial structures (more known as commercial buildings), warehouses, healthcare units, and a bunch more. Any type of structure that generates income is commercial real estate, even restaurants, hotels, resorts and malls. Even multi-family residences (apartments) can be considered commercial because of their profit-generating status. They do differ in various places and tax obligations.

Commercial properties are known to be more pricey compared to residential properties. Not always but most of the time, they are more expensive because they generate income. And, anything that produces a profit is eyed by a lot of possible buyers or renters. The higher the demand, the more reasons to increase in value.

New Construction Must Knows

Have you ever dreamed of building your own home? Today’s market has allowed many to make that dream possible. That means your dream could become a reality sooner than you imagined. New construction is much more accessible when remembering the following three things.

It’s actually quite simple. First is that new construction homes may not be listed on the MLS. Most builders employ their own sales reps that stay on site. This means that the best way to find new construction might be to actually take a drive out to where you are looking to build and see if there are any billboards or signs advertising new subdivisions in the area.

Second, new homes are often sold before they are built. This allows future homeowners to customize the home to their liking. Builders will usually build a couple of model homes that they will stage to help the retail buyer get a general feel for what the home will be like once finished. This helps homeowners feel more secure and visualize the end product.

Lastly, first buyers have a better chance at getting a discount. When a project kicks off, builders want the homes in the area they are building to look extremely desirable. If the builder can say they have 10 homes under contract in a couple of months, that can help motivate future buyers because it looks like a high demand area. Usually builders will build in phases as well. This allows them to get a feel for the market and raise prices as the area appreciates. Discounts can be in the form of upgrades. Most builders will prefer to give an upgrade over a discount on the purchase price so the property or sale values in the area are not affected.

To close, remember that builders don’t have any emotions attached to their properties. They didn’t raise kids there and they don’t have memories fogging what they think the homes are worth. They are simply worried about spreadsheets and if the project will succeed. New construction is a great opportunity in today’s market. Let’s start making your realty dreams a reality.

Zoning in on Zoning

Knowing what you can and can’t do with a piece of property is crucial; it can make or break many deals. I highly suggest you determine this before getting started in any real estate transaction. This can save you a lot of money, time, and energy. I am not kidding about the money part. So what is zoning, and why is it important?

Local governments create zoning ordinances to map out the physical boundaries of different zoning districts, which can occasionally be modified. To determine what your lot is currently zoned as, you will want to go to the municipal building. Zoning and some other ordinances can often be found online. However, do not, I repeat, do not rely solely on that as your only resource. Always go to the primary source to double check your information, especially if it’s a deal you intend to do yourself or invest in.

Now you are probably wondering, why the big fuss over zoning? Well, zoning determines what land uses are permitted in each district or classification. Some examples of classifications may include, but are not limited to residential, mixed residential, commercial, and conservation. Zoning ordinances also lay out all the juicy specifics, like lot size minimums and maximums, setbacks, and height restrictions. Please remember that land use and regulation laws vary from state to state. Therefore, you need to be familiar with the states you work with or at least know where to find the right information when needed.

Like stated earlier, zoning is a very important variable when doing any real estate transaction. Please familiarize yourself with zoning before you end up paying to do it later. Either way, you will have to know it. Now, take this and get out there and apply it.

How To Acquire a Certificate of Occupancy for Tenant Improvements in a Commercial Building

This article is designed to help you through the permitting and construction processes associated with a tenant improvement (TI) project. Tenant improvements are defined as structural or nonstructural interior alterations to an existing commercial or industrial space. This includes electrical, mechanical and plumbing permits, a change in the permitted use or an increase in the permitted number of occupants.

To apply for a tenant improvement permit, you need to stop at the building counter in the public service building in your city and provide them with a complete submittal package. A complete submittal package consists of the following:

  1. A completed Tenant Improvement Worksheet.
  2. Four copies of a Plot/Site Plan showing the general layout of the existing building site, the location of the tenant improvement, the address, and the handicapped path of travel from parking to the accessible entrance(s).
  3. Four copies of construction plans and details, including but not limited to the floor plan, exiting plan, reflected ceiling plan, framing details, lighting plan, electrical/plumbing/mechanical plans and other applicable plans as listed in the Tenant Improvement Worksheet.
  4. Two sets of Title 24 energy compliance documents, when changes are proposed to the mechanical system, lighting or building envelope.
  5. A completed Hazardous Materials Questionnaire.

During the permitting process you will be asked to pay two separate fees: a plan check fee and permit fee. You are required to pay the plan check fee before they take your application for plan check. As for the permit fee, you must pay it at the time of permit issuance. Both fees are determined by the type of construction, the type of occupancy, the square footage and the extent of the tenant improvement.

After the development services technicians (DST) verify that the application package is complete, and you have paid the plan check fee, they will forward a set of plans/documents to each of the four departments/divisions: Building, Planning, Engineering and Fire. Approval from all four departments/divisions is required prior to permit issuance.

After you obtain all the required approvals and pay the permit fee, a DST will issue you a building permit. Now you can start construction. At certain stages during construction, you must schedule an inspection. The following list represents the sequence of required inspections for a typical tenant improvement:

  1. Underground plumbing and electrical
  2. Foundation
  3. Interior wall framing and rough electric
  4. T-bar ceiling and rough trades (electrical, plumbing & mechanical)
  5. Drywall nailing
  6. Electrical service
  7. Final Inspection

After all required inspections are approved and any required approvals from other divisions and/or departments are obtained, the building inspector will notify the utility company to release the electric meter and a Certificate of Occupancy will be issued. The issuance of a Certificate of Occupancy authorizes you to occupy and use the facility based on the permitted use shown on the Certificate of Occupancy.

The Advantages of Building When Zoning Changes

In this market, it is getting more and more difficult to find deals where an investor can simply fix up a home and flip it for a profit because sellers expect to get higher prices and there is an abundant of investors looking for the same deals. So don’t follow the crowd; find older homes in areas where the zoning has changed and build a new structure that will increase the value of the property. Here is an example of a deal I am working on in Los Angeles, California:

 

There is an area in North Hollywood near Universal Studios that is very desirous to live in. In this area, the zoning changed from single-family homes to multi-unit condos (three story condos with underground parking.) Because of the change in zoning, the property values in the area have risen tremendously, but that is okay, because the price of the condos units, when completed, are very expensive also; thus a great profit margin can be achieved. For instance, a friend of mine just inherited his mother‘s home which looks like a small, very old starter home: three bedrooms, two baths, and about 1500 square feet. It is not the house that is worth the money, but the property in its location. He was offered a $1,000,000 for his property by the next door neighbor. Should he take it? Maybe, but not necessarily. He asked me for advice.

 

First, I could see that the zoning had changed because all the properties surrounding him had three story condo complexes built on them. I investigated what the condo units were selling for and discovered that a 1450 sf condo demanded $700,000 and sold like a hot cake, and there were not a lot of units for sell. Then I laid out a building plan on the property after calling the building department to discover the set-backs and height requirements. I estimated that we could get 14 units on the property with a semi-underground parking structure. Fourteen units times $700K each equals $9,800,000.00 in retail sells. Then I calculated the building cost after talking with a local contractor to be $4,500,000.00 and I contacted a few financial institutions for a construction loan. By having the property paid for and the appraisal of the project as high as it was, one was willing to loan us the money to construct the building at a reasonable rate of 1 ½ points and 5.2 % ARM.

 

The projected profits, after paying to design and construct the building and demolish the old building, as well as taking away the financial charges, the marketing cost to sell the units, the closing costs and the holding costs for taxes, insurance and utilities, and paying my friend $1,200,000.00 for his property ended up being $2,562,500.00. I told my friend I would do a joint venture with him where he would put the property up as his investment and I would procure the construction loan and supervise the project: line up the architect, hire the contractor, see that the interior finishes are up to par with what is selling, line up the real estate company, create all contracts (using an attorney) and oversee the project. My friend would receive $1,200,000.00 for his property out of the proceeds first ($200,000 more than he was offered) and half of the remaining profits after all expenses are paid for. I would receive the other half of the profits with no money invested, but dong all the work. (A cool $1,281,500 in a year to a year and a half, with no money down). The key was finding the construction loan and that is why it pays to network with cash investors who may end up becoming lenders on future projects.

 

So, look for those unique deals that are a little out of the ordinary and think about building new.

Part 2 – Getting Started with Residential Land Development

Part 1 of this series discussed the initial steps to getting started with residential land development. We covered financing options, finding partners, and finding properties. Part 2 will pick up where we left off and teach you 3 more steps you need to take. Because we covered 3 steps in the first article, we will number the following steps 4, 5, and 6.

4. Preliminary Due Diligence

After identifying a potential property, you will need to explore the codes, zoning regulations, and development processes for the local municipality or jurisdiction. Although you can go through the process to change the zoning or use for the property, it is typically a long and painful process that doesn’t guarantee your proposed changes will be approved. It’s ideal to keep your development conforming with existing codes and regulations.

5. Obtain Estimates For The Development

You will likely need to talk to several different contractors to get bids on the work that needs to be done. It’s wise to use contractors that have done similar projects within the area. They will have more experience working with the local city. Their experience will help them understand the requirements and costs for the project in the area. In addition to getting bids from the contractors, make sure you talk with multiple city officials multiple times. You need to make sure all of the stages of the application and approval process are covered. This process can include, but is not limited to:

  • Filling out and submitting paperwork
  • Meeting with city officials
  • Various 3rd party tests and permits
  • Purchasing water rights
  • Application fees
  • Construction inspection fees

6. Negotiation

Now you should have a good estimate on the timeline and cost to execute the development. You are ready to run numbers and make an offer to the seller. One of the keys to making an offer and negotiating is understanding if there’s any part of the development process that the seller is willing to complete. If it’s a big enough project, the seller may be willing to seller finance or subordinate the property. With the amount of information needed for a development project, it’s usually a good idea to have at least one meeting with the seller to discuss as many details as possible. Then you should present an offer that contains multiple options to make the deal happen.

Getting Started with Residential Land Development

There are those of you who would like to pursue land development, but you lack the knowledge and courage to do so. I’ll try to help you learn a little more about it with 3 basic tips. The courage part is something you’ll have to work on yourself. Get some guts dude!

  1. Discuss Financing Options with Banks, Brokers, and Private Lenders

It’s common practice to have a discussion with a bank before buying a car or house. This helps you figure out what you can afford. It also helps you understand the shopping process and what you need to do to secure the loan. The same applies to pursuing a land development project. Find out how much money is needed for a down payment and what loan terms are available. This will help you understand what types of projects will work for you. You will also know if you need to bring on any partners. This takes us to tip number 2.

     2. Find Some Partners

Don’t let greed get in the way of bringing the right partner into your project. You’re likely to lose a lot more money with ‘rookie mistakes’ than you would lose by sharing the profit with a good partner. I use 3 different types of partners to do development projects.

  • Private money lenders will loan the money needed for the project and have some advice or resources that will help you.
  • Joint venture partners are also a great option. They invest their own money and can offer expertise and effort.
  • Other investors and developers are important if you want to pass on the project for a finder’s fee.

      3. Find Some Property

As with most real estate, a good real estate agent can be helpful in finding the right property. Search the MLS or websites like Redfin.com for properties that are oversized compared to the surrounding properties. These are the types of properties that can be subdivided into smaller lots. You can also drive around your local market and search Google Maps for oversized properties.


    Go through these 3 steps and start finding some development opportunities. You can learn and network while you go through the process. Peace be the journey.