Real Estate Investing Basics - Understanding the Fundamental Differences Between Single Family Homes and Commercial Property
While it is not uncommon for an investor to focus on only one type of real estate, the wealth that they seek is often easiest to achieve with a diverse investment portfolio. Not only does this allow for multiple streams of income, it also provides investors with better protection from fluctuations in any given market. Unfortunately, when investors do not understand the fundamental differences between the two most common real estate models - single-family residential real estate units and commercial real estate (CRE) - they risk significant financial loss.
Use the following sections to gain a better understanding of the key differences between these real estate sectors and how they can be used to determine the potential return on investment (ROI) on any given property, and discover what a seasoned real estate attorney can do to help improve the outcome of your next residential or commercial real estate transaction.
Net Operating Income (NOI) - What is it and When Does it Matter?
In the simplest of terms, net operating income (NOI) is the annual net income generated by property. It is determined by first subtracting any vacancy and credit losses from the potential rental income of an income-generating property, then adding any additional income to that total (which is known as the effective rental income). This new total represents the property's gross operating income. Finally, the operating expenses are subtracted, giving investors their total NOI.
Though a single-family unit can have an NOI, it is generally irrelevant in determining an investor's ROI in this setting. Here, leases may actually be detrimental to the return amount, as the value of a residential property is its potential sale amount whereas, in commercial real estate, the value of a property is based upon what it can bring in, less any expenses. NOI can also allow a commercial property to make gains or losses, regardless of other market dynamics, which makes it an integral part of determining whether a given CRE property is worth the investment.
Contact Our Naperville Real Estate Attorneys
One does not have to completely understand the nuances of the real estate market to make a profit. Instead, parties can seek skilled and competent legal assistance to ensure that due diligence is conducted, contracts are effectively negotiated, and the risk of any delays resulting from zoning and land use issues are minimized.
As one of the most trusted real estate firms in the state of Illinois, Lindell & Tessitore, P.C. can assist with your next residential or commercial real estate transaction. Our seasoned Oak Brook real estate lawyers can also help you develop a strong strategy for building and expanding your current portfolio. Schedule your consultation by calling the offices at 630-778-3818 today.