Is A Rental Property Considered Commercial Use
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What is an investment commercial property? Kent Property Witness offer RICS expert witness surveyor services for Tonbridge and Kent. Find out more about the difference between commercial and residential property and how to buy commercial property.
What Is Investment Commercial Property?
Investment commercial property refers to a business-related rent property that offers a stable workspace for employers and employees or exists for hospitality instead of residential real estate, which constitutes a living space. Commercial real estate is an investment owners lease to prospective tenants to conduct activities and plans that are more rental income-generating.
Doing so is beneficial for both parties. It is a relatively broad rental real estate category, including a wide range of storefront properties to more extensive shopping malls and retail centres. Commercial real estate involves a wide range of categories: hotels, holiday and weekend resorts, strip malls, office spaces or blocks, healthcare facilities, canteens, and restaurants.
Commercial real estate is generally categorised into four clear classes heavily depending on their function in our lives:
Office spaces and blocks
Multi-family rental property
Retail and shopping outlets
Investing in Commercial Property vs Residential Property
Commercial property is often perceived as a traditional sound investment for business purposes. The costs of tenants customisation and the initial investment costs for your chosen building tend to be much higher than the costs of any residential real estate.
However, any overall returns you receive for higher. There are a few prevalent headaches and costly legal issues that require lawyers or developments associated with residential tenants that you often won't experience with straightforward leases and companies.
Commercial property investors are known for utilising triple net leases, meaning that building insurance, maintenance, real estate property taxes, and other expenses that cost more money are borne from the company you're working with leasing its premises.
Advantages such as this are not often available to real estate investors that predominantly purchase and oversee residential rental properties.
In addition, commercial property investment tends to offer more benefits such as straightforward pricing alongside more favourable leasing terms and conditions.
Residential property investors must look at a wide range of factors involving the overall emotional appeal of the household property concerning potential future tenants. It would be best to consider the target audience and the types of people who may desire the home you are renting out for hire.
In contrast, investors of commercial properties can entirely rely on net income statements that accurately display the value of any current leases and rules involved. You can then compare this value against the capitalisation rate of various other similar properties within that location.
Types Of Commercial Property
There are various commercial properties across numerous industries; we pass by or live beside a whole host of commercial features in our everyday lives. Owning them is an enormous responsibility compared to a simple residence income property.
Commercial real estate is often divided into five specific categories, including:
Many office properties are small offices or blocks, one tenant buildings, downtown skyscrapers and a wide range of others that aid companies in completing their day-to-day jobs.
It provides a space for them to sit and tap away at computers, or other forms of work, etc.
Land often involves the financing and investment of undeveloped, rural or raw land for sale that owners will eventually utilise for future development concerning a wide variety of potential properties. Its intended use may also concern infill land with inner cities and towns, pad sites, etc. Such forms of ownership require planning permission before your building project can go ahead.
Resturants and Retail Shops
These types of buildings involve small neighbourhood shopping centres and power centres for large anchor retail stores, for example, OfficeMax, Best Buy and PetSmart.
It also includes pad sites on motorway frontages, regional outlet malls and single-tenant retail buildings.
The multi-family category often includes high-rise apartment buildings or various apartment complexes. Any block or physical property more prominent than a fourplex building tends to be considered commercial real estate.
The industrial category often relates to projects and properties such as extensive R&D facilities, warehouses, distribution centres, and cold or self-storage.
This category considers various non-residential properties, for example, hospitality facilities, medical centres or clinics, hotels, numerous self-storage developments, along with many more.
Rental Property as a Business
Owning a rental property can often qualify you as a business, but only if you continuously spend and work on household management to earn a profit from the monthly rent.
The IRS states that are several factors that must be relevant to your rental property method for it to be considered a business; these factors include:
The number of properties rented. If you own more than two or three properties, your rental can be classified as a business.
Many consider the terms involved in the lease documents, for example, long-term and short-term leases.
Your level of day-to-day involvement as the owner is considered. If you put a great deal of effort into maintenance, you're more so a business.
The overall significance of ancillary services under the household or property lease agreement.
They also consider whether you, the landlord, have filed all returns on required information.
The type of property is also considered; for example, if you own more commercial buildings than residential ones, you're more likely to be perceived as a business.
Under these tests, the IRS and courts have frequently found that most landlords in the industry are not legally required to own too much property or do a wide range of related work to qualify as a business. There aren't specific numbers of properties or units that you should be renting out to be eligible as a landlord or as a rental business.
In one particular case, a married couple was discovered to be engaged in business whilst they only owned two condominium units with a 25% time-share interest.
The actual job of renting the units and ensuring the household appliances was in repair, and good shape were tasked to a professional management company acting as their agent.
Consider all the factors above to assess whether or not you qualify as a business.
Rental Property as Investment
Rental ownership is considered an investment compared to a business. You're still actively earning a profit; however, it's not your full-time job that you're consistently working on with the assistance of agents, managers or employees.
Some may find this a challenging concept to grasp, so we'll provide an example:
"Edgar Grier inherited a home owned by his mother that she had rented for numerous years to the same tenant. That tenant occupied the property, living there for an extended period until Grier decided to sell it around 14 years later. Grier managed the investment property over the years, often with the help of a trustworthy agent but primarily by himself.
The house required very little management; however, it wasn't up to Grier to care for each maintenance aspect, such as replacing the furnace or other details.
The court of law and IRS found that Grier treated the house as more of an investment than a Business, renting the home out to tenants, but it was not his responsibility to micro-manage the maintenance or appearance.
The courts and law firms noted that Grier's investment house was the only rental property he had ever owned. They concluded that Grier's landlord activities were far too minimal for the single rental to be considered a business or even rise to that level."
Typically, those with rental property businesses have a few more properties to take care of and manage compared to one or two.
Finally, those who buy interests in business entities owning plenty of real estate yet do not have any involvement in the overall management of those properties are also considered investors purely for tax benefits and purposes.
Purchasing interests may include people who own several shares of Real Estate Investment Trusts (REITs) and corporations alongside those of limited partners in partnerships owning real estate.
Are you looking for advice about investing in commercial properties?
Contact us and give us a call about any information or advice about property assessments.