Choosing between residential vs. commercial real estate investing is not a decision that can be made in just a day. Each strategy gives its own set of benefits as well as its own set of challenges. The path an investor decides to take will depend on their time, goals, risk tolerance, and liquid capital. Review the following points before making your final choice.
What is the Difference Between a Commercial and Residential Property?
The technical difference between a commercial and residential property is as follows:
Residential real estate is all single-family houses and one to four-unit rental residences while commercial property is anything with at least five or more units. Apartments, Condos, duplexes, and quadruplexes make up residential real estate while hotel, office, retail, industrial, multifamily (of five units or more), and special purpose buildings are considered to be commercial real estate.
Another difference between residential and commercial properties is the type of tenant each building accommodates. Residential properties are normally leased to individuals and families, while commercial properties are leased to different businesses.
Finally, every property type comes with a different set of possibilities. Commercial real estate tends to grant investors a quite wider range of potential investments. For instance, there are more commercial property investment funds than residential ones. While residential real estate investing tends to give investors a more active role in the property.
Benefits of Commercial Real Estate Investing
Easier To Increase Value
One of the biggest differences in commercial and residential real estate is the way in which property values are determined. While residential real estate is mainly influenced by comparable properties, commercial real estate is more directly influenced by how much revenue it generates. The more cash flows a commercial property is earning; the higher the property value will be. With the perfect tenants, investors could see an improvement in value at a much faster rate than residential housing.
Smart investors understand that it is of utmost concern to evaluate all the advantages and disadvantages before making a final investment decision.
You have heard the saying, ‘with greater risk comes greater rewards,’ which is more poignantly the case with commercial properties and high returns. If compared to the returns on residential properties, commercial property returns, and cash flow are far more attractive. Besides, more space equals more tenants, which equals more cash in your pocket.
Sometimes it can be difficult for investors looking to rent out their single-family property or small multi-unit property to find tenants who are qualified. Commercial tenants tend to be corporations, businesses, or something of the like. As they are backed by a larger company, they are normally more likely to respect the property and its rules. Though this is not always the case, but qualified tenants will make any landlord owner’s life easier.
Longer Lease Term
Commercial leases are much longer when get compared to residential properties, which typically range from six to twelve months. It is not quite uncommon for commercial properties to lease for anywhere from five to ten years. For investors, this meant lower turnover costs and vacancy rates. The longer lease terms signal reliable, positive cash flow for those concerned about marketing a property from year to year. It is much possible for commercial investors to end up with less than desirable tenants for extensive periods of time, but with the right application process and legal protections, investors can avoid any long term issues.
Benefits of Residential Real Estate Investing
Cost of Entry
While it is possible to get commercial real estate loans even as a new investor, funds require for investing in residential real estate is certainly less than commercial real estate. The average person might not have sufficient savings for a sizable down payment on a commercial property, while it is more likely that they have enough saved for a single-family house. If the idea of a commercial property sounds too overwhelming as a newbie investor, think of it this way: Once an investor has obtained some cash flow producing residential properties, they will likely have the capital and significant experience to invest in a commercial building.
Decreased Tenant Turnover
For residential real estate investors, particularly if their focus is on single-family houses, tenant turnover is not something dealt with often. Businesses grow and change, and those are usually the tenants that make up commercial properties. With that sort of volatility, it can be quite difficult to keep tenants for long periods of time. This means more work has to be done to finding tenants on a daily basis as opposed to once in a blue moon. However, if you market and screen tenants rightly as a residential real estate investor, you can find individuals who are committed to being long term renters. If you keep focusing on acquiring only long term tenants, you can be more positive than they will treat the home as if it is their own.
Much Lenient Zoning Laws
With commercial real estate, investing comes far more red tape to deal with as the property owner. Zoning laws are quite strict, building permits are harder to come by, etc. With residential real estate, regulations and rules are not only more lenient but also a more small scale.
Larger Buyer and Renter Pool
In fact, everyone needs a place to live. Residential real estate profits from having a large pool of potential tenants and buyers when compared to commercial real estate –which solely relies on businesses. As companies adjust to online marketplaces and remote work opportunities, investors might find it harder to attract commercial tenants in some markets. The high rise demand for residential real estate makes this an especially attractive opportunity for investors, no matter the market.
Performs Better In Economic Crisis
Business is often the first to experience the costs of an economic downturn, which can influence commercial investors in a few ways. First, commercial property owners wishing to attract tenants while the economy is in decline might find marketing the property to be particularly challenging. As a fact, residential real estate is not immune to these challenges, though, as a whole residential property owner will get benefit from the fact that housing will always remain in demand despite the state of the economy. There is also no assurance a company will stay in business for the duration of a commercial lease. This can present an unusual challenge for commercial investors counting on long term tenants.
Both residential and commercial real estate investing have positives and negatives. To decide whether which strategy is the right one for you, it is essential to review the benefits and determine which ones suit more with you and your business’ core values.
Deciding between a residential vs. commercial investment property is not easy to tackle, mainly because both have their own pros and cons. In fact, both will diversify your portfolio, both come with important tax benefits, and both of them will pull you one step closer to achieving your aims and goals of financial freedom.
So how is an investor supposed to choose?
The answer to the above question solely depends on what the investor wants to gain by investing in real estate. Investors must take some time to think about their short and long term goals and do their proper research. If they are wanting to make a quick profit to begin, wholesaling or rehabbing a residential property might be the best way to go. If they are in it for the long term and looking to achieve passive income, commercial properties offer attractive profits.
If you want to make the most returns, you may want to consider investing in commercial real estate, though, and residential properties might be more appealing if you are more comfortable working on a small scale. Thinking about how much time you are willing to devote to your project, as well as your risk tolerance can make it easier and simpler to decide where to invest your money.