Choosing between commercial and residential real estate investments is not a decision that can be made in a matter of days. Using one method over another has its advantages and disadvantages. Risk tolerance, time horizon, and return expectations all go into an investor’s decision-making process. 

In this article, we’ll be covering all the things that you need to know about residential and commercial real estate to help you decide which one suits you best.

Differences Between Residential And Commercial Investments

Property classified as either residential or commercial has the following differences:

• In terms of design and construction:
  • A single-family home or a multi-family building with one to four units is considered a residential property. Residential real estate includes condominiums, duplexes, and quadruplexes.
  • Commercial property, on the other hand, refers to properties with at least five units. Commercial real estate includes office, retail, industrial, multi-family (five or more units), hotel, and special-use buildings.
• The type of tenant each building gets is another glaring contrast between commercial and residential properties. Families and people rent residential properties, whereas businesses rent commercial properties.
• Finally, there are distinct advantages to owning different kinds of property: 
  • Commercial real estate offers a far broader range of investment opportunities than residential. Commercial real estate investment funds, for example, outnumber residential real estate investment funds. 
  • Residential real estate investing, on the other hand, gives investors a greater say in how the property is managed.

PROs Of Investing In Commercial Real Estate

Smart investors realize that weighing the advantages and disadvantages of various investment options is critical before making a final selection. Commercial real estate investing’s advantages, on the other hand, are indisputable.

Qualified Potential Tenants

Investors wishing to rent out a single-family home (or a modest multi-unit property) may find it challenging to locate renters who are qualified and who will keep the property in good condition. Commercial renters, on the other hand, are typically firms, corporations, or other organizations. They are more likely to abide by the property’s restrictions because they are backed by a larger firm. Qualified tenants can make a landlord’s life easier, but this isn’t always the case.

Value Increase

Unlike residential real estate, where similar properties have a significant role, commercial real estate’s revenue has a direct bearing on its value. In other words, the more money a business property brings in, the more valuable it is. Investors may benefit from a far faster rise in property value than homeowners do.

Triple Net Leases

With a triple net lease, the owner of the property incurs no property costs. Because the lessee pays all property expenses, including taxes, the property owner is responsible for the mortgage. This form of lease is frequently signed by large corporations (think Starbucks, Target, Walmart, etc.) to be able to keep a consistent look and feel. 

These costs are then taken care of by them while the investor pays almost no maintenance charges. What a win-win situation! Investors can choose from various net leases, but only commercial properties benefit from a triple net lease.

Higher Return Potential

Commercial property cash flow and returns outpace those of residential property by a wide margin. The average annual return on a typical commercial real estate investment is 12.7%, while the average annual return has been 8.8% over the past 15 years. 

This is according to the NCREIF Property Index. room means more renters, and more renters mean more money for you. For investors trying to diversify their portfolio, this isn’t a bad choice.

Longer Terms

Commercial premises are often leased for periods of five to ten years. Investors might expect decreased vacancy and turnover expenses as a result of this. Those who are concerned about selling their home from year to year will be relieved to learn that long lease terms indicate a steady stream of good cash flow. 

There is a risk that commercial property owners will have to deal with unsatisfactory renters for long periods of time. Long-term problems can be avoided by following the proper application procedures and ensuring that their investments are legally protected.

PROs Of Residential Real Estate Investing

Entry Cost

Even if you are a new investor, you can get loans for commercial real estate. However, residential real estate is almost always cheaper than commercial real estate, at least to start. Investing in a commercial building may seem intimidating for rookie investors, but once they’ve purchased a number of cash flow-generating residential properties, they’ll likely have the capital and knowledge needed to make the jump to commercial real estate.

Bigger Buyers 

Residential real estate has a much larger pool of possible tenants and buyers than commercial real estate, which relies solely on businesses for its existence. Investors may have a harder time attracting commercial tenants in some regions as companies adapt to internet marketplaces and remote work alternatives. Residential real estate is an awesome investment opportunity regardless of the current market conditions.

Lenient Zoning Laws

As a property owner, you’ll have to deal with a lot more red tape when you invest in commercial real estate. Building permits are more difficult to obtain, and zoning restrictions are stricter, and so on. Residential real estate has more lax and smaller-scale rules and restrictions.

Reduced Tenant Turnover

It’s common for commercial properties to be occupied by businesses that are constantly changing and expanding. When the market is so volatile, it’s tough to keep long-term tenants. As a result, finding tenants on a regular basis, rather than only when a vacancy arises, will need more effort. As a residential real estate investor, you might be able to find long-term tenants provided you market and screen your tenants effectively. 

You can be more confident that long-term tenants will treat the property as if it were their own if you focus on getting them.

Costs Of Commercial VS Residential Construction

Even though the properties are of similar size, the costs of commercial and residential real estate are typically very different. Materials, compliance regulations, overhead, labor, and equipment all have a role in the cost disparities.

Business real estate can have significantly higher expenses than residential because of the need for higher-quality labor and technology designed solely for commercial projects. Overhead, labor, and equipment expenditures in residential real estate can be astronomical in some cases. Because of this, the cost of establishing residential real estate does not usually come close to that of constructing commercial properties.

Commercial VS Residential Electricity Rates

Both commercial and residential buildings need the energy of the same caliber. Nevertheless, electric providers frequently give discounts and various pricing to commercial property owners because they buy electricity in bulk. Business owners can save money on their electricity bills by taking advantage of special commercial rates. Due to the huge amount of energy that they must consume, electricity providers may recoup a large portion of their costs.

Commercial VS Residential Property Loans

Banks often provide traditional residential loans or mortgages to borrowers. A commercial mortgage, very much unlike a residential one, is made for a business rather than an individual buyer. For tax purposes, it is normally in the best benefit of the borrowers to sign as a representative of a corporate company.

Commercial loans, on the other hand, are viewed as riskier by lenders. This increases interest rates and shortens the duration of a commercial loan. Why? Because there is a separate market for commercial lenders outside of regular banks. 

A business loan’s tenure can range from five to twenty years with an amortization period often exceeding the loan’s term. It is possible for commercial lenders to create customized repayment plans for each customer.

Key Takeaway

Because both commercial and residential investment properties have their own advantages and disadvantages, deciding which one to invest in can be difficult. Both will broaden your investment horizons, provide considerable tax advantages, and move you closer to financial independence. As an investor, how do you choose?

Investment in real estate is a personal decision, so the answer will ultimately be determined by the investor’s goals. Consider your short- and long-term objectives as an investor. It’s possible that rehabilitating or wholesaling a residential home is the best method to start making money quickly. Commercial properties, on the other hand, have a lot to offer long-term investors who are searching for passive income.