Commercial Vs Residential Real Estate Investment

Commercial real estate

Commercial Vs Residential Real Estate Investment

As a form of security for the value of their hard-earned money in these times where the value of most currencies is fluctuating, more and more people are turning to investments. Undoubtedly, investing in real estate is becoming increasingly attractive.

Owning properties is surely a great way to protect the value of your money. The decision lies in choosing to invest in either residential or commercial properties. Ultimately, the choice is yours but it pays to be equipped with the right information before settling on any of the investments.

What Is Commercial Real Estate?

Commercial real estate entails buildings that are used for business purposes. These facilities are not for residential purposes. Their purposes include office and retail spaces, hotels, industries, warehouses, and mixed-use buildings.

The thing with commercial buildings is that they come in all shapes and sizes. They can be a single storefront, an entire shopping center, or even a skyscraper.

Investing in commercial real estate is more complex than investing in residential properties. When you invest in a commercial property, you are not only buying the physical building but also the business that is being conducted inside it.

The thing with commercial real estate is that its success or failure relies heavily on the businesses operating inside it. If the businesses are doing well, then your investment will also do well. However, if the businesses are struggling, then your investment will also take a hit.

Before you decide to invest in commercial real estate, you need to have a clear understanding of the risks involved. You should also have a solid plan in place to ensure that your investment will be successful.

What Is Residential Real Estate?

Residential real estate, on the other hand, refers to properties that are used for living purposes. These include apartments, condos, single-family homes, and even vacation homes.

Unlike commercial real estate, residential properties are not usually used for business purposes. The exception to this is when a property is rented out to tenants. In this case, the property is still considered residential real estate.

The thing with residential real estate is that it is more stable than commercial real estate. This is because people will always need a place to live. The demand for residential properties is relatively constant, which makes them a more stable investment.

However, this does not mean that investing in residential real estate is risk-free. There are still risks involved, especially when it comes to the property market.

Pros Of Commercial Real Estate Investment

Below are some reasons why you should consider investing in commercial real estate:

1. Potentially Higher Profits

The biggest advantage of commercial real estate is that it has the potential to generate higher profits. This is because commercial properties are usually larger and can be rented out to multiple tenants. If one or more of the space is empty, the other occupied spaces will fetch you some money.

2. Longer Leases

Usually, commercial properties are leased out for about 5 to 10 years. This means that once you rent out the facility, you would not be in search of occupants in the short term. This will even give you a more predictable flow of income.

Moreover, before you lease out the building, the costs you incur in maintenance and the like will not be recurring as a lease of commercial property means handing over the building in its entirety to the occupants, including costs incurred while the facility is in use by them.

3. More Freedom to Choose Tenants

When you invest in commercial real estate, you have more freedom to choose your tenants. This is because commercial tenants are usually businesses, which means they are less likely to default on their rent payments.

4. Hedge Against Inflation

Commercial real estate can also be used as a hedge against inflation. This is because the value of commercial properties usually goes up when inflation rates rise.

5. Triple Net Leases

Once you lease out a commercial property, you transfer all costs related to the building to the tenant. Insurance, property tax, and maintenance costs are no longer your headache. The tenant has to take care of them and that means less risk for you as the owner.

Of course, as the owner, you may need to pop by once in a while to check up on the property to make sure it is maintained well. If you cannot do that, you can employ the services of a property manager. 

Cons Of Commercial Real Estate Investment

1. High Cost of Entry

To invest in commercial real estate, you need a huge amount of money as compared to investing in residential real estate. It is more expensive to acquire commercial properties. This is one of the reasons that deter people from investing in commercial real estate.

2. Complex Purchase And Management

For starters, the paperwork involved in the purchase of commercial properties is complicated. Not to mention, the process of securing financing for a commercial property is also more difficult.

3. Longer Vacancy Periods

If you are not careful in choosing your tenants, you may end up with a vacant commercial property. It can take months or even years to find new tenants, which can be costly for you.

4. Riskier

Another downside of commercial real estate is that it is riskier as compared to residential real estate. This is because the demand for commercial properties is volatile and can be affected by economic conditions.

5. Inability To Increase Rent As Desired

You do not have the convenience of reviewing rent in the short term with commercial real estate investment. Once the building is leased out, you will be waiting 5 to 10 years or more till you can increase the rent.

Pros Of Residential Real Estate Investment

1. Low Cost of Entry

The biggest advantage of residential real estate investment is the low cost of entry. You can get started with a small amount of money as compared to commercial real estate.

2. Easy To Manage

Residential properties are much easier to manage as compared to commercial ones. This is because you would only be dealing with a few tenants as compared to commercial properties where you have to deal with many tenants.

3. More Stable Income

The income from residential real estate is more stable as compared to commercial real estate. This is because people will always need a place to live, no matter what the economic conditions are.

4. Less Risky

Residential real estate is generally less risky as compared to commercial real estate. This is because the demand for residential properties is more consistent and not as volatile as commercial properties.

5. Higher Potential Returns

Although the initial investment may be lower, you have the potential to earn higher returns from residential real estate in the long run. This is because you can increase the rent every year, which will not be possible with commercial real estate.

Cons Of Residential Real Estate Investment

1. Unpredictable Cash Flow

When your residential property is empty, it does not give you any income. This means that whenever the property is empty your cash flow stops. This is mostly what happens when a facility is a single-family unit.

2. Higher Turnover

Though shorter lease terms benefit the tenant, it is not so great for owners of residential properties as the properties are rented out for 12 months or less at a go. In some areas, you may constantly be in search of new occupants of the space. 

3. Higher Maintenance Costs

On average, a residential property will have higher maintenance costs as the owner is responsible for the upkeep of the property. This means that you will need to factor in these additional costs when making your investment decision.

4. Personal Liability

If you own a rental property, you will be personally liable for any accidents or injuries that occur on the property. This means that you could be sued if someone is injured while on your property. To protect yourself, you will need to have insurance in place.