Owning property is always an asset and both residential and commercial properties come with their own set of benefits and drawbacks. Deciding whether to invest in residential or commercial real estate will depend on many factors including how much money you are able to invest, what your objectives are and how involved you want to be in long-term maintenance.
There are key differences between residential and commercial properties including property type, market competition, income potential, and many other factors. If you are selling a property, be it residential or commercial, there are also different factors to consider.
What Is the Difference Between Residential and Commercial Properties?
Residential real estate concerns any property where people live, be it owner-occupied or rented to tenants. This can include, but is not limited to, duplexes, condos, townhouses and mobile homes. However, not all properties where people live can be defined as residential real estate; hotels, student housing and apartment buildings with more than 4 units all fall under the category of commercial real estate.
Commercial real estate, on the other hand, covers offices, retail properties, apartments and industrial properties. It would be any places where people do business however, within that description, there is a lot of variation. Commercial real estate could be both owner-occupied (such as a retail outlet) or rented to commercial tenants.
Why Might You Want to Invest In Residential Real Estate?
There are many reasons why people choose to invest in residential real estate and, done correctly, it can be an extremely lucrative move.
Unlike commercial real estate, residential real estate has a relatively low barrier to entry in that you can find it anywhere. Whether you are looking to buy a property in a small village or a large urban area, there are plenty of available options.
In addition, people always need a place to live meaning that there is consistent demand. As such, you will usually have a large pool of prospective buyers or renters. This also means that in the case of an economic crisis, such as the recent pandemic, residential real estate tends to be more resilient than commercial real estate.
Generally speaking, residential real estate is easier to finance and there are a range of different loan types available. Not only that, but residential leases typically have shorter lease terms which means that landlords can adjust their rent annually to reflect market conditions.
Residential properties tend to be far more low maintenance than commercial properties and, for that reason, tend to be far easier to manage from a landlord’s perspective/
What Are the Advantages of Investing in Commercial Real Estate?
Investing in commercial real estate can be riskier than residential real estate; however, many argue that it has the potential to yield much higher reward.
One of the great advantages of commercial real estate is that your tenants are businesspeople. This means that they are typically more willing to demonstrate their affordability and creditworthiness by showing financial records or licenses. In some cases, this could mean less risk for the landlord as payment is guaranteed.
A clear reason why one might invest in commercial real estate is the larger rental income they are able to demand. Commercial properties on the whole generate significantly more rent than that of a residential property.
In some cases, leases could be more favourable for commercial real estate than for residential as they tend to be longer; from an investor perspective, this might be beneficial as it can make future rental income more predictable. Also, there tends to be less regulation surrounding residential real estate meaning that landlords have more flexibility.
Although residential real estate might be easier to manage due to the size of the property, it is true that when residential properties are concerned, something could happen at any hour of the day. With commercial properties, it is unlikely that you will get a call for a repair in the middle of the night as they operate with limited hours.